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SEC Files "Friend of the Court" Brief in Janus Case

As expected, the Securities and Exchange Commission has filed an amicus ("friend of the court") brief with the U.S. Supreme Court in the Janus Capital Group v. First Derivative Traders case.   The Janus case is a class action law suit against Janus Capital Group and Janus Capital Management LLC, the the Janus funds' investment adviser. The suit alleged that that the fund and the adviser were responsible for false and misleading statements in a number of the individual Janus funds' prospectuses. According to the plaintiffs, the funds' prospectuses contained disclosures stating that the funds' adviser did not permit, and took measures to prevent, market timing of the funds shares. Thereafter, market timing practices authorized by the funds' adviser and Janus Capital Group were revealed. First Derivative alleged that they and other fund shareholders bought Janus Capital Group shares at inflated prices and thereafter lost money as a result of the market timing activities.

The district court dismissed First Derivative Traders' class action suit concluding that the plaintiffs had had not plead sufficiently key elements of an Exchange Act section 10(b) securities fraud (i.e., prospectus liability) action against the adviser. The court also dismissed the plaintiffs' claim of control person liability (under section 20(a)) against Janus Capital Group. On appeal to the Fourth Circuit, the appeals court disagreed with the district court, and held that both the plaintiffs' section 10(b) primary liability claim against the adviser and the section 20(a) control person liability claim against Janus Capital Group were sufficiently pled. It reversed the district court's order granting defendants' motion to dismiss and remanded the case for further proceedings.

Janus Capital Group appealed to the Supreme Court, and the Court announced on June 24 that it would hear oral arguments in the case on December 7. The Court is being asked to address two key questions about this case:

  1. Whether a service provider can be held primarily liable in a private securities-fraud action for "help[ing]" or "participating in" another company's misstatements; and
  2. whether a service provider can be held primarily liable in a private securities-fraud action for statements that were not directly and contemporaneously attributed to the service provider.

In the SEC's amicus brief, the Commission is asking the Supreme Court to adopt an expansive reading of section 10(b) of Exchange Act of 1934.  The SEC argues for the Court to read section 10(b) in a way which would support the plaintiff's claim that the investment adviser is primarily liable for making the false or misleading statements in the funds' prospectuses regarding preventing market-timing activities.  The Commission stresses the language of the statute, contending that an issuer can speak "indirectly" to the markets and be liable under Section 10(b). Therefore, it "follows that someone else can make a statement indirectly by creating it and having it appear in a prospectus formally issued in the name of another entity."  Using this logic in the Janus situation, the investment adviser here can be said to have "made" the false statements about market timing.

The Commission goes on to distinguish between those who aid and abet a violation of the securities laws, and those who may be secondary actors, but commit a primary violation.  Aiding and abetting is not within the scope of Section 10(b) while, as other cases have made clear, secondary actors are covered. Thus, the Commission argues, even if the funds' adviser in this instance is viewed as a secondary actor, the allegations in the complaint constitute a primary violation of the securities laws. 

The Commission also attacks in its brief the Petitioner's (Janus Capital Group's, the defendant's) claim that First Derivative Traders and the other investors (the plaintiffs) do not meet the causation requirements needed to support a Section 10(b) cause of action.  According to the Commission the fraud-on-the-market presumption is sufficient to support this kind of action.  According to the SEC, particularly in view of the nature of the relationships between a fund, its adviser, and its adviser's affiliates in a mutual fund complex,  Janus Capital Group and Janus Capital Management LLC should be held liable under Section 10(b).

The full text of the SEC's amicus brief is available at: