If you repeat someone else’s bogus investment statement, you may be foolish, but you are not liable for the bogusness.
The Supreme Court in Janus Capital Group, Inc. v First Derivative Traders, 131 S.Ct. 2296, 2299 (2011) held that an investment advisor was not liable for fraudulent statements made in the prospectus of a sponsored mutual fund because the investment advisor was not the “maker” of those statements under Securities and Exchange Commission (SEC) Rule 10b-5, which prohibits “mak[ing] any untrue statement of a material fact” in connection with the purchase or sale of securities.
Janus Capital Group, Inc. (JCG) organized a business trust called The Janus Investment Fund (the Fund). The Fund was a separate legal entity owned entirely by mutual-fund investors. The Fund retained JCG’s wholly-owned subsidiary, Janus Capital Management, LLC (JCM), to be its investment advisor and administrator with respect to the Fund. The Fund issued prospectuses describing the Fund’s investment strategy and operations.
In 2003, the Attorney General of the State of New York alleged that JCG entered into secret arrangements to permit market timing in several Janus funds despite prospectus statements that the Fund was not suitable for market timing. After the allegations became public, investors withdrew significant amounts of money from the Fund, which led to a sharp decrease in the management fees paid to the JCM, which in turn led to a decrease in JCG’s income and caused JCG’s stock price to fall.
In September 2003, First Derivative Traders (First Derivative), representing a class of stockholders in JCG, brought suit against Janus Capital, JCG, and JCM, alleging violations of the Securities Exchange Act of 1934 and Rule 10b-5 of the SEC. First Derivative argued that JCG and JCM “caused” the Fund to issue a prospectus that included misleading statements about JCG’s practice of market timing and that those misleading statements led to the decrease in JCG’s stock price. 131 S.Ct. at 2300. In response, JCM argued that the mutual funds were a separate legal entity, owned by investors, and thus neither the advisor nor its subsidiaries could be held liable in a private securities fraud action.
The trial court dismissed First Derivative’s complaint for failure to state a claim, finding that the complaint did not allege that JCG had made or prepared the prospectuses or that any statements were directly attributable to JCG. 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 in the prospectuses. 131 S.Ct. at 2301. The court reasoned that JCG investors would have inferred that, even if JCM had not itself written the alleged misstatements, JCM must have at least approved of the statements.
The Supreme Court reversed the lower court order holding that JCM did not “make” the fraudulent statement because the Fund was a legally separate entity and thus had “ultimate authority over the statement, including its content and whether and how to communicate it.” 131 S.Ct. at 2302. Justice Clarence Thomas, writing for the majority, stated that “One who prepares or publishes a statement on behalf of another is not its maker” and, by analogy, “[e]ven when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it.” Id.