By Richard D. Bernstein, Barry P. Barbash, and James C. Dugan, Willkie Farr & Gallagher LLP
The National Chamber Litigation Center (NCLC) recently filed an amicus brief in the United States Supreme Court urging the Court to reverse the Fourth Circuit's decision in Janus Capital Group, Inc. v. First Derivative Traders, which expanded liability for securities fraud under §10(b) of the 1934 Securities Exchange Act and S.E.C. Rule 10b-5 to include service providers who participate in drafting or supervising a misleading statement. NCLC's brief argues that the Court, following its recent precedent in securities fraud cases, should decline to expand the implied private right of action under §10(b) and Rule 10b-5 because responsibility for such an expansion lies with Congress, not the courts, and because such an expansion would impede efforts to maintain the U.S. as the leading global financial center in increasingly competitive markets.
The plaintiffs in Janus are shareholders of the parent holding company that owns the Janus family of mutual funds. The complaint alleges that the Janus funds' corporate parent and its investment adviser subsidiary participated in drafting and supervising misstatements that appeared in the funds' prospectuses concerning purported safeguards in place to prevent "market timing" transactions. The plaintiffs alleged that, when government investigations revealed thatthe Janus funds had permitted "market timing" transactions to occur, the price of the funds' parent's shares declined. The plaintiffs' second amended complaint asserted causes of action under §10(b) and Rule 10b-5 against both the funds' corporate parent and its investment adviser. The district court dismissed those claims, holding that the second amended complaint did not allege that the defendants "made" the allegedly misleading statements, as required by §10(b) andRule 10b-5. The Fourth Circuit reversed, holding that allegations that the defendants substantially participated in drafting and approving the alleged false statements were sufficient to satisfy the requirement that the defendants "make" the statements even though the statements were not publicly attributed to defendants. The Fourth Circuit further held that service providers could be liable under §10(b) and Rule 10b-5 if "interested investors would attribute to the defendant a substantial role in preparing or approving the allegedly misleading statement," even if the statement was not publicly attributed to the defendants. The Supreme Court granted certiorari to resolve a perceived split among the circuit courts as to when secondary actors can be held primarily liable for securities fraud under §10(b) and Rule 10b-5 in the absence of any false statement being directly and publicly attributed to them.
In its amicus brief, NCLC argued that the Fourth Circuit's holding was an improper expansion of the implied private right of action under §10(b) and Rule 10b-5. Recent Supreme Court decisions, including among others Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. and Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc ., make clear that any expansion of the implied private right of action under §10(b) and Rule 10b-5 must come from Congress. Congress has repeatedly declined to expand that right of action to include service providers who themselves do not speak but who supervise or participate in drafting an allegedly false statement. NCLC argued that the Court should decline to expand the implied private right of action where Congress has repeatedly declined to do so, including in the recent Dodd-Frank legislation. NCLC further argued that the test adopted by the Fourth Circuit, which requires a "case-by-case" analysis of whether a service provider was perceived to have played a "substantial role" in the misleading statement, was unworkably vague, would lead to inconsistent results, and would disadvantage U.S. capital markets and discourage issuers from listing on U.S. exchanges.
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The authors, Richard D. Bernstein, Barry P. Barbash, and James C. Dugan, are partners at Willkie Farr & Gallagher LLP. For further information, please contact Richard at (202) 303-1108, Barry at (202) 303-1201, or James at (212) 728-8654.
The National Chamber Litigation Center is the leading voice of business in the courts. For more information about this and other NCLC litigation, please contact Amar Sarwal, (202) 463-5337, asarwal@uschamber.com.
