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Supreme Court Limits Who Can Be Found Liable in Private Securities Fraud Claims

Janus Capital Group, Inc. et al. v. First Derivative Traders
No. 09–525 (U.S. 2011)

by Imran O. Shaukat, Summer Associate
Semmes, Bowen & Semmes (www.semmes.com)

In this recent private securities fraud case, the Supreme Court of the United States held that alleged false statements made by a parent corporation’s wholly owned subsidiary were not attributable to the parent corporation. Specifically, Janus Capital Group, Inc. (“JCG”) did not violate Securities and Exchange Commission (SEC) Rule 10(b)(5) (“Rule 10(b)(5)”) for making false statements in mutual fund prospectuses when the statements were made by JCG’s subsidiary, a separate legal entity.

Rule 10(b)(5) prohibits making any untrue statement of material fact in connection with the purchase or sale of securities. Here, First Derivative Traders (“First Derivative”), representing a class of stockholders in JCG, alleged that JCG and its wholly owned subsidiary, Janus Capital Management LLC (“JCM”), made false statements in mutual fund prospectuses, in violation of Rule 10(b)(5). The prospectuses were filed by Janus Investment Fund, which retained JCM to be its advisor and administrator. First Derivative argued that because JCG controlled its subsidiaries, JCG should be held liable for making the false statements in the mutual fund prospectuses. JCG argued that because Janus Investment Fund was a separate legal entity, neither JCG nor JCM could be held liable in a private securities fraud action.

The District Court dismissed First Derivative’s Complaint for failure to state a claim. The Fourth Circuit reversed, holding that First Derivative had sufficiently alleged that JCG and JCM, by participating in the writing and dissemination of the prospectuses, made the misleading statements contained in the documents.

In reversing the decision of the Fourth Circuit, the Supreme Court clarified that the maker of a statement, under Rule 10(b)(5), is the entity with authority: (1) over the content of the statement; and (2) as to whether and how to communicate that statement. The Court relied on Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 511 U. S. 164 (1994), where the Court held that Rule 10(b)(5) does not allow for private securities fraud claims against aiders and abettors. To include persons or entities without ultimate control over the content of a statement would substantially undermine Central Bank. The Court reasoned that without control, a person or entity can merely suggest what to say, not “make” a statement in its own right. Because the statements in the prospectuses were made by JIF, the Court concluded that First Derivative failed to state a claim against JCG or JCM under Rule 10(b)(5).


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