29 June 2010
In the latest of a series of cases considering third-party liability under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, the Supreme Court granted certiorari on June 28, 2010 in Janus Capital Group Inc. v. First Derivative Traders, No. 09-525, to decide whether an investment adviser that participates in the drafting and dissemination of a misleading prospectus issued by the adviser’s advisee can be held liable in a private securities action. The Court has previously held that Section 10(b) does not allow outside advisers to be held liable for knowingly providing assistance to a client that commits securities fraud or for aiding and abetting such fraud in the absence of a public statement by the advisor on which investors could rely. See Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008); Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994).
This case raises questions regarding the scope of Section 10(b) liability as applied to mutual funds.
The case arises from allegations that the prospectuses of certain Janus mutual funds falsely suggested that that the funds would prevent hedge funds from engaging in “market timing transactions” that harm long-term investors. Although each of the Janus mutual funds operates as an independent legal entity, each retains Janus Capital Management (JCM) as its investment adviser. Plaintiffs, who did not invest in any Janus mutual funds but who owned stock in JCM’s parent company, filed this private securities lawsuit alleging that JCM drafted and disseminated each of the misleading prospectuses and that the value of its stock was harmed when the misrepresentations came to light. The court of appeals held that although JCM served only as a third-party investment adviser, it could be held liable for the fraud based on its role in drafting and disseminating the misleading prospectuses.
In addition to disputing whether a service provider can ever be liable for participating in another company’s misrepresentations, the petition also raises a second question regarding the conditions that must be met for third-party liability. JCM argues that even if third-party liability is possible in a private securities lawsuit, an investment adviser can only be held liable if the misleading statements in the prospectuses are explicitly attributed to the adviser. The court of appeals held that “direct attribution” is not required to establish liability under Section 10(b).
Absent extensions, which are likely, amicus briefs in support of the petitioners will be due on August 19, 2010, and amicus briefs in support of the respondent will be due on September 20, 2010. Any questions about this case should be directed to
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