The Meaning of "Make a Statement"

[Baker, John]

The Supreme Court on Monday gave its interpretation of what it means to "make a statement," http://www.supremecourt.gov/opinions/10pdf/09-525.pdf.  It's a bit different from what you might have supposed.  Below are excerpts from a post I have written on the subject, full version at http://groups.yahoo.com/group/FundLaw/message/1327:
 
 
The United States Supreme Court has ruled that an investment adviser to a mutual fund cannot be held directly liable under Rule 10b-5 for misstatements in the fund's prospectus. Janus Capital Group v. First Derivative Traders, No. 09-525 (June 13, 2011). The 5 - 4 opinion was written by Justice Thomas, with a dissent by Justice Breyer. Although the ruling was delivered in the context of an adviser - fund relationship, it is written in broad language that is likely to have lasting and unforeseeable ramifications for securities fraud actions generally.

The central issue in the case was what it means to "make" a statement. Rule 10b-5 provides in part that it is unlawful to "make any untrue statement of a material fact" in connection with the purchase or sale of any security. In the case before the Court, shareholders of Janus Capital Group, Inc. argued that the company's subsidiary, Janus Capital Management LLC, the investment adviser to the Janus Investment Fund, "made" untrue statements contained in the Janus Investment Fund prospectuses. Those prospectuses contained statements that could be read to suggest that the funds would not allow market timing; when it emerged that the funds did allow some investors to engage in market timing, Janus Capital Group's stock price fell nearly 25%. The prospectuses allegedly were drafted and reviewed by Janus Capital Management employees, subject to the ultimate authority of the Janus Investment Fund board of trustees.

The Court ruled that the fund adviser did not "make" the statements in the fund prospectuses and therefore cannot be primarily liable for them under Rule 10b-5:

<<For purposes of Rule 10b-5, the maker of a 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. And in the ordinary case, attribution within a statement or implicit from surrounding circumstances is strong evidence that a statement was made by - and only by - the party to whom it is attributed. This rule might best be exemplified by the relationship between a speechwriter and a speaker. Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit - or blame - for what is ultimately said.>>

. . . .

The Court explained that it need not defer to the SEC's interpretation of the meaning of "make" in Rule 10b-5, because it did not find the meaning to be ambiguous. (Justice Thomas presumably wrote this with a straight face, but if the meaning of "make" was not ambiguous prior to the Court's decision, then it's hard to think what would meet the Court's standard of ambiguity.) 
 
 
 
John Baker

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