In July 2010, the United States Supreme Court agreed to hear arguments in a securities fraud class action case about prospectus disclosures and market-timing. The case is Janus Capital Group v. First Derivative Traders, on appeal from the 4th Circuit, and originating in the United States District Court for the District of Maryland.
First Derivative Traders filed, for itself and on behalf of some shareholders of Janus Capital Group Inc., a class action law suit against Janus Capital Group and Janus Capital Management LLC, the the funds' investment adviser. The suit alleged that that the fund and the adviser were responsible for false and misleading statements in a number of the individual Janus funds' prospectuses. According to the plaintiffs, the funds' prospectuses contained disclosures stating that the funds' adviser did not permit, and took measures to prevent, market timing of the funds shares. Thereafter, market timing practices authorized by the funds' adviser and Janus Capital Group were revealed. First Derivative alleged that they and other fund shareholders bought Janus Capital Group shares at inflated prices and thereafter lost money as a result of the market timing activities.
The district court dismissed First Derivative Traders' class action suit concluding that the plaintiffs had had not plead sufficiently key elements of a section 10(b) securities fraud (i.e., prospectus liability) action against the adviser. The court also dismissed the plaintiffs' claim of control person liability (under section 20(a)) against Janus Capital Group under. On appeal to the Fourth Circuit, the appeals court disagreed with the district court, and held that both the plaintiffs' section 10(b) primary liability claim against the adviser and the section 20(a) control person liability claim against Janus Capital Group were sufficiently pled. It reversed the district court's order granting defendants' motion to dismiss and remanded the case for further proceedings.
Janus Capital Group appealed to the Supreme Court, and the Court announced on June 24 that it would hear the case this fall. The Court is being asked to address two key questions about this case:
- Whether a service provider can be held primarily liable in a private securities-fraud action for "help[ing]" or "participating in" another company's misstatements; and
- whether a service provider can be held primarily liable in a private securities-fraud action for statements that were not directly and contemporaneously attributed to the service provider.
The legal questions here are about the extent to which false or misleading public statements can be attributed to affilates or parents of a fund's adviser. In the words of the Fourth Circuit Court:
Here, the allegedly misleading statements about market timing appearing in the Janus funds prospectuses are unquestionably public. The real question is whether these statements were sufficiently attributable to JCG and JCM. While the prospectuses did not explicitly name JCG and JCM as the drafters, plaintiffs nevertheless allege in their complaint that JCG and JCM may be held responsible for the statements in the prospectuses because "as a practical matter [JCM] runs" the Janus funds, defendants disseminated the prospectuses on a joint Janus website and, consequently, the public would attribute the misstatements in the prospectuses to defendants.
The Supreme Court no doubt accepted this case because there is a disagreement amongst the Circuit Courts about the degree of attribution required to plead reliance. Currently, there is no aiding-and-abetting liability in private actions brought under Section 10(b) of the Securities Exchange Act of 1934, so the Supreme Court has before it the difficult question of whether and to what degree a service provider can be held primarily liable in a private securities fraud action for "helping" or "participating in" another company's misstatements.
The progress of this case may be tracked via:
Pleadings in the case may be found via the links below.