In a few words last week, the U.S. Supreme Court may well have changed the way Rule 10b-5 cases are litigated. In Janus Capital Group Inc. v. First Derivative Traders, the Court, in a 5-4 decision, adopted a rule of narrow construction for Rule 10b-5 cases generally and held that only the “maker” of a false or misleading statement—meaning a “person or entity with ultimate authority over the statement”—could be liable under Rule 10b-5.1 In doing so, the Court adopted the bright line rule advocated by petitioner (defendant below) and its supporting amici, and rejected the argument of respondent (plaintiff below) that Janus Capital Management (JCM) could be liable for alleged misstatements in a prospectus issued by Janus Investment Fund, a mutual fund for which JCM had served as investment adviser, based on the allegation that JCM had helped draft and disseminate the misstatements. Perhaps most important, the Supreme Court adopted a general rule of narrowly construing Rule 10b-5 itself that should apply to other important issues—not only in private actions, but in SEC proceedings and criminal cases as well.
Background
The plaintiff in Janus was a shareholder of the parent holding company of JCM. The complaint alleged that JCM and its corporate parent participated in drafting and supervising misstatements that appeared in the fund’s prospectuses concerning purported safeguards in place to prevent “market timing” transactions. The plaintiff alleged that, when government investigations revealed that the Janus Investment Fund had permitted “market timing” transactions to occur, the price of JCM’s parent’s shares declined. The plaintiff asserted Rule 10b-5 claims against both JCM and its corporate parent.
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