What Janus Meant: The First Wave Of Court Decisions Interpreting The Supreme Court's 'Ultimate Authority' Test In Securities Cases

The Supreme Court's decision in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (June 13, 2011), sent a powerful signal when it held that the investment advisor to a mutual fund could not be held primarily liable under Section 10(b) of the Securities Exchange Act for statements in the fund's prospectus, because the investment advisor did not have "ultimate authority" over the statements.

The Janus decision already has impacted the securities fraud landscape. The Court's ruling appears straightforward – no primary liability except for those who have ultimate authority or control over the content and dissemination of a statement. In the six months since Janus was decided, courts have applied the ruling in cases involving related corporate entities, corporate officers, and major shareholders. The Ninth Circuit has noted that "[Janus] sets the pleading bar even higher in private securities fraud actions seeking to hold defendants primarily liable for the misstatements of others."1 Yet just how high the pleading and proof bar has been set outside the mutual fund and investment advisor context remains an open question. Different federal courts – even within the same district – have come to different conclusions. Until higher courts rule on the scope of Janus, the uncertainty created by these differing lower court decisions could blur the Janus "bright line rule." And plaintiffs have begun to cast their nets wider, looking for alternative theories to avoid dismissal under Janus.

The "Ultimate Authority" Standard Set by Janus

The Janus saga began when investors in Janus Capital Group common stock brought a putative securities fraud class action alleging that both Janus Capital Group ("JCG") and Janus Capital Management ("JCM") (the investment adviser to the Janus Mutual Funds) were responsible for statements in the Janus Funds' prospectuses about the company's policies against market timing. When these statements turned out to be untrue, claimed the plaintiffs, investors pulled assets out of the Janus Funds which in turn reduced management fees paid to JCM and, under the fraud-on-themarket theory, caused the plaintiff investors to purchase shares of JCG, the parent company of JCM, at inflated prices.

The Supreme Court held that neither JCM nor its parent JCG could be held primarily liable for the misleading statements in the fund prospectuses. The Court ruled that to "make a statement" for purposes of liability under Section 10(b) and Rule 10b-5 requires that the person or entity must have the ultimate authority over the statement. In order to "make" a statement, said the Supreme Court, a person must actually control the making of it.

In Janus, the Court overturned a Fourth Circuit Court of Appeals decision that held the investment advisor may be held primarily liable for statements made in a mutual fund prospectus. The Supreme Court noted that the investment advisor maintained substantial control over the fund, but the fund was a separate legal entity that observed corporate formalities, maintained its own board of directors, and issued the prospectus for which the plaintiffs sought redress. The Court refused to extend the implicit private right of action under Section 10(b) to those individuals or entities that exert control over the entity that issued the prospectus. The Court's opinion, written by Justice Clarence Thomas, found that liability could not arise simply because the alleged primary violator was "significantly involved" in preparing the statement, or "assisted" the entity with ultimate control over the crafting of the statement. The Court analogized that the maker of a statement is not the speechwriter, but the speaker.

Limitations on Primary Liability for Securities Fraud

In context, Janus is one decision in a long line of recent Supreme Court cases limiting the scope of the private right of action under Section 10(b) and Rule 10b-5. As the Janus opinion points out, the right must be given "narrow dimensions" because "Congress did not authorize [a private right of action] when it first enacted the statute and did not expand [it] when it revisited" the issue.2 Instead, the right has been implied.3 To state a claim, the plaintiff must allege that in connection with the purchase or sale of a security, the defendant made a materially false statement or omitted a material fact, with scienter, and that the plaintiff relied on the misrepresentation causing the plaintiff injury.4

The Supreme Court over the years expanded the implicit private right of action by adopting the fraudon- the-market theory and permitting private securities litigants the presumption of reliance to bring class action claims under Rule 10b-5.5

In its recent decisions, up to and including Janus, however, the Court has steadily limited the private right of action. These have included Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 180 (1994), which determined there was no separate aiding and abetting liability in a private securities action, and Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 156 (2008), which held that a company or individual who provides assistance to a corporation that makes a misstatement in public documents cannot be held liable in a private securities fraud action under a scheme theory of liability.

The Court's clear-cut refusal in Janus to extend primary liability to those who assist or participate in making a statement – even in the context of the close relationship between a mutual fund and its investment advisor – would seem to be an unambiguous direction to lower courts that only those who control or have authority over the statement can be liable to investors.

Following Janus, several lower courts have dismissed claims that might have survived prior to it...