Supreme Court: Janus Not Liable for Securities Fraud

(June 14, 2011) — In an acrimonious June 13 decision, the Supreme Court ruled 5-4 that Denver-based Janus Capital Group could not be held liable for false statements made in the prospectuses of its subsidiary mutual funds that it formally advised.

Janus Capital Group’s shareholders brought the class-action securities fraud lawsuit against the company after Janus became embroiled in a market-timing scandal in 2003. After New York’s attorney general sued Janus Capital Group for allegedly inflating its stock price through delays in fund valuation, shareholders sued Janus because its funds’ disclosure documents stated that the company would curb trading strategies based on such policies.

At issue was whether Janus Capital Group and its subsidiary Janus Capital Management could be held liable for their mutual funds’ misstatements and thus be charged with violating the Securities and Exchange Commission’s (SEC) rule prohibiting “any person, directly or indirectly” from “mak[ing] any untrue statement of material fact” in connection with buying or selling securities.

Justice Clarence Thomas, writing for the majority, argued that only the mutual funds themselves and not their advisors could be held liable. Justice Thomas’ logic revolved around his interpretation of the word “make.”

“One who prepares or publishes a statement on behalf of another is not its maker,” Justice Thomas wrote. “Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it.”

Justice Thomas ceded that the shareholders “persuasively argue that investment advisers exercise significant influence over their client funds.” He concluded, however, that “corporate formalities were observed” and the fund and its adviser “remain legally separate entities.”