September 2, 2011

Ultimate Authority

As noted by The 10b-5 Daily in its writeup of the Janus decision, a key open question was whether the Supreme Court's "ultimate authority" requirement for primary liability also applied to corporate insiders. Just a few months later, there is already a district court split on the issue.

In In re Merck & Co., Inc. Sec., Derivative & "ERISA" Litigation, 2011 WL 3444199 (D.N.J. Aug. 8, 2011) the company's executive vice president for science and technology argued that he did not have "ultimate authority" over the statements attributed to him in Merck's public filings. (It is the same Merck case that led to the Supreme Court's recent decision concerning the statute of limitations for securities fraud claims.) The court found that the holding in Janus was limited to cases involving a "separate and independent entity" and could not "be read to restrict liability for Rule 10b-5 claims against corporate officers to instances in which a plaintiff can plead, and ultimately prove, that those officers - as opposed to the corporation itself - had 'ultimate authority' over the statement." Accordingly, the court declined to dismiss the claims against the Merck officer on that basis.

The ink was barely dry on the Merck decision, however, before another district court disagreed with its analysis. In Hawaii Ironworkers Annuity Trust Fund v. Cole, No. 3:10CV371 (N.D. Ohio Sept. 1, 2011), the court found that "nothing in the Court's decision in Janus limits the key holding - the definition of the phrase 'to make . . . a statement' under Rule 10b-5 - to legally separate entities." Indeed, the dissent in Janus clearly believed that the majority's holding also applied to corporate insiders. In the instant case, the plaintiffs' own complaint made it clear that the defendants, who were officers in one of the company's business units, did not have ultimate authority over the alleged false statements in the company's filings. The court also noted that the alleged false statements, unlike in the Merck case, were not specifically attributed to the defendants (a fact that might otherwise be sufficient to establish "ultimate authority"). The court therefore dismissed the Rule 10b-5(b) claims against the defendants for making false statements, but declined to dismiss the related Rule 10b-5(a) and (c) claims based on deceptive conduct.

What will the next court to address the issue hold? Stay tuned.

Posted by Lyle Roberts at September 2, 2011 10:28 PM | TrackBack
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