To "Make" a Statement

Thu Nov 4 22:34:50 UTC 2010

        It isn't unusual for a court case to turn on the meaning of
words, but a case currently before the Supreme Court, Janus Capital
Group v. First Derivative Traders, No. 09-525, takes this a step
further, since a central issue is what it means to "make" a statement.

        The case has a somewhat unusual factual background:  The Janus
Funds are well-known mutual funds, and their prospectuses indicated that
market timing would not be allowed in the funds.  (Market timing is the
rapid purchase and sale of shares of a fund, resulting in costs that
must be borne by the other fund shareholders.)  A subsidiary of Janus
Capital Group manages the Janus Funds and, it is alleged, wrote the
prospectuses.  In 2003 the New York Attorney General charged that the
Janus Funds did allow market timing, and the stock of Janus Capital
Group fell sharply.  Investors in Janus Capital Group stock brought a
securities fraud claim against Janus Capital Group, based on the alleged
misrepresentations in the Janus Funds prospectuses.

        The Securities and Exchange Commission's Rule 10b-5 makes it
unlawful to "make" any untrue statement of a material fact in connection
with the purchase or sale of any security.  Does that rule apply to this
case?  The alleged misrepresentations were directed to investors in
Janus Funds, not to investors in Janus Capital Group, and they bore the
name of Janus Funds, not Janus Capital Group.  On the other hand, it's
well-known that the investment manager of a mutual fund is in de facto
control of a fund and provides its management services, often including
writing the prospectuses.  Most mutual funds do not even have any
employees.  There is no aiding and abetting liability in private claims
for securities fraud, so Janus Capital Group can be liable here only if
it "made" the alleged misrepresentations.

        The SEC, in an amicus brief, has weighed in on behalf of the
plaintiffs, saying that someone who creates or writes statements
contained in a written document can be described as the "maker" of those
statements, even if someone else is the nominal speaker.  The defendant
takes a different view:  That "make" in this context means "to put
forth; give out; deliver; as to make a speech," so only the Janus Funds
can be the "maker."  (The Janus Funds owe no duty to the shareholders of
Janus Capital Group, so they can face no liability in this case.)  The
defendant characterizes itself as merely a service provider to the Janus

        Any thoughts?  The briefs are at, and
additional case documents are at
st-derivative-traders.  The Supreme Court will hear oral argument on
December 7.

John Baker

John M. Baker, Esquire
Stradley Ronon Stevens & Young, LLP
1250 Connecticut Avenue, N.W., Suite 500
Washington, DC 20036-2652
p: 202.419.8413
f: 202.822.0140

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