Securities Law Archives

November 3, 2011

The Make Believe of Janus

By Edward Pekarek and Genavieve Shingle

The United States Supreme Court created a troublesome rule recently with its opinion in Janus Capital Group, Inc. v. First Derivative Traders.[1] First Derivative alleged that Janus Capital Group (JCG), and its wholly owned subsidiary, Janus Capital Management (JCM), made false statements in prospectuses filed by the Janus Investment Fund (JIF), and those statements affected the price of JCG's shares.[2] Throughout the pertinent time period, JCM provided JIF with "the management and administrative services necessary for the operation" of JIF.[3] First Derivative argued that JCG should be held liable for the misdeeds of JCM as a "controlling person" under section 20(a) of the 1934 Securities Exchange Act ('34 Act).[4]

Regardless of the uniquely close relationship between the Janus defendants, the Court emphasized that "[a]ny reapportionment of liability in the securities industry in light of the close relationship between investment advisers and mutual funds is properly the responsibility of Congress and not the courts."[5] Although JCM may have been significantly involved in preparing the JIF prospectuses, the Court determined that JCM did not "make" the statements at issue, at least for the purposes of section 10(b) of the '34 Act, and Rule 10b-5 thereunder. Because JCM did not owe a statutory burden to file the prospectuses with the SEC, it did not "make" any of the statements in those prospectuses.[6] As a result, the Court reversed the Fourth Circuit, holding that First Derivative failed to state a claim against JCM under Rule 10b-5.[7]

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