The Duality of the U.S. Supreme Court’s Janus Decision
The LAW FIRM OF DAYREL SEWELL, PLLC is pleased to announce its latest publication, “The Duality of the U.S. Supreme Court’s Janus Decision”, appearing in the 2015 American Bar Association Securities Litigation Fall Newsletter ( See The Duality of the U.S. Supreme Court’s Janus Decision ). 
Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder prohibit, among other things, the making of untrue and misleading statements of fact in connection with the purchase and sale of any security. In light of this prohibition, a seminal question is who has the liability for making the untrue or misleading statement? The United States Supreme Court addressed this question in its decision in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011). The Janus decision made an impact on the securities fraud landscape. It initially appeared to be a well-constructed guiding principle, yet different courts have come to disparate conclusions with respect to its application; thus creating the “duality” that exists – ironically – in the aftermath of the Janus decision. In Janus, the Court held that only a person who has the “ultimate authority” over a statement, including its content and whether and how to communicate it, can be the “maker” of the statement for purposes of Section 10(b) and Rule 10b-5. The Janus Court held that the investment advisor to a mutual fund cannot be primarily liable under Section 10(b) for statements made in in the fund’s prospectus because the investment advisor did not have the ultimate authority in making the statements. The Court held that to “make” these statements for purposes of rule 10b-5, the alleged maker must have “ultimate authority over the statement, including its content and whether and how to communicate it,” and that the fund managers did not have that authority. Janus, 131 S. Ct. at 2302. The Court concluded saying it is the entity that has control over the content of the statements and the authority of how and when to make them, that will have the primary liability. Id. at 2301. The government’s broader view of interpreting the word “make” as “create” thereby extending the primary liability to all parties who had a significant role in the creation of the misinterpretations, and the dissent’s broader view of interpreting the “maker” based on the facts and circumstances of the particular case, were both rejected. Id. at 2311. You are encouraged to comment and receive free updates by subscribing to the firm’s Blog and Press Release sections.
Yue
The Supreme Court effectively ruled that the “maker” of a statement is the “speaker” rather than “speechwriter” in Janus. The Supreme Court concluded that it is the entity that has control over the content of the statements, and the authority of how and when to make them, that will have the primary liability. Obviously, the Supreme Court tried to narrow the definition of the term “make”. Although there is no secondary liability for making of untrue and misleading statement in connection with the purchase or sale of securities based on Janus, there are many remaining secondary problems.
The first issue being, who should be liable for making untrue or misleading statements when the director who has “ultimate authority” was excused by due diligence protection? For example, if a company’s director solely relies on services and/or information from an independent advisor or of-counsel, should that the advisor or of-counsel mislead the company, who should be liable for this untrue or misleading statement? As mentioned in several judgments, the advisor or counsel didn’t have “ultimate authority” to determine the content of the statement. Additionally, the company’s director may have a meritorious defense against liability based on having performed due diligence to assure the accuracy and completeness of the statement, which requires the director to act in good faith. So there is the problem. It is arguable that it could be found that neither director, who acted in good faith and performed due diligence, nor advisor or counsel, who “provided” (not “made”) the untruth and misleading statement didn’t have “ultimate authority under this situation. Although the advisor would still be liable under other provision of the Federal securities laws as well, it would possibly decrease the validity of Rule 10b-5.
Morever, it often creates confusion amongst interested individuals and entities when courts determine who has “ultimate authority” in situations which involve a parent company and one or more of its subsidiaries. In Roseville, the court ruled that ENV had “direct control over all the corporate transactions” of the subsidiary. And in Optimal, the court ruled “subsidiary entity’s board manages and has the authority to alter the prospectus statements without consulting the shareholders.” These holdings foster ambiguity over exactly what is meant by “directly control” and whether “directly control” could be regarded as “ultimate authority”. In Roseville, I doubt that even though ENV was the sole stockholder, it doesn’t mean that ENV’s board didn’t have any power to review, to oversight and to manage this company. By the way, the Court should carefully consider dealing with relationship between parent company and its subsidiary, which involves the well-established rules regarding piercing the corporate veil.
Other questions still remain such as Janus‘ applicability to other anti-fraud provisions and SEC enforcement. I don’t think it’s a wise decision that the court only considers the context of provisions, which means that Janus will primarily only apply to the word “make”, without considering consistency of provisions and the intent of the Supreme Court’s holding. “Rome was not built in a day” and we also need to wait for further decisions to refine Janus‘ interpretation and its consistent application.
Melissa W.
It is good to see someone who has a real grasp of the subject matter. Thank you.