To Make or to Mar: The Supreme Court Turns Away Another Securities Law Plaintiff
University of Pennsylvania Journal of Business Law, Vol. 14, No. 2, 2012
67 Pages Posted: 13 Oct 2011
Date Written: October 11, 2011
The United States Supreme Court, in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), once again denied a remedy to securities law plaintiffs and further restricted the implied private right of action under Securities Exchange Act Section 10(b) and SEC Rule 10b-5. In Janus, the Court held that one, and only one, person or entity can “make” a material misstatement under Rule 10b-5(b), namely that person or entity with “ultimate authority over the statement, including its content and whether and how to communicate it.” 131 S. Ct. at 2302. As a result, an investment adviser to mutual funds that issued misleading statements in investor prospectuses could not be held liable as a “maker” of those misstatements, notwithstanding substantial evidence indicating that the adviser made almost all management decisions for the funds and controlled almost every aspect of their work.
This article takes issue with the restricted meaning given by the Court to the word “make” and argues that the Court’s reading of the term was justified neither as a linguistic nor as a legal matter. Utilizing the dictionaries cited by the Court, the article plumbs the myriad meanings of “make” and reasons that the Court was not justified in substituting a “test” for a “definition.” The article also questions the Court’s holding that the funds and the adviser enjoyed separate corporate existences. Although such a “veil-piercing” analysis might be relevant had the plaintiffs proceeded on the theory that the defendants operated as a “single economic entity,” such an approach is inappropriate where, as here, the plaintiff’s claim sounds in fraud. Finally, the article suggests a “test” of its own for who is a “maker” and urges the Court to examine the benefit to the defendant from prospectus misstatements, rather than focusing on the artificial issue of who exercises “ultimate authority” over those misstatements.
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