Supreme Court Decides Who Is the ‘Maker’ of a Statement Under Section 10(b)

On June 13, in a 5-4 decision, the U.S. Supreme Court narrowed the circumstances under which a defendant can be held liable in a private action under Rule 10b-5 for “making” a false or misleading statement. The decision held that an investment adviser did not “make” statements contained in prospectuses of the adviser’s mutual fund clients, even though the adviser may have assisted the mutual funds in preparing the statements.

The decision has important implications not just for mutual funds and their advisers, but for all investment advisers, accountants, and others who provide services to issuers of securities.

Skadden, Arps wrote in is one-page briefing memo on the topic:

Janus Capital Group, Inc. v. First Derivative Traders, No. 09-525 (U.S. June 13, 2011)

Today, in a 5-4 decision, the Supreme Court of the United States in Janus Capital Group, Inc. v. First Derivative Traders interpreted the meaning of the phrase to make in Rule 10b-5 promulgated under Section 10(b) of the Securities Exchange Act of 1934. Under Rule 10b-5, it is unlawful for any person, directly or indirectly, … [t]o make any untrue statement of a material fact in connection with the purchase or sale of securities. 17 CFR §240.10b–5(b). The Supreme Court held that, [f]or purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. Slip op. at 6. Without control, a person or entity can merely suggest what to say, not 'make' a statement in its own right. Accordingly, one who prepares or publishes a statement on behalf of another is not its maker. Id.

The Court's holding, as the opinion itself notes, follows from its previous opinion in Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 511 U. S. 164, 180, in which the Court held that Rule 10b-5's private right of action does not include suits against aiders and abettors who contribute substantial assistance to the making of a statement but do not actually make it. In reaching its decision today, the Supreme Court noted that, for Central Bank to have any meaning, there must be some distinction between those who are primarily liable (and thus may be pursued in private suits) and those who are secondarily liable (and thus may not be pursued in private suits). Accordingly, the Supreme Court sought to draw a clean line between the two — the maker is the person or entity with ultimate authority over a statement and others are not. Slip op. at 7 n. 6.

In their complaint, shareholders of parent company Janus Capital Group (JCG) sued both JCG and its subsidiary, Janus Capital Management LLC (JCM). They alleged fraud under Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5, as well as control person liability under Section 20(a) of the Securities Exchange Act, all in connection with the sale of shares in the JCG. According to the complaint, the Janus Investment Fund managed by JCM issued prospectuses falsely asserting that its managers did not permit market timing. The plaintiffs alleged that, when the market learned that the Janus Investment Fund managed by JCM actually permitted purported market-timing transactions, investors withdrew their money from the Janus Investment Fund, and the share price of the parent's publicly traded common stock declined in value. The complaint, however, did not allege that defendants JCG or JCM actually issued the prospectuses containing representations about Janus' market-timing policies, only that the Janus Investment Fund had issued such prospectuses.

As such, the Court reasoned that the Janus Investment Fund, as opposed to JCG or JCM, made the alleged false statements. The Court rejected the argument that JCM, as fund manager, assisted in preparing the prospectuses, and therefore could be liable as a maker of the statements in the prospectuses at issue. The Court reasoned that this assistance, subject to the ultimate control of Janus Investment Fund, does not mean that JCM 'made' any statements in the prospectuses. Although JCM, like a speechwriter, may have assisted Janus Investment Fund with crafting what Janus Investment Fund said in the prospectuses, JCM itself did not 'make' those statements for purposes of Rule 10b-5. The Court's holding is not only consistent with past Supreme Court precedent refusing to find a private right of action for parties to sue on an aiding and abetting theory under Rule 10b-5, but also prevents a dramatic expansion of potential liability for a broad range of secondary actors and advisers who do not control the ultimate statement, including accounting firms, lawyers and possibly many others.

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