564 U.S. 135 (2011), 09-525, Janus Capital Group, Inc. v. First Derivative Traders

Docket Nº:09-525
Citation:564 U.S. 135, 131 S.Ct. 2296, 180 L.Ed.2d 166, 79 U.S.L.W. 4466, 22 Fla.L.Weekly Fed. S 1124
Opinion Judge:Thomas, Justice.
Party Name:JANUS CAPITAL GROUP, INC., et al., Petitioners v. FIRST DERIVATIVE TRADERS
Attorney:Mark A. Perry argued the cause for petitioners. David C. Frederick argued the cause for respondent. Curtis E. Gannon argued the cause for the United States, as amicus curiae, by special leave of court.
Judge Panel:Thomas, J., delivered the opinion of the Court, in which Roberts, C. J., and Scalia, Kennedy, and Alito, JJ., joined. Breyer, J., filed a dissenting opinion, in which Ginsburg, Sotomayor, and Kagan, JJ., joined, post, p.148. Justice Breyer, with whom Justice Ginsburg, Justice Sotomayor, and Justi...
Case Date:June 13, 2011
Court:United States Supreme Court
 
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Page ___

___ U.S. ___ (2011)

131 S.Ct. 2296

JANUS CAPITAL GROUP, INC., ET AL., PETITIONERS

v.

FIRST DERIVATIVE TRADERS

No. 09-525

United States Supreme Court

June 13, 2011

Argued December 7, 2010

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 09–525.

[131 S.Ct. 2297] Syllabus [*]

Respondent First Derivative Traders (First Derivative), representing a class of stockholders in petitioner Janus Capital Group, Inc. (JCG), filed this private action under Securities and Exchange Commission (SEC) Rule 10b–5, which forbids "any person . . . [t]o make any untrue statement of a material fact" in connection with the purchase or sale of securities. The complaint alleged,

inter alia, that JCG and its wholly owned subsidiary, petitioner Janus Capital Management LLC (JCM), made false statements in mutual fund prospectuses filed by Janus Investment Fund—for which JCM was the investment adviser [131 S.Ct. 2298] and administrator—and that those statements affected the price of JCG's stock. Although JCG created Janus Investment Fund, it is a separate legal entity owned entirely by mutual fund investors. The District Court dismissed the complaint for failure to state a claim. 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 contained in the documents. Before this Court, First Derivative continues to argue that JCM made the statements but seeks to hold JCG liable only as a control person of JCM under §20(a).

Held:

Because the false statements included in the prospectuses were made by Janus Investment Fund, not by JCM, JCM and JCG cannot be held liable in a private action under Rule 10b–5. Pp. 2301-2305.

(a) Although neither Rule 10b–5 nor the statute it interprets, §10(b) of the Act, expressly creates a private right of action, such an "action is implied under §10(b)." Superintendent of Ins. of N.Y. v. Bankers Life & Casualty Co., 404 U.S. 6, 13, n. 9, 92 S.Ct. 165, 30 L.Ed.2d 128. That holding "remains the law, " Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 165, 128 S.Ct. 761, 169 L.Ed.2d 627, but, in analyzing the question at issue, the Court is mindful that it must give "narrow dimensions . . . to a right . . . Congress did not authorize when it first enacted the statute and did not expand when it revisited" it, id., at 167, 128 S.Ct. 761. Pp. 2301-2304.

(1) For Rule 10b–5 purposes, 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. Without control, a person or entity can merely suggest what to say, not "make" a statement in its own right. This rule follows from Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 511 U.S. 164, 180, 114 S.Ct. 1439, 128 L.Ed.2d 119, which held that Rule 10b–5's private right of action does not include suits against aiders and abettors who contribute "substantial assistance" to the making of a statement but do not actually make it. Reading "make" more broadly, to include persons or entities lacking ultimate control over a statement, would substantially undermine Central Bank by rendering aiders and abettors almost nonexistent. The Court's interpretation is also suggested by Stoneridge, 552 U.S., at 161, 128 S.Ct. 761, and accords with the narrow scope that must be given the implied private right of action, id., at 167, 128 S.Ct. 761. Pp. 2302 - 2303.

(2) The Court rejects the Government's contention that "make" should be defined as "create, " thereby allowing private plaintiffs to sue a person who provides the false or misleading information that another person puts into a statement. Adopting that definition would be inconsistent with Stoneridge, supra, at 161, 128 S.Ct. 761, which rejected a private Rule 10b–5 suit against companies involved in deceptive transactions, even when information about those transactions was later incorporated into false public statements. First Derivative notes the uniquely close relationship between a mutual fund and its investment adviser, but the corporate formalities were observed, and reapportionment of liability in light of this close relationship is properly the responsibility of Congress, not the courts. Furthermore, First Derivative's rule would read into Rule 10b–5 a theory of liability similar to—but broader than—control-person liability under §20(a). Pp. 2303 - 2304.

[131 S.Ct. 2299] (b) Although JCM may have been significantly involved in preparing the prospectuses, it did not itself "make" the statements at issue for Rule 10b–5 purposes. Its assistance in crafting what was said was subject to Janus Investment Fund's ultimate control. Pp. 2304-2305.

566 F.3d 111, reversed.

Thomas, J., delivered the opinion of the Court, in which Roberts, C. J., and Scalia, Kennedy, and Alito, JJ., joined. Breyer, J., filed a dissenting opinion, in which Ginsburg, Sotomayor, and Kagan, JJ., joined.

Mark A. Perry, Washington, DC, for petitioners.

David C. Frederick, Washington, DC, for respondent.

Curtis E. Gannon, for United States as amicus curiae, by special leave of the Court, supporting the respondent.

Mark A. Perry, Counsel of Record, Thomas G. Hungar, Scott P. Martin, Gibson, Dunn & Crutcher LLP, Washington, DC, Counsel for Petitioners.

Ira M. Press, Edward M. Varga, III, Kirby McInerney LLP, New York, New York, David C. Frederick, Counsel of Record, Brendan J. Crimmins, Kiran S. Raj, Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C, Washington, DC, for Respondent.

OPINION

THOMAS, Justice.

This case requires us to determine whether Janus Capital Management LLC (JCM), a mutual fund investment adviser, can be held liable in a private action under Securities and Exchange Commission (SEC) Rule 10b-5 for false statements included in its client mutual funds' prospectuses. Rule 10b-5 prohibits "mak[ing] any untrue statement of a material fact" in connection with the purchase or sale of securities. 17 CFR §240.10b-5 (2010). We conclude that JCM cannot be held liable because it did not make the statements in the prospectuses.

I

Janus Capital Group, Inc. (JCG), is a publicly traded company that created the Janus family of mutual funds. These mutual funds are organized in a Massachusetts business trust, the Janus Investment Fund. Janus Investment Fund retained JCG's wholly owned subsidiary, JCM, to be its investment adviser and administrator. JCG and JCM are the petitioners here.

Although JCG created Janus Investment Fund, Janus Investment Fund is a separate legal entity owned entirely by mutual fund investors. Janus Investment Fund has no assets apart from those owned by the investors. JCM provides Janus Investment Fund with investment advisory services, which include "the management and administrative services necessary for the operation of [Janus] Fun[d], " App. 225a, but the two entities maintain legal independence. At all times relevant to this case, all of the officers of Janus Investment Fund were also officers of JCM, but only one member of Janus Investment Fund's board of trustees was associated with JCM. This is more independence than is required: By statute, up to 60 percent of the board of a mutual fund may be composed of "interested persons." See 54 Stat. 806, as amended, 15 U.S.C. §80a–10(a); see also 15 U.S.C. A. §80a–[131 S.Ct. 2300] 2(a)(19) (2009 ed. and Feb. 2011 Supp.) (defining "interested person").

As the securities laws require, Janus Investment Fund issued prospectuses describing the investment strategy and operations of its mutual funds to investors. See 15 U.S.C. §§77b(a)(10), 77e(b)(2), 80a–8(b), 80a–2(a)(31), 80a–29(a)–(b). The prospectuses for several funds represented that the funds were not suitable for market timing and can be read to suggest that JCM would implement policies to curb the practice.1 For example, the Janus Mercury Fund prospectus dated February 25, 2002, stated that the fund was "not intended for market timing or excessive trading" and represented that it "may reject any purchase request . . . if it believes that any combination of trading activity is attributable to market timing or is otherwise excessive or potentially disruptive to the Fund." App. 141a. Although market timing is legal, it harms other investors in the mutual fund.

In September 2003, the Attorney General of the State of New York filed a complaint against JCG and JCM alleging that JCG entered into secret arrangements to permit market timing in several funds run by JCM. After the complaint's allegations became public, investors withdrew significant amounts of money from the Janus Investment Fund mutual funds.2 Because Janus Investment Fund compensated JCM based on the total value of the funds and JCM's management fees comprised a significant percentage of JCG's income, Janus Investment Fund's loss of value affected JCG's value as well. JCG's stock price fell nearly 25 percent, from $17.68 on September 2 to $13.50 on September 26.

Respondent First Derivative Traders (First Derivative) represents a class of plaintiffs who owned JCG stock as of September 3, 2003. Its complaint asserts claims against JCG and JCM for violations of Rule 10b–5 and §10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, as amended, 15 U.S.C. §78j(b). First Derivative alleges that JCG and JCM "caused mutual fund prospectuses to be issued for Janus mutual funds and made them available to the investing public, which created the misleading impression that [JCG and JCM] would implement measures to curb market timing in the Janus [mutual funds]." App. to Pet. for Cert. 60a. "Had the...

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