Supreme Court Considers the Word ‘Make,’ Shields Mutual Fund Company from Suit
The U.S. Supreme Court has held in a 5-4 decision that a mutual fund advisory company can’t be held liable in an investor suit for false statements in prospectuses prepared by its client funds.
SCOTUSblog calls the decision shielding Janus Capital Management from liability “an important limitation on the scope of 10b-5 liability.” The majority opinion (PDF) by Justice Clarence Thomas said JCM can’t be liable because it did not “make” the statements in the prospectuses.
JCM, a subsidiary of Janus Capital Group, acts as an investment adviser and administrator to a family of mutual funds. The funds were created by the parent company but are owned by investors. JCM had helped write and disseminate the prospectuses, but it did not “make” the alleged false statements within the meaning of Rule 10b-5 of the Securities and Exchange Act, Thomas said.
“For purposes of Rule 10b–5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it,” Thomas wrote. “Without control, a person or entity can merely suggest what to say, not ‘make’ a statement in its own right. One who prepares or publishes a statement on behalf of another is not its maker.”
Justice Stephen G. Breyer filed a dissent that was joined by Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan. “The English language does not impose upon the word ‘make’ boundaries of the kind the majority finds determinative,” Breyer wrote.
In their appeal, investors had argued a ruling for the company would allow investment firms to avoid liability by creating separate shell companies to commit fraud, the Wall Street Journal (sub. req.) reports.
Gibson Dunn partner Mark Perry, who represented Janus, issued a statement applauding the decision. The opinion “is important not just for the parties to this case, but for all participants in the securities markets, including bankers, lawyers, accountants and investment advisers,” he said.
The case is Janus Capital v. First Derivative Traders. Bloomberg News and Thomson Reuters also have coverage.
Updated at 11:45 a.m. to include Mark Perry’s statement.
