According to the Securities and Exchange Commission Enforcement Division’s Chief Counsel Joseph Brennan, the US Supreme Court’s ruling in Janus Capital Group Inc. v. First Derivative Traders is impacting the types of violations the federal regulator is now filing against defendants. Brennan says to look out for more possible control person liability and aiding and abetting claims. Speaking at the SEC Speaks conference by the Practising Law Institute in Washington, Brenner said the views he was expressing are his own.
In the high court’s 2011 ruling, the decision honored, under Rule 10b-5 of the 1934 Securities Exchange Act, a narrow perspective of primary liability in a private lawsuit. The majority held that an investment adviser who was a legally separate entity from the mutual fund that submitted an allegedly prospectus couldn’t be held primarily liable in a private action even if that adviser had played a key role in developing the statement. Justice Clarence Thomas wrote that the statement’s maker is the entity or person with final authority over the statement (including its content and how it should be communicated).
The Exchange Act’s SEC Rule 10-b5(b) makes it illegal to either issue any statement of material fact that is untrue or leave out a key fact. The Supreme Court’s ruling establishes an even higher pleading bar in private securities fraud cases where the plaintiff wants to hold defendants liable for other’s misstatements.
The ruling, however, has not had a big impact on who the SEC can charge. It also hasn’t had a big influence on SEC enforcement decisions involving other statutes and provisions.
Also discussing Janus at the same gathering was SEC Deputy Solicitor John Avery. He noted while that the decision signified a significant “change” and the “narrowing” of how primary liability for issuing false or misleading statements is defined, it remains unclear whether SEC actions are covered under the ruling. While some district courts have found that Janus applies to SEC actions, federal appellate courts have not issued any decisions related to this matter.
Avery said that the ruling has, however, changed the way the SEC files charges. The federal agency, which is authorized to pursue aiders and abbettors accused of violative conduct, might now charge those that played a role in creating the statement as abbettors and aiders even though they wouldn’t be liable per Janus. However, in certain cases, this authority won’t work too well.
Meantime, federal courts are starting to deal with whether Janus is applicable beyond the context of Rule 10b-5. In four out of five SEC cases, the courts have ruled against applying Janus outside the rule.
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SEC Looking to Aiding/Abetting Claims In Wake of Janus Decision, Official Says, BNA Securities Law Daily, February 27, 2012
Janus Capital Group Inc. v. First Derivative Traders and the Law of Unintended Consequences, Forbes, September 21, 2011
Read the Supreme Court’s Opinion (PDF)
More Blog Posts:
Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court, Stockbroker Fraud Blog, June 16, 2011
Janus Avoids Responsibility to Mutual Fund Shareholders for Alleged Role in Widespread Market Timing Scandal, Stockbroker Fraud Blog, June 11, 2007
SEC Chairwoman Defends ‘No Wrongdoing’ Settlements, Institutional Investor Securities Blog, February 27, 2012