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?