Narrowing the Scope of Private Enforcement and Enhancing Effect of Distinct Corporate Legal Personality: Janus Capital Group, Inc. v. First Derivative Traders

In a deeply divided 5-4 decision, the U.S. Supreme Court in Janus Capital Group, Inc. v. First Derivative Traders  held, in an opinion by Justice Thomas, that the person making false statement, but not necessarily the person creating or contributing to the false statements, may be held liable in private actions under Rule 10b-5. Justice Thomas explained that "in analyzing whether JCM “made” the statements for purposes of Rule 10b–5, we are mindful that we must give “narrow dimensions … to a right of action Congress did not authorize when it first enacted the statute and did not expand when it revisited the law.” Id., at 167." (citing Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008). Three justices (Ginsburg, Sotomayor and Kagan) joined Justice Breyer's dissent. The holding continues a generation-long trend to narrow the power of private individuals to enforce securities and corporate law in favor of enforcement by the state and its agents.  

 (From Bill Singer, Street Sweeper, Let’s “Make” A Deal: US Supreme Court Rules on Janus Appeal, Forbes, June 13, 2011 ("On June 13, 2011, the United States Supreme Court issued an intriguing Decision that wrestled with the issues of the legal fiction of seemingly independent entities that nonetheless operate with apparent common interests and connections. In an Opinion that reads as much as a legal dissertation as a High School grammar lesson, the Court tries to determine what is meant by “making” a misstatement.")).

The case holding continues a trend that vaunts formalism over functionalism as a basic approach to interpretation of statues and legislative programs, and contributes to what can only be understood as an official suspicion of the ability of motives of private actor sin the enforcement of law. In this case, the hearty of the litigation involved the meaning of the word "make" as it applies to an entity that is part of a related group of entities, all of which had a hand in the development of information at the heart of the fraud case under Rule 10b-5.  The trend is at variance with that of other advanced jurisdictions, especially in Europe.  At its limit, it suggests a taste for the forms of authoritarianism and managerial centralism (even as it begs otherwise), that is at odds with traditional American political culture. 

 (From Timothy Raub, Oral Argument Heard In Securities Class Action Challenging Primary Liability Of Service Providers, Lexis/Nexis Communities, Litigation Resource Community, Dec. 8, 2010).

On the other hand, the case is important for a peripheral issue that has little to do with U.S. domestic securities law.  One of the significant issues affecting the framing of corporate norms beyond the state has been that of the responsibility of different parts of a corporate group for actions that cause harm, and the responsibility of corporations for managing conduct down their supply chains.  Those efforts have sought to soften the older, but still strictly guarded notion of distinct legal personality that separates corporations from each other the way that people are viewed as wholly distinct actors in law. For a short discussion in the context of the human rights responsibilities of business sunder law and social norms, see, Larry Catá Backer, Using Corporate Law to Encourage Respect for Human Rights in Economic Transactions: Considering the November 2009 Summary Report on Corporate Law and Human Rights Under the UN SRSG Mandate, Law at the End of the Day, January 14, 2010. In Janus Capital Group, then, the issue could be seen as a backdoor method for imposing liability on corporate groups despite their distinct legal personality.  Here Janus Capital Group, Inc. (JCG), is a publicly traded company that created the Janus family of mutual funds. These mutual funds were organized in a Massachusetts business trust, the Janus Investment Fund. That Fund, JIF, then retained JCG’s wholly owned subsidiary, JCM, to be its investment adviser and administrator. 

(From http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a8261zuLlpKc)

This philosophy has tended to hamper efforts to create a supra national legal culture in which related corporations or corporations engaging jointly in an enterprise, can be held liable under legal standards.  As a result, there has been movement for a development of parallel concepts in soft law, either sponsored by international public organizations like the Organization for Economic Cooperation and Development (the Guidelines for Multinational Enterprises), by organs of the United Nations (the Protect-Respect-Remedy framework and Guiding Principles) or by private organizations (for example through product and process certification programs). Janus, thus, may have as great an impact in the transnational sphere, where it serves to reinforce the power of separate corporate personality for assessing liability under law-systems, than it has as an addition to the jurisprudence of American statutory interpretation. From the social-norm perspective of the OECD's Guidelines for Multinational Enterprises, or even the Protect-Respect-Remedy framework, the analytical framework would shift from the meaning of thew word "make" (as ultimately irrelevant for a functional analysis) and concentrate on the effective relationship of a parent corporation and its network of subsidiaries as they actually interacted in the development of and transmission of the contested statement. The difference in approaches doe snot bode well for efforts in the short term to harmonize emerging global social norms and the legal norm values illustrated in this case.    

The case syllabus is posted below.  Links to the opinion and the dissent are also included below.

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JANUS CAPITAL GROUP, INC. v. FIRST DERIVATIVE TRADERS ( No. 09-525 )
566 F. 3d 111, reversed. Syllabus

Opinion [Thomas]
Dissent [Breyer]

Syllabus
certiorari to the united states court of appeals for the fourth circuit
No. 09–525. Argued December 7, 2010—Decided June 13, 2011

Respondent First Derivative Traders (First Derivative), representing a class of stockholders in petitioner Janus Capital Group, Inc. (JCG), filed this private action under Securities and Exchange Commission (SEC) Rule 10b–5, which forbids “any person … [t]o make any untrue statement of a material fact” in connection with the purchase or sale of securities. The complaint alleged, inter alia, that JCG and its wholly owned subsidiary, petitioner Janus Capital Management LLC (JCM), made false statements in mutual fund prospectuses filed by Janus Investment Fund—for which JCM was the investment adviser and administrator—and that those statements affected the price of JCG’s stock. Although JCG created Janus Investment Fund, it is a separate legal entity owned entirely by mutual fund investors. The District Court dismissed the complaint 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. Before this Court, First Derivative continues to argue that JCM made the statements but seeks to hold JCG liable only as a control person of JCM under §20(a).

Held: Because the false statements included in the prospectuses were made by Janus Investment Fund, not by JCM, JCM and JCG cannot be held liable in a private action under Rule 10b–5. Pp. 5–12.

(a) Although neither Rule 10b–5 nor the statute it interprets, §10(b) of the Act, expressly creates a private right of action, such an “action is implied under §10(b).” Superintendent of Ins. of N. Y. v. Bankers Life & Casualty Co. , 404 U. S. 6 , n. 9. That holding “remains the law,” Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. , 552 U. S. 148 , but, in analyzing the question at issue, the Court is mindful that it must give “narrow dimensions … to a right … Congress did not authorize when it first enacted the statute and did not expand when it revisited” it, id., at 167. Pp. 5–10.

(1) For Rule 10b–5 purposes, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. Without control, a person or entity can merely suggest what to say, not “make” a statement in its own right. This rule follows from Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A. , 511 U. S. 164 , which held that Rule 10b–5’s private right of action does not include suits against aiders and abettors who contribute “substantial assistance” to the making of a statement but do not actually make it. Reading “make” more broadly, to include persons or entities lacking ultimate control over a statement, would substantially undermine Central Bank by rendering aiders and abettors almost nonexistent. The Court’s interpretation is also suggested by Stoneridge, 552 U. S., at 161, and accords with the narrow scope that must be given the implied private right of action, id., at 167. Pp. 6–8.

(2) The Court rejects the Government’s contention that “make” should be defined as “create,” thereby allowing private plaintiffs to sue a person who provides the false or misleading information that another person puts into a statement. Adopting that definition would be inconsistent with Stoneridge, supra , at 161, which rejected a private Rule 10b–5 suit against companies involved in deceptive transactions, even when information about those transactions was later incorporated into false public statements. First Derivative notes the uniquely close relationship between a mutual fund and its investment adviser, but the corporate formalities were observed, and reapportionment of liability in light of this close relationship is properly the responsibility of Congress, not the courts. Furthermore, First Derivative’s rule would read into Rule 10b–5 a theory of liability similar to—but broader than—control-person liability under §20(a). Pp. 8–10.

(b) Although JCM may have been significantly involved in preparing the prospectuses, it did not itself “make” the statements at issue for Rule 10b–5 purposes. Its assistance in crafting what was said was subject to Janus Investment Fund’s ultimate control. Pp. 10–12.

566 F. 3d 111, reversed.

Thomas, J., delivered the opinion of the Court, in which Roberts, C. J., and Scalia, Kennedy, and Alito, JJ., joined. Breyer, J., filed a dissenting opinion, in which Ginsburg, Sotomayor, and Kagan, JJ., joined.