Court limits prospectus lying liability

June 13, 2011 at 12:55 PM
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WASHINGTON, June 13 (UPI) -- The U.S. Supreme Court Monday ruled 5-4 to limit liability for false statements in a company's prospectus to the entity that actually controls the prospectus.

First Derivative Traders, representing a class of Janus Capital Group stockholders, filed suit under a U.S. Security and Exchange Commission rule that forbids "any person ... [t]o make any untrue statement of a material fact" in the purchase or sale of securities.

The complaint alleged, among other things, JCG and its wholly owned subsidiary, Janus Capital Management LLC, made false statements in mutual fund prospectuses filed by the Janus Investment Fund -- which was advised and administered by JCM -- and that those statements affected the price of JCG's stock.

Although JCG created the Janus Investment Fund, court records say, it is a separate entity owned entirely by mutual fund investors.

A federal judge dismissed the complaint, but the 4th U.S. Circuit Court of Appeals, headquartered in Richmond, Va., reversed.

The appeals court ruled First Derivative had sufficiently alleged JCG and JCM, by participating in the writing and dissemination of the prospectuses, made the misleading statements contained in the documents.

In the case before the Supreme Court, First Derivative argued JCM made the statements though it sought to hold JCG liable only as a control person of JCM under the SEC regulation.

But in an opinion written by Justice Clarence Thomas, the narrow Supreme Court majority held since the false statements in the prospectuses were made by Janus Investment Fund, not by JCM, neither JCM nor JCG can be held liable.

For SEC rule purposes, "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," Thomas said, citing high court precedent. "Without control, a person or entity can merely suggest what to say, not "make' a statement in its own right."

Thomas said the Supreme Court rejected "the government's contention that 'make' should be defined as 'create,' thereby allowing private plaintiffs to sue a person who provides the false or misleading information that another person puts into a statement. ... Although JCM may have been significantly involved in preparing the prospectuses, it did not itself 'make' the statements at issue. ... Its assistance in crafting what was said was subject to Janus Investment Fund's ultimate control."

The high court's four-member liberal bloc, led by Justice Stephen Breyer, dissented.

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