SEC Rule 10b-5 prohibits “mak[ing] any untrue statement of a material fact” in connection with the purchase and sale of securities. 17 C.F.R. § 240.10b-5 (2010). In a 5-4 decision, the Supreme Court held in Janus Capital Group, Inc. v. First Derivative Traders, No. 09-525, that only an entity that has “ultimate authority” over an allegedly false statement can be held liable in a private action brought under Rule 10b-5. Slip op. 6. In so holding, the Court relied upon and reinforced its prior decisions in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), and Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008).

Janus Investment Fund, an entity owned entirely by mutual-fund investors, hired petitioner Janus Capital Management (JCM), a wholly owned subsidiary of petitioner Janus Capital Group (JCG), to be its investment adviser and administrator. With the assistance of JCM, Janus Investment Fund issued several prospectuses describing its investment strategy and operations. The prospectuses represented that a number of funds were not suitable for “market timing,” a trading strategy that exploits time delay in mutual funds’ daily valuation system, and could be read to suggest that JCM would implement policies to curb that practice. In 2003, the Attorney General of New York filed a complaint against JCG and JCM alleging that JCG had entered into secret arrangements to permit market timing in several funds. The price of JCG’s stock thereafter decreased dramatically. 

Respondent First Derivative Traders (First Derivative), which represented a class of plaintiffs who owned JCG stock, brought suit alleging that JCG and JCM had violated Rule 10b-5 by causing misleading prospectuses to be issued and made available to the investing public. The district court dismissed First Derivative’s complaint for failure to state a claim, but the Fourth Circuit reversed. In an opinion by Justice Thomas, the Supreme Court reversed. The Court held that JCM could not be held liable in a private action under Rule 10b-5 for misleading statements included in Janus Investment Fund’s prospectuses because JCM did not “make” the statements in the prospectuses. The Court also held that JCG could not be liable because First Derivative sought to hold it liable solely as a “control person” of JCM, and thus the plaintiffs could not recover against JCG if they could not recover against JCM.

“For purposes of Rule 10b-5,” the Court explained, “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.” Slip op. 6. The Court determined that this rule follows from Central Bank of Denver, which held that Rule 10b-5’s private right of action does not include suits against aiders and abettors; is supported by Stoneridge, which held that dismissal of a Rule 10b-5 complaint was proper because the public could not have relied on undisclosed deceptive acts; and accords with “the narrow scope” that courts must give the implied private right of action, slip op. 8. The Court rejected the argument of the United States, participating as amicus curiae, that “make” in Rule 10b-5 means “create.” And it declined to adopt First Derivative’s argument that JCM should be liable “in light of the close relationship between investment advisers and mutual funds,” pointing out that JCM and Janus Investment Fund are “legally separate entities” and that Janus Investment Fund’s board of trustees “was more independent than the [applicable] statute requires.” Slip op. 10.   

Applying this rule, the Court concluded that JCM did not “make” any of the statements in the Janus Investment Fund prospectuses. The Court explained that Janus Investment Fund bore the statutory obligation to file prospectuses with the SEC and that Janus Investment Fund did in fact file those prospectuses. That JCM may have been significantly involved in preparing the prospectuses, the Court said, did not mean that JCM “made” the misleading statements, because this assistance was subject to the ultimate control of Janus Investment Fund.

In a dissenting opinion, Justice Breyer, joined by Justices Ginsburg, Sotomayor, and Kagan, argued that the majority did not correctly interpret Rule 10b-5. In the dissent’s view, “both language and case law” indicate that an entity that does not have “ultimate content-related responsibility” can “make” statements contained in a firm’s prospectus. Slip op. 2 (Breyer, J., dissenting).

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