In a much-awaited decision, the Supreme Court today ruled in favor of the mutual fund industry in a case involving a company's responsibility for statements made in prospectuses, eliciting a huge sigh of relief from fund companies, broker-dealers and others involved in selling mutual funds.
The suit, Janus
Capital Group v. First Derivative Traders, stems from the 2003 market-timing lawsuits in which a number of mutual fund companies, including Janus
Capital Group Inc., allowed certain investors to make rapid trades of shares of their funds to the detriment of longer-term investors.
Janus settled the charges with regulators. But in this case, First Derivatives, which was a shareholder of Janus, not its funds, claimed that the parent company should be held liable for statements made in its fund prospectuses.
A District Court judge in Maryland dismissed the case in 2005, but the Court of Appeals for the Fourth Circuit reversed that decision.
The Securities Industry and Financial Markets Association and the U.S. Chamber of Commerce were among a number of organizations to come to the defense of Janus. In its friend of the court filing with the Supreme Court, SIFMA claimed that the Fourth Circuit decision could cause “crippling uncertainty in the securities markets,” by allowing lawsuits to be filed on a case-by-case basis.
In a 5-4 decision, the high court ruled that it was up to Congress, not the courts, to expand the terms of the liability in securities industry.
If the court had decided otherwise, it would have opened the floodgates for lawsuits against any entity involved with selling mutual funds, including financial advisers, observers said.
“This is a very big decision for the industry,” said Robert Skinner, a partner at Ropes & Gray LLP. “With this decision, the Supreme Court is saying that just being significantly involved in making prospectus statements isn't enough.”
In his opinion, Justice Clarence Thomas made the analogy of a speechwriter and the speaker.
“One who prepared or published a statement on behalf of another is not its maker,” he wrote in the opinion.
“Even when a speechwriter drafts a speech, the content is entirely in control of the person who delivers it. And it is the speaker who takes credit or blame for what is ultimately said,” Mr. Thomas said.
Not surprisingly, the court's decision didn't sit well with attorneys for the plaintiffs. "We fear that a ruling that erodes investor recovery rights will embolden unscrupulous management…they now have additional opportunities to mislead the public without fear of investor lawsuits under federal securities law,” said Ira Press, a partner with Kirby McInerny LLP, who represented First Derivative. “When that happens, it erodes investor confidence.”
But Mark A. Perry, a partner at Gibson Dunn & Crutcher and the outside counsel for Janus, said the decision should elicit “a great sigh of relief” from the industry.
Even though the decision was a close one, the language is very clear, observers said.
“I am sure that the plaintiff's bar will try to continue to find wiggle room, but this language is hard to get around,” Mr. Skinner said.
