Opinion analysis: Who “makes” statements under the federal securities laws?

Monday’s decision in Janus Capital Group, Inc. v. First Derivative Traders provided a bright-line rule with respect to potential primary liability under Securities and Exchange Rule 10(b)-5, which prohibits “mak[ing] any untrue statement of material fact” in connection with the purchase or sale of securities:  in a decision by Justice Thomas (joined by the Chief Justice and Justices Scalia, Kennedy, and Alito), the Court limited potential primary liability under the Rule to speakers and persons and entities with ultimate authority over statements.  [For more background on the case, you can read my preview of the case here and my recap of the oral argument here.]

In doing so, the Court rejected broader readings of the statute from both the government – which urged the Court to hold that the word “make,” for purposes of the federal securities laws, should be defined as “create” and that potential primary liability extends to parties who play a significant role in the creation of false statements –  and from the dissent, which argued that the “maker” of an allegedly false statement should be determined based on the facts and circumstances alleged in a particular case.

Petitioner Janus Capital Management LLC (JCM) served as an investment advisor and administrator to the Janus mutual fund family.  The Janus mutual fund family was in turn created by publicly traded Janus Capital Group (JCG) and is organized in a Massachusetts business trust, the Janus Investment Fund.  JCM and JCG are the petitioners here and are both separate legal entities from Janus Investment Fund.

Respondent First Derivative Traders alleged in the district court that both JCM and JCG bore primary liability for allegedly misleading prospectus materials issued by Janus Investment Fund because they “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 [JCG and JCM] would implement measures to curb market timing in the Janus [mutual funds.]”  After the district court dismissed the action for failure to state a claim, the Fourth Circuit reversed, holding that First Derivative had sufficiently  alleged that “JCG and JCM, by participating in the writing and dissemination of the prospectuses, made the misleading statements contained in the documents.”

JCG and JCM filed a petition for certiorari, which the Court granted.  On Monday it reversed the Fourth Circuit’s decision, holding that only a party “with ultimate authority over the statement including its content and whether and how to communicate it” is the one that “makes” the statement within the meaning of Rule 10b-5.  Accordingly, even allegations that JCG and JCM were “significantly involved in preparing” the prospectuses fails to state a claim against them under Rule 10b-5.  In so holding, the Court compared JCG and JCM to speechwriters: “Even 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.”

The Court also rejected as overly broad the government’s contention that the word  “make” under Rule 10b-5 should be defined as “create.” That argument, the Court explained, was both unpersuasive and inconsistent with its 2008 decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. And in any event, the Court continued, because it found the plain language of Rule 10b-5 to be unambiguous, it need not defer to the government’s interpretation.  Finally, the Court expressed skepticism regarding the need to ever defer to the government’s broad interpretation of the private right of action.

In contrast to the bright-line rule requiring that the “maker” of an allegedly misleading statement must either be the actual speaker or have ultimate authority over the statement, Justice Breyer wrote in his dissent – which was joined by Justices Ginsburg, Sotomayor, and Kagan – that the language of Rule 10b-5 and case law require a more flexible approach.  “Neither common English nor this Court’s earlier cases limit the scope of [‘make’] to those with ‘ultimate authority’ over a statement’s content.”  Instead, he would analyze the issue of which party or parties “make” a statement based on the individual circumstances alleged; in this case, he concluded, “the circumstances here are such that a court could find that Janus Management made the statements in question.”

The practical effect of the opinion should be to narrow the non-speaking parties subject to potential primary liability under the federal securities laws and to focus litigants and counsel on potential theories of secondary liability for such non-speakers involved in same way with allegedly false statements.