In a blow for investors’ rights advocates, the U.S. Supreme Court ruled on Monday in favor of Janus Capital Group and against a group of Janus shareholders who sought to sue publicly-traded JCG for publishing misleading statements in fund prospectuses. Clarence Thomas wrote the 5-4 majority decision, which went along the court’s established ideological lines. Ann Carrns conveys the court’s reasoning:
The court said that Janus could not be sued for supposedly misleading statements in the prospectuses of its mutual funds because it and a subsidiary that advised the funds, Janus Capital Management, were separate legal entities from the mutual funds themselves.
Plaintiffs argued, unsuccessfully, that
[w]hile Janus Capital and Janus Capital Management may be separate legal entities from the mutual funds… the management unit in practice runs the day-to-day operations of the mutual funds. Therefore, the parties argued, they should be held liable for misleading prospectus information.
The ruling is particularly frustrating for investors’ rights advocates since, as Floyd Norris has said:
One of the great legal fictions of Wall Street is that mutual funds are independent of the companies that create and run them… In the real world, the fact that Janus controls the funds it runs is so obvious as to hardly merit a mention, any more than one would emphasize that General Motors or General Electric control their subsidiaries.
The high court’s ruling further bakes that fiction into law, allowing mutual fund companies to continue to construct legal entities that insulate them from liability in the event that they do wrong by shareholders. In this case, deep-pocketed Janus Capital Group and Janus Capital Management manage to separate themselves legally from Janus Investment Fund, so investors in the mutual funds cannot make claims against JCG or JCM for wrongdoing. It’s like buying a Toyota from a Toyota dealership, finding the brakes don’t work, then finding Toyota hiding its liability behind two layers of legal entities: “it’s not us, it’s the floor mat maker!”
In a tweet, Paul Kedrosky calls the Supreme Court decision “[h]opelessly bizarre, facile & stupid stuff.” William Birdthistle, a professor at the Chicago-Kent College of Law, adds “everyone knows the fund is an empty marionette. It doesn’t do anything… you’re left with a circumstance where no one is responsible for this.”
The case goes back to Eliot Spitzer as New York AG days in 2003, and Norris pointed out in his December, 2010 column
[t]he basic facts are not in dispute. Janus settled with the Securities and Exchange Commission in 2004 and paid $100 million in penalties. At the time, an S.E.C. enforcement official said it was clear to the commission that Janus “violated an investment adviser’s fiduciary duty to investors.”
In its settlement with the S.E.C., Janus agreed that its Janus Capital Management subsidiary, known as J.C.M., would “cause the Janus funds to operate” in accordance with governance policies that would prevent such violations in the future. It did not claim that J.C.M. had no control over the funds. But in its brief with the Supreme Court, Janus says that “J.C.M. is neither a primary actor nor a primary violator with respect to the statements” in the prospectuses. “The statements in the Janus Funds’ prospectuses were made by the trust comprising the Janus Funds — a separate legal entity, with its own board of trustees and legal counsel — not by J.C.M.”
In accepting this claim from JCG, Justice Thomas dives deeply into the meaning of the word “make,” referencing the OED in a manner that recalls a Clintonian definition of “sexual relations” :
For purposes of Rule 10b–5, 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. Without control, a person or entity can merely suggest what to say, not “make” a statement in its own right. One who prepares or publishes a statement on behalf of another is not its maker. And in the ordinary case, attribution within a statement or implicit from surrounding circumstances is strong evidence that a statement was made by—and only by—the party to whom it is attributed. This rule might best be exemplified by the relationship between a speechwriter and a speaker. Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit—or blame—for what is ultimately said.
This, despite the fact that all of the officers of Janus Investment Fund (which “made” the prospectuses) were also officers of JCM.
Janus Capital Group may have won this battle on a technicality, but it certainly leaves investors with another reason – beyond obfuscation in fee statements – to question the integrity of the nearly $12 trillion U.S. mutual fund industry.
Sources:
Supreme Court Ruling: Janus Capital Group Inc. v. First Derivative Traders, Decided June 13, 2011 http://www.supremecourt.gov/opinions/10pdf/09-525.pdf
“Supreme Court Ruling in Janus Case Limits Shareholder Suits” Ann Carrns, 6/13/11, New York Times https://bucks.blogs.nytimes.com/2011/06/13/supreme-court-ruling-in-janus-case-limits-shareholder-suits/?ref=business
“A Novel Way to Sidestep Investor Suits” Floyd Norris, 12/2/10, New York Times https://www.nytimes.com/2010/12/03/business/03norris.html
“Janus Found Not Liable for Funds Prospectuses” Brent Kendall, Wall Street Journal, 6/14/11 http://online.wsj.com/article/SB10001424052702303848104576383453742250090.html
“Recent Mutual Fund Trends” 2011 Investment Company Fact Book, http://www.icifactbook.org/fb_ch2.html
