The U.S. Supreme Court ruled in favor of an adviser to a mutual fund, Janus Capital Group Inc. and a subsidiary (Janus), in a case that will limit the ability of shareholders of mutual fund companies to prevail in securities fraud suits.
In a 5-4 decision, the Supreme Court ruled that Janus could not be held liable for false statements made in the prospectus of the mutual funds that it advised. Shareholders of certain Janus funds brought a class-action securities fraud suit against Janus after Janus became embroiled in a market-timing scandal in 2003. The New York attorney general sued Janus for allegedly inflating the Janus funds’ share prices through delays in fund valuation. Shareholders of the Janus funds followed with a lawsuit alleging that the funds’ disclosure documents stated that Janus would curb harmful late trading strategies based on through policies described in the prospectuses.
The case addressed the issue of whether Janus could be held liable for the misstatements in the Janus funds’ prospectuses and thus be charged with violating rules under the Securities Act of 1933 prohibiting “any person, directly or indirectly” from “mak[ing] any untrue statement of material fact” in connection with buying or selling securities.
Justice Clarence Thomas, in the majority’s opinion, ruled that only the Janus funds themselves and not their investment advisers could be held liable. In focusing on the word “make,” Justice Thomas stated:
One who prepares or publishes a statement on behalf of another is not its maker … Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it.
The Court held that fund shareholders cannot sue Janus for assisting with writing the allegedly misleading prospectuses for the Janus funds. In the Court’s view, the Janus funds are separate legal entities and that the Janus funds, not Janus, as the adviser, were responsible for the prospectuses.
Click here to access the decision.