One of the decisions securities fraud attorneys need to make before even bringing the claim is who to name as defendants in the lawsuit. Typically this is the party who made the material misstatement, but what does that really mean? In the case of many Wall Street firms the identity of the real maker of the statement can become cloudy, with wholly own subsidiaries and corporations formed by other corporations all interacting with each other. This is the exact issue that the Supreme Court has recently addressed, defining who the “maker” of a statement is. Although the Supreme Court provided clarity in the opinion about who was a “maker,” this clarity created legal loopholes which allow corporations to avoid liability under private rights of action of Section 10b-5 for those entities with creative ways of creating additional corporations that observe corporate formalities.
In the United States Supreme Court case of Janus Capital Group, Inc. v. First Derivatives Traders, decided by the Court on June 13, 2011 the Plaintiff, First Derivative Traders, brought a private 10b-5 securities claim as a class representatives against Janus Capital Group (“JCG”). The allegation was that JCG and its wholly owned subsidiary, Janus Capital Management (“JCM”) made false statements in mutual fund prospectuses filed by Janus Investment Fund (“JIF”) — for which JCM was the investment advisor and administrator — and that those statements affected the price of JCG’s stock. Although JCG created JIF, JIF is a separate legal entity that is owned entirely by mutual fund investors.
To he held liable under a 10b-5 claim for false statements the party must, “make any untrue statement of material fact.” The issue was whether or not the investment advice and counsel given by JCM to JIF, which it incorporated into its prospectus, constituted “making” a misrepresentation for the elements of a 10b-5 claim.
The district court dismissed the claims, finding the defendants were not the makers, and then the Fourth Circuit reversed. Then, the Supreme Court stepped into the fray granting certiorari to the case. There the plaintiffs continued to argue that JCG had made the statements, and in addition, also argued that JCG should be held liable as a control person under Section 20(a). The Supreme Court disagreed, holding that JIF was the only “maker” of the statement and therefore JCM and JCG could not be held liable under a private action under Rule 10b-5.
The Supreme Court clarified that JCM, even though it was the primary architect of JIF’s prospectus did not “make” the misrepresentations within the prospectus, but instead JIF was their maker. The Court found that under 10b-5 the “maker” of statements, “is the person or entity that has ultimate authority over the statement, including its content and whether and how to communicate it.” In its reasoning the Court made the analogy to a speechwriter and a speaker saying, “Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it.”
The Court also made clear the stark division between bringing a private action under 10b-5 and the SEC bringing claims under the rule. Relying on its decision in Central Bank of Denver N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), the Court stated that the private right of action under rule 10b-5 does not extend to aiders and abettors of securities fraud, those avenues of redress being reserved to the SEC. Since, the Court concluded that the JCM did not “make” the misrepresentation under 10b-5 the Plaintiffs claim failed.
This ruling seemingly creates a massive loophole in the scope of private claims actionable under 10b-5, in essence shielding parties that originate misrepresentations simply because they were not the party to effectuate their dissemination. The dissent to the Court’s opinion voiced by Justice Breyer picked up on this inequitable result. Justice Breyer argued that the Court’s definition of “make” was far too limited and in fact had no basis not only in securities law but in the wider English language usage of the word. For him, to construe “make” as the Court did was to artificially create a statutory loophole that limited the effectiveness of private claims under 10b-5 without support of legislative intent to do so. When taking in the policy concerns focused on the availability of equitable remedies for securities fraud and the maintenance of a fair market place, Justice Breyer’s position is both more sensible and defensible. Unfortunately though, it is not the law of the land.