The Janus opinion, which holds that primary liability for securities fraud is limited to the person or entity with ultimate authority over the alleged false statements, has had its first impact. Earlier this week, the U.S. Supreme Court denied cert in a case alleging that a law firm and one of its former partners were liable for false statements made by Refco in its public filings. The Second Circuit had dismissed the claims, finding that under its "bright line" test the attorneys could not be liable because they were not identified to investors as the makers of the statements. In the wake of Janus, the Court left the Second Circuit's decision undisturbed. Law360 has an article on the cert denial.
In the Janus Capital Group v. First Derivative Traders case, the U.S. Supreme Court has held that for purposes of primary liability under Rule 10b-5, the "maker" of a statement is the person or entity with ultimate authority over the statement. The 5-4 decision authored by Justice Thomas rejects the government's proposed "creation" test, which would have extended primary liability to a person who provides false or misleading information that another person puts into a statement. Justice Breyer penned a vigorous dissent.
Oral argument does not always point the way to the ultimate decision in a case. Here, however, the justices split along the same lines, and for the same reasons, as publicly discussed back in December. At issue in Janus was whether a fund's investment advisor had "made" the alleged misstatements in the prospectuses issued by the fund. The Court concluded that "the maker of a statement is the entity with authority over the content of the statement and whether and how to communicate it." Because the fund (and not its investment advisor, which was a separate corporate entity) possessed the "ultimate authority" to determine what would go into its prospectuses, it was the "maker" of the alleged misstatements.
Although the Court recognized that an investment advisor acts as the manager of a fund and exercises significant influence over the contents of any prospectus, it concluded that "[a]ny reapportionment of liability in the securities industry in light of the close relationship between investment advisers and mutual funds is properly the responsibility of Congress and not the courts." Moreover, the Court found that its bright-line definition of "maker" was consistent with its past rejections of secondary liability in private securities fraud suits.
Holding: Judgment reversed.
Quote of note: "[T]he 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. One who prepares or publishes a statement on behalf of another is not its maker. And in the ordinary case, attribution within a statement or implicit from surrounding circumstances is strong evidence that a statement was made by—and only by—the party to whom it is attributed. This rule might best be exemplified by the relationship between a speechwriter and a speaker. Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit—or blame—for what is ultimately said."
Notes on the Decision:
(1) In dissent, Justice Breyer argues that the "English language does not impose upon the word 'make' boundaries of the kind the majority finds determinative." It is more reasonable to conclude that several different individuals or entities can "'make' a statement that each has a hand in producing." Here, according to the dissent, the "special relationships" alleged between the fund, its investment advisor, and the prospectus statements "warrant the conclusion that [the investment advisor] did 'make' those statements."
(2) The Court is notably silent on the exact scope of its decision. Is it limited to cases involving separate corporate entities or does it also extend to disputes over who, within a corporation, can be said to have "made" an alleged misstatement? The dissent appears to suggest that it covers both situations, noting (as part of its criticism of the decision) that "[e]very day, hosts of corporate officials make statements with content that more senior officials or the board of directors have 'ultimate authority' to control."
(3) One of the key issues at the oral argument was whether a limited interpretation of "make a statement" would allow a corporate entity to avoid liability by duping another corporate entity into making misstatements. A possible solution is the application of Section 20(b) of the Exchange Act, which makes it unlawful for a person to effect a securities fraud through another person. The Court declined to address the issue (see Note 10), but will we now see an increase in Section 20(b) claims as plaintiffs attempt to limit the impact of the decision?
As predicted, the U.S. Supreme Court has issued a narrow decision in the Halliburton case rejecting the Fifth Circuit's requirement that securities fraud plaintiffs must prove loss causation to obtain class certification. The unanimous (and short) opinion authored by Chief Justice Roberts holds that loss causation is not a precondition for invoking the fraud-on-the-market presumption of reliance and, therefore, is not necessary to establish that reliance is capable of resolution on a common, classwide basis.
While the Court endorsed the majority position adopted by the Second Circuit, Third Circuit, and Seventh Circuit, it focused entirely on the nature of the fraud-on-the-market presumption and did not address the scope of Federal Rule of Civil Procedure 23 (governing class certification). Moreover, the Court gave short shrift to the defendants' argument that although the Fifth Circuit specifically said "loss causation," it really was imposing a "price impact" test designed to determine whether the alleged misrepresentation had affected the company's stock price in the first place. The Court noted that "loss causation is a familiar and distinct concept in securities law; it is not price impact" and declined to do anything other than take the Fifth Circuit "at its word."
Holding: Judgment vacated and remanded to district court for further proceedings consistent with opinion.
Quote of note: "According to the Court of Appeals, however, an inability to prove loss causation would prevent a plaintiff from invoking the rebuttable presumption of reliance. Such a rule contravenes Basic’s fundamental premise—that an investor presumptively relies on a misrepresentation so long as it was reflected in the market price at the time of his transaction. The fact that a subsequent loss may have been caused by factors other than the revelation of a misrepresentation has nothing to do with whether an investor relied on the misrepresentation in the first place, either directly or presumptively through the fraud-on-the-market theory. Loss causation has no logical connection to the facts necessary to establish the efficient market predicate to the fraud-on-the-market theory."