Today, the Supreme Court ruled that a mutual fund investment adviser cannot be held liable for the statements in a prospectus made by the adviser’s client (the mutual fund itself). Janus Capital Group, Inc. v. First Derivative Traders, No. 09-525, slip op. (Jun. 13, 2011). In doing so, the Court rejected the argument of the Government in an amicus brief that a private plaintiffs should be permitted to sue a person who provides false or misleading information to another person, who then includes that information in a statement. A copy of the opinion is available on the Supreme Court’s website.

The petitioners in the appeal were Janus Capital Group, Inc. ("JCG") and Janus Capital Management LLC ("JCM"). JCG is a publicly traded company which created a "family" of mutual funds, including the Janus Investment Fund. JCM provides services to the Janus Investment Fund as an investment adviser. Importantly, although JCM is a wholly owned subsidiary of JCG, neither company has an ownership interest in the Janus Investment Fund.

Plaintiff First Derivative alleged that JCG and JCM "caused" the Janus Investment Fund to issue a prospectus "which created the misleading impression that [JCG and JCM] would implement measures to curb market timing in the Janus [mutual funds]." When the Attorney General of New York filed a complaint in 2003 alleging that JCG entered into secret arrangements to allow market timings in mutual funds advised by JCM, investors withdrew significant amounts of money form the fund. Because JCM was paid a fee based on the total value of the funds, the withdrawals impacted JCM’s income, and caused the value of its parent company, JCG, to fall by 25%.

The District Court dismissed First Derivative’s complaint for failure to state a claim. In re Mutual Funds Inv. Litig., 487 F. Supp.2d 618, 620 (D. Md. 2007). The Fourth Circuit Court of Appeals reversed, finding that "by participating in the writing and dissemination of the prospectuses," JCM and JCG "made the misleading statements contained in the documents." In re Mutual Funds Inv. Litig., 566 F.3d 111, 121 (4th Cir. 2009).

Justice Thomas, writing for a 5-4 majority, reversed, ruling that JCM did not "make" the statement in the Janus Investment Fund’s prospectus, stating:

For the purpose of Rule 10b-5, the maker of the statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. Without control, a person or entity can merely suggest what to say, not "make" a statement in its own right. One who prepares or publishes a statement on behalf of another is not its maker.

In an amicus brief, the Government urged the Court to rule that "make" a statement should be defined to include those who "create" the statement. First Derivative similarly argued that JCM’s role as an investment adviser should render it the "maker" of statements by its client, Janus Investment Fund. The Court rejected the argument noting the corporate structure (neither JCM, not its parent company JCG owned the Janus Investment Fund) and that only the fund – not JCM – bore "the statutory obligation to file the prospectus with the SEC."

Justice Breyer, joined by Justices Ginsburg, Sotomayor and Kagan) dissented.