Janus Capital Group Inc
By a 5-4 vote in a narrow decision, the justices overturned a ruling by a U.S. appeals court that a class-action securities fraud lawsuit could go forward.
In backing the Denver-based Janus, one of the largest mutual fund companies, the high court's decision will mean few changes for the way big asset managers govern themselves -- structures that could have faced a major overhaul if the ruling had gone the other way.
Janus, in appealing to the Supreme Court, argued that the funds were separate legal entities and that neither the parent company nor its subsidiary was responsible for the prospectuses and could not be held liable.
The high court agreed. It ruled the alleged false statements in the prospectuses were made by an investment fund, not Janus Capital, and that Janus and the subsidiary therefore cannot be held liable in a private securities fraud lawsuit.
The lawsuit was brought on behalf of those who bought Janus stock from mid-2000 through early September 2003.
It alleged that the prospectuses of several Janus funds created the false or misleading impression that the company would adopt measures to curb market timing -- when in fact secret arrangements with several hedge funds permitted such transactions, to the detriment of long-term investors.
The lawsuit alleged that Janus stock was purchased at inflated prices, until public disclosure of the arrangements.
Janus paid $225 million in 2004 to settle claims by regulators that it had failed to disclose the trading arrangements to long-term investors.
Market timing -- allowing favored investors to buy or sell shares based on outdated prices at the expense of other investors -- took place at Janus and other fund firms in the last decade.
RULING SEEN AS IMPORTANT
Mark Perry, the attorney who represented Janus, said he was delighted the Supreme Court agreed with the company's position that only the party ultimately responsible for a statement can be sued for fraud in such private investor lawsuits.
The court's clarification of the scope of primary liability under the securities laws is important not just for the parties to this case, but for all participants in the securities markets, including bankers, lawyers, accountants, and investment advisers, he said.
The Obama administration supported the plaintiffs before the Supreme Court while the Chamber of Commerce business group supported Janus.
The high court previously has issued a number of rulings that limited private shareholder securities fraud lawsuits. It divided in the Janus case along conservative and liberal lines.
Justice Clarence Thomas in the majority opinion said Janus Capital may have assisted the Janus Investment Fund with crafting what it said in the prospectuses, but Janus Capital itself did not actually make those statements.
Janus had argued that technically it is a service provider to the funds. A federal judge initially sided with Janus.
William Birdthistle, an associate professor at the Chicago-Kent College of Law who had written an amicus brief on behalf of First Derivative Traders, called the ruling a pretty simplistic one that will leave the basic structure of the mutual fund industry unchanged.
He said the ruling's most dramatic impact could be to encourage other industries to adopt the split management structure of the mutual funds sector as a way to avoid liability.
What this ruling says is that as long as there are separate legal entities, even if management totally dominates all aspects, there's no liability, Birdthistle said. This is going to open the eyes of those not in the funds industry who are going to say: 'Wow, those guys are bulletproof', he said.
The Supreme Court case is Janus Capital Group v. First Derivative Traders, No. 09-525.
(Additional reporting by Ross Kerber in Boston, Editing by Gerald E. McCormick and John Wallace)