Recently, a 5-4 United States Supreme Court held, in Janus Capital Group Inc. et al. v. First Derivative Traders, No. 09-525, 2011 WL 2297762 (U.S. June 13, 2011), that an investment advisor was not liable for fraud in the prospectus of a sponsored mutual fund because the investment advisor was not the “maker” of the fraudulent statements – even though the fund’s officers were all also employees of the advisor and even though the advisor prepared, filed, and distributed the prospectus. Janus draws a bright line to protect public companies’ service providers, such as bankers, lawyers, accountants, investment advisors and financial advisors, who will not be liable to private plaintiffs for statements made by their client issuer, no matter how significant a role they played in advising or drafting such statements. The high court found that the only persons who can have direct liability in private lawsuits are those who have “ultimate authority over the statement, including its content and whether and how to communicate it.” Only such persons are the “makers” of “statements” for purposes of direct liability in private Rule 10b-5 suits. “Without control,” according to the Court, “a person or entity can merely suggest what to say, not ‘make’ a statement in its own right,” and therefore “[o]ne who prepares or publishes a statement on behalf of another is not its maker.”
The majority opinion was written by Justice Thomas and joined by Chief Justice John Roberts and Justices Antonin Scalia, Anthony Kennedy and Samuel Alito. Justice Stephen Breyer wrote the dissent, in which Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan joined, and argued that, instead of a bright line rule, the Court should adopt a more flexible approach and determine whether a person is a “maker” of a statement based on the circumstances of each case.
For more information about the author, Curtis Alva, click here.