UPDATE: Lower Courts Interpret The Supreme Court's Decision In Janus Capital Group, Inc. v. First Derivative Traders

Last summer, the Supreme Court held in Janus Capital Group, Inc. v. First Derivative Traders, Inc. that a defendant may only be held be liable for securities fraud in a private action brought under Rule 10b-5(b) of the Securities Exchange Act of 1934 if it was the "maker" of a misstatement.1 Specifically, a defendant may be responsible for a misstatement if it is the "person or entity with ultimate authority over the statement, including its content and whether and how to communicate it."2 In the nine months since Janus was decided,3 the lower courts have applied what is a seemingly simple holding in divergent ways. Market participants should take an interest in these post-Janus opinions for two reasons. First, they suggest potential Janus-based defenses available in ongoing or future securities-related litigation. Second, they offer a window into the strategies that the U.S. Securities and Exchange Commission ("SEC") and the plaintiffs' bar are using to avoid Janus's strictures. Among the questions dividing the courts are the following: 1. Does Janus's "ultimate authority" limitation apply to actions brought under other rules or statutes prohibiting false or misleading statements?

1. Southern District of New York and SEC's Chief Administrative Law Judge: Yes. In SEC v. Kelly (S.D.N.Y.), the SEC asserted causes of action against two non-officer senior managers under Rules 10b-5(a) and 10b-5(c) of the Exchange Act and Section 17(a) of the Securities Act of 1933 in connection with alleged fraudulent transactions intended to artificially inflate revenue figures reflected in publicly filed financial statements.4 Although the SEC conceded that the defendants lacked the "ultimate authority" to make the statements at issue and thus could not be held liable under Rule 10b-5(b),5 it argued Janus did not preclude it from asserting "scheme liability" under Rule 10b-5(a) and 10b-5(c) or claims alleging fraud in the sale of securities under Section 17(a).6 Under the SEC's logic, although Rule 10b-5(a), Rule 10b-5(b), Rule 10b-5(c), and Section 17(a) all address similar conduct constituting securities fraud, only Rule 10b-5(b) contains the word "make" on which the Court's decision in Janus turned. Judge Colleen McMahon disagreed with the SEC's position, granting defendants' motions for judgment on the pleadings on all three claims.7 She reasoned that, to hold otherwise would render Janus "meaningless" because it would undermine the Supreme Court's stated intention to preserve a distinction between those who are primarily liable and those who are secondarily liable under the securities laws.8 "Where the primary purpose and effect of a purported scheme is to make a public misrepresentation or omission," the court stated, "courts have routinely rejected the SEC's attempt to bypass the elements necessary to impose 'misstatement' liability under subsection (b) by labeling the alleged misconduct a 'scheme' rather than a 'misstatement.'"9 In In the Matter of John P. Flannery and James D. Hopkins, the SEC's Chief Administrative Law Judge Brenda Murray reached a similar conclusion.10 In a case involving alleged misstatements by a chief investment officer and a product engineer, she relied on Kelly in holding that Janus was appropriately applied not just to claims under Rule 10b-5(b), but also to claims under Rule 10b-5(a) and (c), as well as Section 17(a).11 ALJ Murray held that, "with respect to allegations involving documentary evidence, the [Enforcement] Division must establish...