Posted On: June 16, 2011

Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court

In a 5-4 ruling, the US Supreme Court placed specific limits on securities fraud lawsuits this week when it ruled in Janus Capital Group v. First Derivative Traders, No. 09-525 that the mutual funds investment adviser could not be sued over misstatements in fund prospectuses. Justice Clarence Thomas, who wrote for the majority, said that only the fund could be held liable for violating an SEC rule that makes it unlawful for a person to make a directly or indirectly untrue statement of material fact related to the selling or buying of securities.

The fund and its adviser were closely connected. Janus Capital Group, which is a public company, created Janus Investment Fund, which then retained Janus Capital Management to deal with management, investment, and administrative services. However, in its appeal to the nation’s highest court, Janus argued that the funds are separate legal entities. He said that the parent company and subsidiary are not responsible for the prospectuses, and they therefore cannot be held liable. The investors filed their securities fraud lawsuit after the New York attorney general sued the adviser in 2003.

The plaintiffs claimed that the funds disclosure documents falsely indicated that the adviser would implement policies to curb strategies based on fund valuation delays. At issue was whether it could be said that the adviser issued misleading statements that the SEC rule addressed. Justice Thomas said no. He noted although the adviser wrote the words under dispute, the fund was the one that issued them. Meantime, Justice Stephen G. Breyer, who wrote the dissent, said that there is nothing in the English language stopping someone from saying that if several different parties that each played a part in producing a statement then they all played a role in making it.

Shepherd Smith Edwards and Kantas founder and stockbroker fraud lawyer William Shepherd says, “As Wall Street fraud continues to plague investors, regulator ignore existing rules and legislators bow to lobbyists to dilute new legislation aimed at curtailing the plague. Yet, as an attorney I am most dismayed when “activist” judges - especially Supreme Court Justices – take the side of those who victimize investors. In the 1930’s and 1940’s laws were passed to regulate Wall Street. Our capital markets then became the safe haven for investors worldwide and grew exponentially. Now we seem to be in a ‘race to the bottom,’ with Wall Street more and more resembling Times Square - with a huckster every ten feet.”

Related Web Resources:

Janus Capital Group v. First Derivative Traders, US Supreme Court (PDF)

In 5-4 Vote, Supreme Court Limits Securities Fraud Suits, New York Times, June 14, 2011

Supreme Court Ruling on Janus Funds “Smells”, Business Insider, June 16, 2011


More Blog Posts:
Janus Avoids Responsibility to Mutual Fund Shareholders for Alleged Role in Widespread Market Timing Scandal, Stockbroker Fraud Blog, June 11, 2007

Wells Fargo Advisors LLC Agrees to $1 Million FINRA Fine for Securities Charges Related to Mutual Fund Prospectus Delivery, Stockbroker Fraud Blog, May 12, 2011