In a decision that could have important consequences for the scope of federal securities fraud claims, the Supreme Court held last week that only the corporate entity that makes a statement to the public can be liable. Even if related companies prepare the statement, the court held in Janus Capital Group v. First Derivative Traders, “the maker of a statement is the entity with authority over the content of the statement and whether and how to communicate it.”

The plaintiffs, shareholders of Janus Capital Group, Inc. (the management company), alleged that the management company caused Janus Investment Fund to issue prospectuses that falsely suggested that the fund would not allow so-called “market timing” trading. In fact, the fund did allow such trading. When the New York attorney general filed a complaint against the management company challenging the practice, investors withdrew significant sums from the fund. The management company’s stock price allegedly dropped as a result.

The question that the court addressed was whether the management company could be liable for causing the fund to issue misleading prospectuses. The court held that to be liable, the defendant must have “made” the material misstatements and that here, the management company had not. To “make” a statement, the court reasoned, a party must have “ultimate control” over the content of the statement; a speaker makes statements, for example, but his speechwriter does not. Therefore, even if the management company prepared the fund’s prospectuses, it was not the ultimate speaker and could not be liable under Rule 10b-5.

Justice Thomas’s majority opinion found that this result was a natural extension of prior decisions in Central Bank of Denver v. First Interstate Bank of Denver and Stoneridge Investment Partners v. Scientific-Atlanta. Central Bank held that Rule 10b-5 does not create liability for aiding and abetting securities fraud. In the Janus opinion, the court reasoned that “[i]f persons or entities without control over the content of a statement could be considered primary violators who ‘made’ the statement, then” there would (almost) be no such thing as an aider or abettor.

In Stoneridge, the court held that contract counterparties of a securities issuer could not be liable for entering into transactions that the issuer used to manipulate its financial statements. It reached that conclusion because nothing that the counterparties did made it “necessary or inevitable” for the issuer to commit fraud by allegedly misreporting the results. Justice Thomas wrote that the Stoneridge holding, while not controlling, supported the decision in Janus, because without any “ultimate control” over the statement, “it is not ‘necessary or inevitable’ that any falsehood will be contained in the statement.”

The Janus opinion is noteworthy for its deference to corporate forms. The court acknowledged the close practical relationship between an investment manager and its funds and recognized that the management company had posted the fund’s filings on its own website.  But the majority found it more important that the management company and the fund observed corporate formalities and that it was the fund, not the manager, that had the statutory duty to file the prospectuses. 

The court did not completely close the door on possible claims against a management company.  It noted that there was no allegation that the manager had “filed the prospectuses and falsely attributed them to” the fund. It also noted that nothing in the prospectuses identified the management company as the speaker. The latter observation seems to leave open, in particular, the possibility of a claim where specific statements in public filings are attributed to specific speakers other than the issuer. As Justice Breyer pointed out in dissent, moreover, Central Bank expressly holds that anyone, including banks, lawyers, and accountants, but also presumably including related companies, that does “make” material misstatements can be liable. Finally, in-house counsel should remain attuned to the possibility of state-law fraud claims that might have broader reach.

Janus is further evidence that the Supreme Court, at least in the absence of direction from Congress, will read the implied private right of action in Rule 10b-5 very narrowly. The decision provides some predictability over the scope of liability and the potential defendants in a 10b-5 case.