Janus Capital Group, Inc. v. First Derivative Traders

2011-06-13

Headline: Investment adviser is not liable under securities fraud rule for false statements in its client fund prospectuses, limiting private suits unless the adviser had ultimate control over the prospectus content.

Holding: The Court held that the investment adviser cannot be held liable in a private securities-fraud suit for false statements in its client mutual fund prospectuses because the fund, not the adviser, “made” those statements.

Real World Impact:

Makes it harder to sue advisers for prospectus statements they did not control.
Limits private securities suits to parties who had ultimate authority over statements.
Signals that only Congress or SEC can broaden adviser liability.

Topics: mutual funds, securities fraud, investment advisers, market timing, prospectus disclosures

Summary

Background

A mutual fund called Janus Investment Fund issued prospectuses saying the funds were not intended for market timing. Janus Capital Management (an investment adviser that ran the funds) helped prepare those prospectuses. After a public complaint alleged secret deals permitting market timing, investors withdrew money and the parent company’s stock price fell. A group of shareholders sued, saying the prospectuses were misleading and that the adviser and parent company caused investor losses.

Reasoning

The Court’s key question was whether the investment adviser “made” the statements in the prospectuses for purposes of private securities fraud suits. The Court interpreted “make” to mean the person or entity with ultimate authority over the statement’s content and whether to communicate it. Relying on earlier cases, the majority concluded that the fund — not the adviser that drafted or suggested language — filed and attributed the prospectuses, so the adviser did not “make” the statements and cannot be sued privately under that rule.

Real world impact

The ruling narrows who private plaintiffs can sue for prospectus statements: advisers who only helped draft or influence a client fund’s disclosure are protected unless they had ultimate control over the statement. The Court said changes to this allocation of liability are for Congress or the SEC, not the courts. The decision reversed the Fourth Circuit and ends this private claim against the adviser.

Dissents or concurrances

The dissent argued the adviser’s close control and role could make it a maker of the statements, and that the majority’s rule creates a loophole letting managers avoid liability in some fraud cases.