Janus Capital Group Inc. and a subsidiary cannot be held liable in a lawsuit by shareholders over allegedly false statements in prospectuses for several Janus mutual funds, the U.S. Supreme Court ruled Monday.
Reuters notes that in backing the Denver-based Janus, one of the largest mutual fund companies, the high court's decision will mean few changes for the way big asset managers govern themselves—structures that could have faced a major overhaul if the ruling had gone the other way.
Janus, in appealing to the Supreme Court, argued that the funds were separate legal entities and that neither the parent company nor its subsidiary were responsible for the prospectuses and could not be held liable.
The high court agreed. It ruled the alleged false statements in the prospectuses were made by an investment fund, not Janus Capital, and that Janus and the subsidiary therefore cannot be held liable in a private securities fraud lawsuit.
Writing for the majority, Justice Clarence Thomas said that Janus Capital may have assisted the Janus Investment Fund with crafting what it said in the prospectuses, but Janus Capital itself did not actually make those statements.
Wolters Kluwer Law & Business issued an in-depth Briefing on the ruling, and noted that the Supreme Court rejected the contention “that both the adviser and the fund might have made the misleading statements within the meaning of Rule 10b-5 because the adviser was significantly involved in preparing the prospectuses. This assistance, subject to the ultimate control of the fund, does not mean that the adviser ‘made’ any statements in the prospectuses.”
Wolters Kluwer goes on to note that “although the adviser, like a speechwriter, may have assisted the fund with crafting the fund’s statements in the prospectuses, the Court reasoned, the adviser itself did not ‘make’ those statements for purposes of Rule 10b-5.”
Further, the briefing states that the adviser provided access to the fund’s prospectuses on its website is also not a basis for liability. “Merely hosting a document on a website does not indicate that the hosting entity adopts the document as its own statement or exercises control over its content. In doing so, the adviser had not made any of the statements in the fund’s prospectuses for purposes of Rule 10b-5 liability, noted the Court, just as the SEC does not make the statements in the many prospectuses available on its website.”
The lawsuit was brought on behalf of those who bought Janus stock from mid-2000 through early September 2003, Reuters notes.
It alleged that the prospectuses of several Janus funds created the false or misleading impression that the company would adopt measures to curb market timing—when in fact secret arrangements with several hedge funds permitted such transactions, to the detriment of long-term investors.
Mark Perry, the attorney who represented Janus, said he was delighted the Supreme Court agreed with the company's position that only the party ultimately responsible for a statement can be sued for fraud in such private investor lawsuits.
"The court's clarification of the scope of primary liability under the securities laws is important not just for the parties to this case, but for all participants in the securities markets, including bankers, lawyers, accountants, and investment advisers," he told Reuters.
The Obama administration supported the plaintiffs before the Supreme Court while the Chamber of Commerce business group supported Janus.