Janus Capital Group v. First Derivative Traders
Issues
Whether, in a private right-of-action, primary liability applies to an investment adviser for alleged participation in the issue of material misstatements by the client funds that it advises despite the lack of aiding-and-abetting liability claims in private actions under Section 10(b) of the Securities Exchange Act of 1934 and Security Exchange Commission Rule 10b-5.
A 2003 investigation by the New York State Attorney General revealed that Janus Capital Management, an investment adviser, had secretly allowed several hedge funds to engage in market-timing trades using the assets of the Janus Investment Fund, which were publicly marketed toward long-term investors. Subsequently, First Derivative Traders, a stockholder in Janus Capital Management’s parent company, brought a private securities fraud action against the Janus companies, alleging that Janus Capital Management was responsible for misleading statements in the Janus Funds’ prospectuses. Though Janus Capital Management argued that its status as a mere outside service provider precluded liability, the Fourth Circuit allowed First Derivative Traders to move forward with its claim. In a decision that will affect the scope of secondary liability in private securities-fraud actions, the Supreme Court is now asked to decide whether an investment adviser can be held responsible for misstatements that appear in its client’s offering documents.
Questions as Framed for the Court by the Parties
There is no aiding-and-abetting liability in private actions brought under Section 10(b) of the Securities Exchange Act of 1934. Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994). Thus, a service provider who provides assistance to a company that makes a public misstatement cannot be held liable in a private securities-fraud action. Stoneridge Inv. Partners, LLC v. Scientific- Atlanta, Inc., 128 S. Ct. 761 (2008). In the decision below, however, the Fourth Circuit held that an investment adviser who allegedly "helped draft the misleading prospectuses" of a different company, ''by participating in the writing and dissemination of [those] prospectuses," can be held liable in a private action "even if the statement on its face is not directly attributed to the [adviser]." App., infra, 17a- 18a, 24a (emphases added). The questions presented are:
1. Whether the Fourth Circuit erred in concluding-in direct conflict with decisions of the Fifth, Sixth, and Eighth Circuits-that a service provider can be held primarily liable in a private securities fraud action for "help[ing]" or "participating in" another company's misstatements.
2. Whether the Fourth Circuit erred in concluding-in direct conflict with decisions of the Second, Tenth, and Eleventh Circuits-that 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.
On September 3, 2003, New York Attorney General Eliot Spitzer filed a complaint against a hedge fund for making secret arrangements with Janus Capital Management (“JCM”) to benefit from market-timing. See First Derivative Traders v. Janus Capital Group, Inc., 566 F.3d 111, 128 (4th Cir.
Edited by
The authors would like to thank Professor Charles Whitehead for his insights into this case.
Additional Resources
· New York Times, Peter J. Henning: The Hurdles to Suing Outside Advisers for Fraud (Oct. 27, 2010).
· Wall Street Journal, Brent Kendall: High Court Requests White House Views on Janus Appeal (Jan. 11, 2010)
· American Economic Association Papers and Proceedings, Eric Zitzewitz: How Widespread is Late Trading in Mutual Funds?