In the few months since the Supreme Court announced the bright line rule of Janus Capital Group, a number of courts have applied the rule, giving us a better picture Rule 10b-5 liability post-Janus. The Supreme Court held in Janus that, for purposes of Rule 10b-5, the 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.” The Court analogized to the relationship between a speechwriter and a speaker: a speechwriter may draft a speech, but the content is within the control of the speaker who delivers it. Thus, the Court found that the investment adviser to a mutual fund was not liable for alleged misrepresentations in the fund’s prospectuses under Rule 10b-5, because the fund, and not the manager, was the maker of the statements.
In a recent decision by Judge McMahon of the Southern District of New York, the rule was extended to scheme liability under Rule 10b-5 and to liability under Section 17(a) of the Securities Act. In SEC v. Kelly, Judge McMahon applied Janus to subsections (a) and (c) of Rule 10b-5, which make it unlawful for any person to “employ any device, scheme or artifice to defraud” or “engage in any act . . . which operates as a fraud . . or deceit upon any person, in connection with the purchase or sale of any security.” The SEC argued that defendants were liable for a scheme based on allegedly false statements under these subsections of Rule 10b-5, even though they were not the maker of the statements under rule announced in Janus. Judge McMahon rejected this argument. Scheme liability under subsections (a) and (c) of Rule 10b-5 hinges on the performance of an “inherently deceptive act that is distinct from a false statement.” Because the SEC’s scheme liability claim was predicated on a misrepresentation and defendants were not makers of the statement under Janus, defendants were not liable under subsections (a) and (c) of Rule 10b-5.
Judge McMahon also dismissed the SEC’s claims under Section 17(a), finding that although the language of Section 17(a) and Rule 10b-5 is not identical, both provisions have the same meaning in defining creating primary liability. Thus, to succeed on a claim under either Rule 10b-5(b) or Section 17(a)(2), a plaintiff must establish that defendants made materially false statements or omissions, as the term maker is defined by Janus.
In another recent case, City of Roseville Employees’ Retirement System v. Energysolutions, Inc., Judge Koeltl of the Southern District of New York declined to find that a parent company and sole owner of stock in a company sold in an initial public offering was not the maker of allegedly false statements in registration statements associated with the sale. The parent company argued that, as a matter of law, it was not the maker of the false statements in the registration statements, because the registration statements were issued by its wholly owned subsidiary and the subsidiary’s officers and directors. The parent company argued that it was, at most, a speechwriter and but not the speaker of the false statements, and therefore not liable under Rule 10b-5.
In her September 30, 2011 decision, Judge Koeltl rejected the parent company’s argument that it was precluded from liability under Janus. The court found that there were questions of fact as to whether the parent was liable as the maker of the false statements, given that the parent owned the subsidiary, had direct control over all corporate transactions, and had authority to determine when and whether to sell the shares. Thus, Judge Koeltl left it to the jury to decide whether the parent had “ultimate authority over the statement, including its content and whether and how to communicate it”, the test stated in Janus.
Thus, the Southern District of New York has applied Janus broadly in one case, yet declined to extend it in a case where defendants argued Janus plainly precluded liability. In just a few months, the impact of Janus has been felt in a number of cases, and we can expect that further clarification and amplification of its holding will follow as courts consider the application of Janusin various contexts.