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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]

Rule 10b-5 prohibits "mak[ing] any untrue statement of a material fact" in connection with the purchase or sale of securities.[8] The critical question considered by the Court was how the term "make" in Rule 10b-5 should be construed. The SEC contended that "make" is synonymous with "create," which would allow it (and private plaintiffs) to assert a claim against one who provides false or misleading material information to another, who later includes it in a statement.[9] However, the Court rejected this definition and found the phrase at issue in Rule 10b-5, "[t]o make . . . any statement," to be the approximate equivalent of "to state."[10]

The Court explained that "the maker of a statement is the person or entity with ultimate authority over the statement," and "[w]ithout control, a person or entity can merely suggest what to say, not 'make' a statement in its own right."[11] Justice Thomas, writing for the five-member majority, compared this rule to the relationship between a speechwriter and a speaker, explaining that "[e]ven when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit - or blame - for what is ultimately said."[12]

Dodd-Frank May Dampen Enthusiasm

While Janus ostensibly offers some degree of shelter from Rule 10b-5 liability to securities intermediaries such as attorneys, bankers, accountants and financial advisers, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) may dampen any enthusiasm before it even begins. Dodd-Frank amended the '34 Act, adding two key provisions to section 9 ("Manipulation of Security Prices"). At first glance, at least one preceding Janus, these recent amendments may have garnered little notice, but in the wake of the "make" analysis, they may raise a few eyebrows. Specifically, Dodd-Frank added a new provision that uses "make"[13] similarly to Rule 10b-5, but a second provision instead utilizes a phrase without definition.[14] The undefined term may ignite a new judicial debate over scienter and what it means to "willingly participate," or perhaps it will be seen as supplanting the need for an intermediary to "make" a statement to run afoul of federal securities law.

Making It Up As We Go Along

The "speechwriter" approach applied by Janus has fostered further confusion in the already muddy field of speech-related law, creating what appears to be an unusual carve-out for securities-related speech. Below are just a few examples of inconsistent U.S. law regarding liability and the "makers" of potentially actionable speech.

All the News That's Fit to Merely Suggest

If one follows Justice Thomas' "speechwriter" logic as advanced in Janus to destinations beyond the capital markets, allegedly libelous content prepared by an advertiser might only create liability risk for the ultimate publisher of the content, because the publication controls whether an advertisement appears in print. An "editorial" advertisement published by the New York Times, which criticized police response to student civil rights demonstrations in Montgomery, Alabama, was prepared and purchased by clergy leaders who were later named co-defendants in a libel action asserted by Montgomery's Police Commissioner.[15]

If the "speechwriter" framework was adopted universally, and of course, retrospectively, the clergy members who purchased the newspaper advertising space conceivably could have moved successfully to dismiss the complaint against them because they were not the "speakers" of the message, as they lacked the ultimate control to publish their criticism in the defendant newspaper, and could only suggest as much, at least according to Janus. Through the lens of Janus logic, these clergy members apparently did not "make" the critical statements at issue in New York Times Co. v. Sullivan.[16] Perhaps the Court intended that allegedly false speech made in connection with securities is somehow "made" differently than allegedly false speech in a newspaper advertisement which criticizes another.

Advertising Fakes Require a Statement Defendant Makes

Curiously, the opposite approach is generally taken in Lanham Act claims, which allege, among other things, false advertising. It is typically the advertiser, not the publisher, radio or television station, who faces liability risk for false commercial speech. In fact, a false advertising claim under federal law requires "speech . . . by a defendant who is in commercial competition with plaintiff." While the term "make" does not appear in the pertinent portion of the statute, it is certainly implied in the passage "speech . . . by a defendant."[18]

If the required speech is attributable to the commercial competitor/defendant, for the purposes of a false advertising claim, it is reasonable to conclude the defendant was also the alleged speaker who "made" the statement. Yet, in the post-Janus securities context, it would be the publication or broadcaster who "made" the statement. The advertiser who prepared false commercial speech is akin to the "speechwriter," and because "the content is entirely within the control of the person who delivers it," the media personnel who determine whether such an advertisement is ultimately aired or published, are those who actually "make" the statement.[19]

Seven Dirty Words Never Stated?

Regulatory litigation involving a radio broadcast of allegedly "obscene, indecent, or profane language,"[20] has treated the broadcaster as the speaker who "makes" the contested statement, consistent with the logic employed in Janus. For example, the late comedian George Carlin[21] was not named as a defendant by the FCC when a citizen complained of a Manhattan radio station airing an audio recording of his "seven dirty words" routine.[22] Of course, the Pacifica case involved government regulation of a radio station licensee for allegedly "indecent speech," as regulated by the FCC.[23] However, the SEC regulates both JCG and JCM, and, based on an application of the logic of Janus, Carlin apparently did not "make" the salacious seven-word statement during his nearly twelve-minute monologue, yet the Court described it in the Pacifica opinion as "the Carlin monologue," thirteen times.[24]

Free Passes for Free Riders

The "safe harbor" of the 1998 Digital Millennium Copyright Act (DMCA), known as the Online Copyright Infringement Liability Limitation Act (OCILLA), shields internet service providers (ISPs) and others from direct copyright infringement liability as well as potential secondary liability related to alleged infringement activity by others. The "safe harbor" requires that an ISP or other protected party must "adopt and reasonably implement a policy" that includes termination of user privileges for "repeat infringers." The requirement of eliminating users certainly seems to be the ability and exercise of editorial control,[25] which was the focus of Janus in determining whether one "makes" a statement. However, for online copyright infringement purposes, the "maker" of an offending statement, the one who possesses editorial control, is actually afforded a free pass.

Facebook the Nation

Functioning much like the DMCA safe harbor discussed above, section 230 of the Communications Decency Act of 1996 (CDA) offers "interactive computer services" immunity from liability for content providers and secondary users who publish content of another. This is analogous to the "speechwriter" and the speaker, yet Congress expressly carved-out liability risk for both the publisher of actionable online speech, such as an ISP, and those who repeat the words, under certain circumstances. The very title of this "safe harbor" provision indicates editorial control: "[p]rotection for private blocking and screening of offensive material."[26]

Elsewhere in the CDA, the exercise of editorial control is deemed "Good Samaritan" blocking and screening of offensive material. Congress expressly excluded from prospective liability such "Good Samaritans" who exercise editorial control over online content. Irrespective of the exercise of such control, Congress legislated that no such "Good Samaritan" would be considered a "publisher or speaker" of the content created by another, despite being vested with the power and control to convert another's mere suggestion into a statement.[27]

Perhaps the defining example of this provision may prove to be Facebook, a business based almost entirely on the publishing of other people's statements, which now faces litigation regarding member-created content that is allegedly racist hate speech.[28] Use of a CDA § 230 defense seems to be a near certainty. Following Janus, the content posted by Facebook members is merely suggested to Mr. Zuckerburg, et al., because the social network can always edit or even delete user content, suspend or terminate member accounts, and it boasts a lengthy history of exercising control over the content it hosts online, most notably the monetizing of its members' private data.[29] Because Facebook ultimately possesses the control to restrict what it publishes, its more than 800 million active users merely suggest what it should say, at least when one uses the Janus framework to determine who "makes" a statement.[30]

Made in America

The Janus opinion only adds to the many inconsistent doctrinal approaches the law has taken regarding who "makes" a statement, and who, if anyone, is responsible for it. What affect Janus may have on the capital markets and investing public remains an open question. Justice Breyer noted in dissent that an unscrupulous manager can include materially false statements in a prospectus and deceive the corporate board (and investing public) while escaping liability under federal securities law, provided s/he did not "make" any materially false statement(s). This is at least in part the result of previous Supreme Court rulings determining that "managers, not having 'made' the statement, would not be liable as principals and there would be no other primary violator they might have tried to 'aid' or 'abet.'"[32]

At least one federal court has already cited Janus in its dismissal of an SEC civil enforcement action for alleged violation of section 17(a) of the 1933 Securities Act, a provision which does not even include a requirement that a statement be "made," reasoning that "courts have routinely held that the elements of misstatement and scheme liability claims under [s]ection 17(a) and Rule 10b-5 are the same."[33] It appears the Janus Court may have ushered in an era that may only make the capital markets increasingly risky for the investing public, and stock market charlatans can almost be heard saying, "go ahead... make my day."
[1] Janus Capital Grp., Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011).

[2] Id. at 2300 (the prospectus suggested that market timing would not be allowed, however, the plaintiffs allege market timing practices).

[3] Id. at 2299.

[4] Id. at 2300, citing 15 U.S.C. §78t(a).

[5] Janus, 131 S.Ct. at 2304.

[6] Id.

[7] Id. at 2305.

[8] 17 CFR § 240.10b-5 (2010).

[9] Janus, 131 S.Ct. at 2303.

[10] Id. at 2302.

[11] Id.

[12] Id.

[13] As amended by Dodd-Frank, section 9(a)(1) of the '34 Act states the following:

If a dealer or broker, or the person selling or offering for sale or purchasing or offering to purchase the security or a security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act) with respect to such security, to make, regarding any security registered on a national securities exchange or any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act) with respect to such security, for the purpose of inducing the purchase or sale of such security or such security-based swap agreement, any statement which was at the time and in the light of the circumstances under which it was made, false or misleading with respect to any material fact, and which he knew or had reasonable ground to believe was so false or misleading. (emphasis added).

[14] As amended by Dodd-Frank, section 9(f) of the '34 Act states the following:

Any person who willfully participates in any act or transaction in violation of subsection (a), (b), or (c) of this section, shall be liable to any person who shall purchase or sell any security at a price which was affected by such act or transaction, and the person so injured may sue in law or in equity in any court of competent jurisdiction to recover the damages sustained as a result of any such act or transaction. In any such suit the court may, in its discretion, require an undertaking for the payment of the costs of such suit, and assess reasonable costs, including reasonable attorneys' fees, against either party litigant. Every person who becomes liable to make any payment under this subsection may recover contribution as in cases of contract from any person who, if joined in the original suit, would have been liable to make the same payment. No action shall be maintained to enforce any liability created under this section, unless brought within one year after the discovery of the facts constituting the violation and within three years after such violation. (emphasis added).

[15] The clergy defendants who prepared and purchased the disputed advertising were Ralph D. Abernathy, Fred L. Shuttlesworth, S. S. Seay, Sr., and J. E. Lowery. New York Times Co., et al. v. L.B. Sullivan, 273 Ala. 656, 665 (1962).

[16] 376 U.S. 254 (1964).

[17] See the Lanham Act test developed in Gordon & Breach Science Publishers v. Am. Inst. of Physics, 859 F.Supp. 1521, 1535-36 (S.D.N.Y. 1994).

The principles from the cases and legislative history may be summed up as follows: In order for representations to constitute 'commercial advertising or promotion' under [Lanham Act] [s]ection 43(a)(1)(B), they must be: (1) commercial speech; (2) by a defendant who is in commercial competition with plaintiff; (3) for the purpose of influencing consumers to buy defendant's goods or services (4) which is disseminated sufficiently to the relevant purchasing public. (emphasis added).

[18] 15 U.S.C. § 1125(a)(1)(B) (emphasis added).

[19] But see Tiffany (NJ) Inc. v. eBay, Inc., 600 F.3d 93, 112-13 (2d Cir. 2010) (action alleging trademark infringement, false advertising, or trademark dilution against online auction internet website proprietor through which counterfeit seller-branded merchandise had been advertised and sold).

[20] In the Matter of a Citizen's Complaint Against Pacifica Foundation Station WBAI (FM), New York, N.Y., 32 Rad. Reg. 2d (P & F) 1331, 56 F.C.C.2d 94, 1975 WL 29897(1975 F.C.C.).

[21] George Carlin is believed to have once asked, "Why is the man (or woman) who invests all your money called a broker"?, available at http://allpoetry.com/quote/by/George%20Carlin.

[22] Citizen's Complaint Against Pacifica, supra note 20.

[23] Id. See F.C.C. v. Pacifica Found., 438 U.S. 726, 731 (1978).

[24] See F.C.C. v. Pacifica Found., 438 U.S. 726, 731, 735, 744, 746, 763, 767, 770, 772, 778 (1978) (Justice Stevens characterized it as "the Carlin monologue" twelve times on behalf of the majority and Justice Stewart did so once, in dissent); see also The Seven Words - George Carlin (1972), available at http://www.georgecarlin.com/dirty/dirty3.html.

[25] According to the Janus opinion, "[w]ithout control, a person or entity can merely suggest what to say, not 'make' a statement in its own right." Janus, 131 S.Ct. at 2303.

[26] 47 U.S.C. § 230.

[27] 47 U.S.C. § 230(c)(1) ("No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.").

[28] Judicial and Freedom Watch Founder Alleges Misuse of "Social Network" In Threatening Jews with Death For Profit, Mar. 31, 2011, available at http://www.freedomwatchusa.org/facebook-and-zuckerberg-sued-for-1-billion. Complaint available at http://www.freedomwatchusa.org/pdf/110331-Fbook-Complaint.pdf.

[29] Ben Kunz, Go Ahead, Facebook. Sell That Data, May 26, 2010, BUSINESSWEEK, available at http://www.businessweek.com/technology/content/may2010/tc20100526_720314.htm.

[30] Facebook statistics, available at http://www.facebook.com/press/info.php?statistics.

[31] Janus, 131 S.Ct. at 2310.

[32] Id. at 2310 (The Supreme Court held previously that the implied private right of action of Rule 10b-5 does not include suits against aiders and abettors; see Stoneridge Inv. Partners, LLC v. Sci-Atlanta, Inc., 552 U.S. 148 (2008), see also Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 63 (1994) (such suits - against entities that contribute "substantial assistance" to the making of a statement but do not actually make it - may be brought only by the SEC, not by private parties)).

[33] See SEC v. Kelly, 08 Civ. 4612 (CM), 2011 WL 4431161, at *4-5 (Sept. 22, 2011 SDNY) (slip opinion); but see SEC v. Daifotis, 11 Civ. 137 (WHA) 2011 WL 3295139, at *1 (Aug. 1, 2011 N.D. Cal.) (slip opinion).


Mr. Pekarek is a Visiting Professor of Law and Supervising Attorney at Pace Law School, who also serves as Assistant Director for the non-profit Pace Investor Rights Clinic of John Jay Legal Services, Inc.

Ms. Shingle is a third-year law student at Pace Law School and a student-intern for the non-profit Pace Investor Rights Clinic, as well as a member of the Pace Willem C. Vis International Commercial Arbitration and FINRA/St. John's Moot Court Teams. She is also the current President of the Pace Lambda Law Society.

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