Supremes Wade Hip Deep Into Securities Laws Bog

The Supreme Court continues to put its stamp on securities class actions as it takes on cases involving hot-button issues. Within the past few weeks it heard arguments in two cases and granted cert in a third.

The Supremes appeared closely divided at the recent argument of a case involving the Janus Capital Group, the investment advisor to the Janus “family” of mutual funds. Shares of these funds are sold to investors through prospectuses, which bear the name of the fund but which are actually written by the funds’ advisor. Although it is common knowledge in the industry that the advisors manage the funds and write their prospectuses, here the advisor argued  that what “everyone knows” is irrelevant, and that it could not be liable because the prospectus did not identify it as the author.

In its previous decisions, the Supreme Court has drawn a sharp distinction between those who actually make a misstatement – and are therefore “primary violators” of the securities laws – and those who merely help the primary violators by “aiding and abetting” them. The primary violators are liable, but the helpers are not. In trying to escape responsibility, various “secondary actors,” such as attorneys, accountants, or bankers, claim that no matter how deeply involved they were in drafting the offending disclosure documents, unless they are publicly identified as the authors, they are just “helpers” and can’t be sued.

In the Janus case, the defendant mutual fund investment advisor was completely responsible for writing the “market timing” policy disclosed in the funds’ prospectuses. Although the advisor was not named as an author of the prospectuses, shareholders who invested in the parent company of the investment advisor filed suit against the advisor.
 
Discussion during oral arguments suggested  that the Court is closely divided on these questions, along the usual lines. Justices Ginsburg, Sotomayor and Kagan appeared concerned that investment advisors could insulate themselves from all fraud claims if they are not held accountable for misrepresentations in prospectuses that they have written. Justices Alito, Scalia, and Chief Justice Roberts, on the other hand, emphasized in their questions the fact that the prospectuses were attributed to the mutual funds, not the advisor, and the funds were legally separate entities from the advisor and retained their own outside counsel to review the policy statements. Justice Scalia observed that the mutual funds controlled the contents of their prospectuses and could have stopped the challenged language from being placed in them.