Janus Capital Group v. First Derivative Traders

In this case, the Supreme Court will determine whether Janus Capital Group (“JCG”), a publicly traded financial services company, and its subsidiary, Janus Capital Management (“JCM”), can be held liable for misrepresentations appearing in the prospectuses of Janus Investment Fund (“Janus Funds”), a family of mutual funds managed by JCM. Respondent First Derivate Traders (“FDT”), a stockholder in JCG, commenced this private securities-fraud action under Section 10(b) of the Securities Exchange Act of 1934 (“the Act”), which prohibits buyers and sellers of securities from using manipulative or deceptive devices in the disposition of securities. Securities and Exchange Commission (“SEC”) Rule 10b-5(b) further proscribes the issuing of untrue or misleading statements in connection with the purchase or sale of securities. Here, JCG and JCM (collectively “Janus”) argue that, as a mere outside service provider, JCM cannot be held liable for unattributed statements made by a legally independent entity such as the Janus Funds. FDT, on the other hand, contends that because the operations and the profitability of all three Janus entities are closely intertwined, JCG and JCM are not mere secondary actors, but primary actors liable for the Janus Funds’ public misstatements.

Janus begins its argument by asserting that, under both the Private Securities Litigation Reform Act of 1995 (“PSLRA”) and the Supreme Court decision of Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), private plaintiffs cannot maintain aiding-and-abetting securities-fraud claims under Section 10(b) of the Act, but instead must target directly the primary actors who committed deceptive acts during the purchase or sale of securities. Indeed, Janus points out that the basic purpose of the PSLRA was to reduce meritless litigation involving outside service providers—such as accountants, lawyers, and underwriters—frequently pursued by plaintiffs for their “deep pockets” rather than for their culpability in the commission of a deceptive act.

Janus contends that, from both functional and definitional standpoints, JCG and JCM must be considered mere secondary actors incapable of liability under the Act. First, Janus notes that, though JCM manages the Janus Funds’ daily operations, JCM and the Janus Funds are separate legal entities, and neither JCG nor JCM own, govern, or control the Funds. Furthermore, despite a detailed contractual relationship, Janus observes that JCM holds no specified responsibility to produce or supervise any disclosures made in the Janus Funds’ prospectuses. Second, with reference to Central Bank and Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008), Janus asserts that the Court has definitively characterized outside service providers in the securities business as secondary actors, implying that in private actions only the direct issuers of securities may be held liable for misstatements that diminish the value of those securities. Finally, Janus objects to FDT’s description of JCM as a “corporate insider” that should be held liable for the misstatements of a client whose operations it closely manages. Janus argues that creating an “investment adviser exception” as FDT suggests would demolish the careful structure Congress and the SEC have to put in place to regulate business relationships in the securities industry.

In response, FDT contends that Janus’ preoccupation with secondary liability is irrelevant because FDT, a stockholder in JCG, is in fact suing a direct issuer of devalued securities—in this case, JCG itself. In arguing in favor of liability, FDT observes that JCG’s revenues related directly to the value of the assets under management at the Janus Funds; indeed, JCG’s stock price fell by 24% within weeks of the revelations of the secret market-timing arrangements. Furthermore, FDT argues that JCG and JCM are far from removed secondary actors, but are better seen as the beating heart driving the Janus Funds’ operation. For instance, FDT points out that, in addition to carrying out the day-to-day management of the Janus Funds, JCM engaged with both JCG and the Janus Funds in a coordinated marketing strategy that presented investors with a unified Janus brand. FDT further mentions that, during the period in question, all seventeen of Janus Funds’ officers served as vice presidents at JCM. Finally, FDT notes that the SEC itself has recognized that, due to high involvement in the daily management of funds, investment advisers such as JCM tend to “dominate” the mutual-fund clients they advise.

After acknowledging that even outside service providers can, under certain circumstances be held liable for the fraudulent misstatements of their clients, Janus asserts that such liability is precluded in this case because Janus did not “make” the statements that appear in the Janus Funds prospectuses. As used in SEC Rule 10b-5(b), Janus proposes that the term “make” be interpreted to mean “to put forth,” “to give out,” “to deliver,” as when the President “makes” or “delivers” a speech written by his speechwriters. Thus, Janus argues that, even if JCM was the entity that created the content that eventually appeared in Janus Funds’ prospectuses, by adopting this content and presenting it in its own offering documents, Janus Funds was the only entity actually making any statement to the public. Janus then takes issue with the many words FDT and its amici use in describing Janus’s role with relation to the content in the Janus Funds’ prospectuses—“helping,” “participating,” “creating,” “causing,” “preparing,” “filing,” and “disseminating.” Janus notes that the language of SEC Rule 10b-5b does not expressly outlaw any of these actions, and furthermore, that words such as “help” are classic signifiers of secondary liability, associated with “aid” and “assistance” rather than with direct conduct.

Countering Janus’s arguments, FDT contends that, since the term “make” is not defined in SEC Rule 10b-5, the term should be given its common meaning—“to cause to exist,” “to create,” “to compose.” To this end, FDT notes that the SEC, the promulgator of Rule 10b-5, has long understood the term “make” in just this manner. Here, FDT argues, there is little doubt that Janus “made” or “caused to exist” the statements that appeared in the Janus Fund prospectuses. In fact, JCM admitted in interrogatory responses that members of its staff drafted, reviewed, and commented on the relevant prospectus language. Finally, FDT argues that, even if JCM merely “helped” or “participated” in the drafting of the Janus Funds prospectuses, the Court has previously recognized that multiple entities can all “make” a single misstatement, and thus share concurrent liability for its consequences.

Finally, Janus argues that FDT cannot hold JCG or JCM liable for securities fraud under Section 10(b) of the Act in the absence of any evidence that FDT actually relied on misstatements issued by JCG or JCM. However, because the Janus Funds prospectuses contained no direct attribution to either JCM or JCG, Janus asserts that FDT would be hard pressed to prove any kind of reliance in this case—actual or presumed.Responding to FDT’s contention that reasonable investors would have realized, even without an explicit attribution, that JCM and JCG were responsible for the content in the Janus Funds prospectuses, Janus points out that the Court has declined to extend securities-fraud liability to defendants who did not themselves speak to the market. Extending liability in this manner makes little sense, Janus contends, because without direct attribution, the role that secondary actors played in shaping a company’s offering documents would not be known to the market, and thus could not be incorporated into the company’s stock price.

FDT, however, responds by asserting that even without direct attribution to either JCG or JCM, a reasonable investor in JCG would still have an interest in the Janus Funds prospectuses because of the link between the Janus Funds assets and JCG’s revenues. Furthermore, contrary to Janus’ suggestion, FDT notes that courts have imposed liability in the absence of direct attribution, for example, by holding corporate insiders liable for misrepresentations issued in a corporation’s name. Finally, FDT contends that Janus’ proposal of a direct-attribution requirement would ultimately harm the purposes of federal securities laws, enabling unscrupulous persons to deceive the securities market without fear of liability so long as these persons could avoid direct attribution for their misstatements.