Oral argument in the Janus case took place this morning. The early verdict is that the U.S. Supreme Court may be headed toward a split decision on whether the investment manager of a fund can be subject to primary liability for securities fraud based on alleged misstatements in the fund's prospectuses.
A few highlights (based on the transcript):
(1) Petitioner (Janus) conceded that its in-house counsel had drafted the prospectuses on behalf of the fund, but argued that the fund was governed by its trustees who were responsible for the contents and issuance of the prospectuses. The court spent a considerable amount of time exploring the nature of the relationship between an investment advisor and a fund. In particular, various members of the court (J. Breyer, J. Kennedy, J. Sotomayor) probed as to whether an investment advisor should be viewed as the equivalent of a corporate manager who can be held liable for the corporation's misstatements.
(2) Justice Sotomayor and Justice Ginsburg both suggested that under Petitioner's theory, a corporate entity could avoid liability by duping another corporate entity into making the misstatements. Petitioner responded that a "dupe case" is addressed in Section 20(b) of the Exchange Act ("the ventriloquist dummy statute"), which makes it unlawful for a person to effect a securities fraud through another person.
(3) Respondent (investors) argued that the Court should adopt the SEC's interpretation of what it means to "make" a statement, i.e., "to create or compose or to accept as one's own." Justice Scalia was skeptical, suggesting that if Respondent was "talking about making heaven and earth, yes, that means to create, but if you're talking about making a representation, that means presenting the representation to someone, not drafting it for someone else to make."
(4) As to whether an investment advisor was the equivalent of a corporate manager, despite the fact that it is an independent entity, Respondent asserted that "contractually outsourc[ing] the management function should not alleviate the securities fraud that is alleged here." Moreover, the investment advisor had "substantive control over the content of the message" and, therefore, was not a mere aider and abettor. In response, Justice Kagan questioned the relevance of "control" given that Respondent had not brought its case under Section 20 of the Exchange Act and presumably could not have done so because of the nature of the relationship between a fund and its investment advisor.Posted by Lyle Roberts at December 7, 2010 10:58 PM | TrackBack