Reviewing the briefs and the December 7, 2010 argument before the Supreme Court in Janus v. First Derivative Traders is quite challenging and slightly surreal. Commonly litigants articulate the “questions presented” to the Court differently in order to guide the reviewing court toward a particular outcome. We often refer to this as framing the issues – as if it is a matter of cropping or blowing up an image to emphasize one aspect of the scene and de-emphasize another. However, in this case, the differences between Petitioners’ and Respondent’s briefs goes well beyond framing. It seems like they were not even starting with the same photo.
Mark Perry, Attorney for Petitioners Janus Capital Group Inc. ("JCG") and Janus Capital Management LLC ("JCM") warned the Court that “Affirming the judgment below would authorize private securities fraud class actions against every service provider that participates in the drafting of a public company’s prospectus.” The implication in this warning is that such liability would not be a good result, even if it would benefit investors by creating an incentive for service providers to stop aiding and abetting fraud.
In briefs, Petitioners take the position that JCM is a mere service provider to the Janus mutual funds and therefore is a “secondary actor.” In this view of the world, each mutual fund is “another company” operating independently, making statements, and offering securities to the public. (Never mind that mutual funds are shell entities typically with no or few independent employees of their own, reliant almost entirely upon their investment advisers to function.)
Based upon this perspective, however, the Petitioners’ Brief points to Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 191 (1994) in which the Supreme Court held that “secondary actors” cannot be held liable under Section 10(b) or Rule 10b-5 unless “all of the requirements for primary liability . . .are met.”
In addition, Petitioners contend that JCM as an investment adviser is not the equivalent of a corporate insider. They argue that an investment adviser is “related only by contract” to the mutual funds it manages and thus “remain[s] independent.” Petitioners also insist that because a board of trustees existed and “reviewed” and “approved” the prospectuses, that JCM did not actually control the Janus Funds. (For those familiar with the mutual fund industry, this is the sort of argument that does not pass the “laugh test.”)
As for primary liability imposed on a secondary actor, Petitioners argue that JCM did not make the alleged misstatements. And, even if JCM did make the statements, Petitioners contend that the element of “reliance” under 10(b) can not be met as the statements could not be “directly” attributed to JCM. Petitioners take the view that the Janus mutual funds alone, and not JCM made the statements.
Essentially, in Petitioners’ view, JCM is like a lawyer, accountant or banker. Petitioners’ Brief points to lower court precedent.“Relying on Central Bank and Stoneridge, the lower courts have correctly applied the prohibition on aiding-and-abetting liability to all persons and entities other than the issuer and certain of its employees.”
In short, Petitioners seem to think that the 7 Janus mutual funds and not JCM or JCG “made” the misrepresentations concerning market timing. In addition, Petitioners also insist that if JCM did make the false statements, because the prospectuses were issued under the Janus mutual funds’ names and not the Janus Capital name, they cannot be attributed to JCM or JCG.
Respondent sees the questions presented quite differently. For Respondent, the identity between Janus (Capital Group), Janus (Capital Management) and Janus (Mutual Funds) is not all that distinct. Respondent’s Brief contends that JCM made the misstatements concerning its own practices with respect to market-timing in the mutual funds it managed.
“To induce investors to purchase shares in the Janus Funds, JCM ‘wrote and represented [a] policy against market timers.’ . . . It ‘caused mutual fund prospectuses to be issued for Janus mutual funds and made them available to the investing public, which created the misleading impression that [JCM] would implement measures to curb market timing in the Janus Funds.’ . . Those prospectuses stated that the Funds were ‘not intended for market timing or excessive trading.’ . . The prospectuses detailed measures employed to deter suspected market timing in the Funds, including closing accounts and imposing redemption fees for Fund shares held less than three months. . . JCM disseminated the prospectuses to the investing public through JCG’s website. . . .Despite announcing a policy prohibiting market timing in the Janus Funds, JCM secretly allowed such transactions.”
Respondent also asserts that JCM is not a secondary actor, as an investment adviser to a mutual fund is not analogous to an outside auditor or attorney. The Respondent also rejects other analogies designed to show that JCM did not “make” the statements.
“Petitioners’ presidential-speechwriter analogy . . .is thus inapt. Unlike petitioners’ analogy, JCM wrote the misstatements regarding market timing, described JCM’s own conduct in supposedly precluding market timing, disseminated those statements, and expressed the prospectus statements in a form that the investing public reasonably attributed to JCM. JCM is thus no mere speechwriter (or law clerk or courier.)”
Additionally, Respondent believes it does not matter whether JCM is a service provider/secondary actor to the mutual fund issuers. Respondent notes that class members bought stock from a different issuer, JCG, a publicly traded firm that is the sole owner of JCM.
As for the projected horrible outcome should the Court reject their arguments, Respondent fears:
“If adopted by this Court, petitioners’ theory would provide a roadmap for unscrupulous companies to commit securities fraud. Such a firm could form a shell corporation and create and disseminate misrepresentations about its activities in the shell corporation’s name. On petitioners’ view, such a scheme could enable the wrongdoer to avoid liability in both private suits and government enforcement proceedings, because the government also must establish that a defendant “made” a misrepresentation.”