May 22, 2009

No Guarantee Of Future Results

When a district court within the Fourth Circuit dismisses a securities class action, it usually stays dismissed. But past performance is no guarantee of future results. In In re Mutual Funds Investment Litig. 2009 WL 1241574 (4th Cir. May 7, 2009), the U.S. Court of Appeals for the Fourth Circuit has reversed the dismissal of a market timing case brought against Janus Capital Group. Moreover, the decision contains some significant legal holdings.

(1) Pleading of Loss Causation - While the Fifth Circuit recently held that loss causation is only subject to notice pleading, the Fourth Circuit is standing tough. The court reaffirmed that, pursuant to Fed. R. Civ. P. 9(b), loss causation must be plead with particularity.

(2) Making of a Misrepresentation - To satisfy the fraud-on-the-market theory, the defendant must have made "a misrepresentation that is public and attributable to the defendant." There is an ongoing circuit split over how to evaluate whether a statement can be attributed to a particular defendant. Some courts (e.g., the Second and Eleventh Circuits) have adopted a "bright line" rule requiring that the misstatement must be attributable on its face to the defendant. Other courts (e.g., the Ninth Circuit) have concluded that substantial participation in the making of the misstatement is sufficient.

The Fourth Circuit declined to fully adopt either approach, instead offering this compromise: it is sufficient for a plaintiff to "alleg[e] facts from which a court could plausibly infer that interested investors would have known that the defendant was responsible for the statement at the time is was made, even if the statement on its face is not directly attributable to the defendant." Applying its new standard to the instant case, the court found that Janus Funds investors would have attributed to Janus Capital Management, the investment advisor to the funds, "a role in the preparation or approval of the allegedly misleading prospectuses. " Janus Funds investors would have been unlikely to come to the same conclusion about Janus Capital Group, however, which was the parent company of the investment advisor.

(3) Scheme Liability - The court found that it did not have to separately evaluate the possible existence of scheme liability. Under Stoneridge, "the existence of a fraudulent scheme does not permit a plaintiff to avoid proving any of the traditional elements of primary liability, such a scienter and reliance." Since the court had already evaluated these elements in connection with the misrepresentation claims, it did not have to go any further.

Holding: Reversed and remanded.

Posted by Lyle Roberts at May 22, 2009 8:59 PM | TrackBack
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