WASHINGTON (Legal Newsline) - The U.S. Supreme Court ruled Monday that Janus Capital Group Inc. and its wholly owned subsidiary cannot be held liable for the false statements in mutual fund prospectuses filed by Janus Investment Fund.

First Derivative Traders, representing a class of stockholders in JCG, filed the lawsuit under the Securities and Exchange Commission Rule 10b-5. The rule forbids "any person... to make any untrue statement of a material fact" in connection with the purchase or sale of securities.

The stockholders alleged that JCG and its wholly own subsidiary, petitioner Janus Capital Management LLC, made false statements in mutual fund prospectuses filed by Janus Investment Fund -- for which JCM was the investment adviser and administrator -- and that those statements affected the price of JCG's stock.

Although JCG created Janus Investment Fund, it is a separate legal entity owned entirely by mutual fund investors, the Court noted.

A district court dismissed the complaint for failure to state a claim. The U.S. Court of Appeals for the Fourth Circuit reversed, holding that the stockholders had sufficiently alleged that JCG and JCM, by participating in the writing and dissemination of the prospectuses, made the misleading statements contained in the documents.

The stockholders continued to argue before the Court that JCM made the statements but sought to hold JCG liable only as a control person of JCM.

The Court, in its 14-page majority opinion, said the statements in the prospectuses were made by Janus Investment Fund, not by JCM. Accordingly, it said, the stockholders have not stated a claim against JCM under Rule 10b-5.

The Court therefore reversed the judgment of the Fourth Circuit.

"There is no allegation that JCM in fact filed the prospectuses and falsely attributed them to Janus Investment Fund. Nor did anything on the face of the prospectuses indicate that any statements therein came from JCM rather than Janus Investment Fund -- a legally independent entity with its own board of trustees," Justice Clarence Thomas wrote for the Court.

"First Derivative suggests that both JCM and Janus Investment Fund might have 'made' the misleading statements within the meaning of Rule 10b-5 because JCM was significantly involved in preparing the prospectuses. But this assistance, subject to the ultimate control of Janus Investment Fund, does not mean that JCM 'made' any statements in the prospectuses.

The Court continued, "Although JCM, like a speechwriter, may have assisted Janus Investment Fund with crafting what Janus Investment Fund said in the prospectuses, JCM itself did not 'make' those statements for purposes of Rule 10b-5."

Justice Stephen G. Breyer dissented, along with Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan.

They take issue with the majority's view that the Janus Investment Fund's board of trustees has "ultimate authority" over the content of the statements in a prospectus and that only "the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it" can "make" a statement within the terms of Rule 10b-5.

Breyer said the majority has "incorrectly interpreted" the rule's word "make."

"Neither common English nor this Court's earlier cases limit the scope of thatword to those with 'ultimate authority' over a statement's content," he wrote.

"To the contrary, both language and case law indicate that, depending upon the circumstances, a management company, a board of trustees, individual company officers, or others, separately or together, might 'make' statements contained in a firm's prospectus -- even if a board of directors has ultimate content-related responsibility."

Breyer said JCM's involvement in preparing and writing the relevant statements "could hardly have been greater," and that there is a "serious suggestion" that the board itself knew little or nothing about the falsity of what was said.

"Unless we adopt a formal rule (as the majority here has done) that would arbitrarily exclude from the scope of the word 'make' those who manage a firm -- even when those managers perpetrate a fraud through an unknowing intermediary -- the management company at issue here falls within that scope," the dissenters wrote.

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