In a decision written by Justice Thomas and joined by the four other conservative justices, the Court expressed hostility to implied private rights of action and grounded its denial of court access on the lack of an express right of action.
The Court dismissed the stockholders suit against a corporate entity that serves as an advisor for a legally independent entity. The Court held that only “a person or entity with ultimate authority over [a] statement” can “make” a statement under Rule 10b-5 of the Securities and Exchange Commission (SEC) and be held liable in a private suit for a misleading statement. Janus Capital Group, Inc. v. First Derivative Traders, No. 09-525, 2011 WL 2297762 (June 13, 2011).
This case expands upon the Court’s ruling in Stoneridge Inc. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2007). In Stoneridge, Justice Stevens wrote the dissent protesting the Court’s hostility to implied private rights of action. With Stevens gone from the Court, the four dissenting justices quibbled about the meaning of statutory language without ever pushing back against Justice Thomas’s explicit narrowing of court access based on the statute containing an implied private right of action rather than an express right of action. Justice Breyer wrote the dissent, joined by Justices Ginsburg, Sotomayor, and Kagan. Justice Breyer is usually a strong advocate for deference to federal agencies. (See, e.g., our posting on Credit Suisse Securities (USA) LLC v. Billing, 551 U.S. 264 (2007)). While the majority opinion “expressed skepticism over the degree to which the SEC should receive deference regarding the private right of action,” Justice Breyer’s dissent did not address deference nor even mention that the SEC had filed a brief in support of court access.
Janus Capital Management (JCM), a wholly owned subsidiary of Janus Capital Group (JCG), serves as the investment and advisor for the Janus Investment Fund, a legally independent entity that owns the Janus family of mutual funds. Prospectuses for several funds indicated that they would not be used for market timing, but JCG allegedly entered into secret contracts to allow market timing. When these allegations became public, investors withdrew money from these funds, leading to less in management fees for JCM, and thus lower profits and a lower stock price for JCG.
First Derivative Traders, representing a class of JCG stockholders, brought the instant suit, alleging that JCM and JCG (through JCM) caused the Janus Investment Fund to issue prospectuses that were misleading with respect to market timing practices. The District Court of the District of Maryland dismissed case for failure to state a claim, but the Fourth Circuit reversed, holding that participating in the writing and dissemination of the prospectuses was sufficient for them to have allegedly “made” the misleading statements contained therein.
The Court began its analysis by observing that the Securities Exchange Act was being enforced via an implied right of action. The Court quoted Stoneridge for the proposition that “[c]oncerns with the judicial creation of a private cause of action caution against its expansion.” Continuing to quote Stoneridge, the Court stated: “we are mindful that we must give ‘narrow dimensions … to a right of action Congress did not authorize when it first enacted the statute and did not expand when it revisited the law.’” Thus, the majority explicitly indicated that it was going to interpret the statute in a manner designed to narrow court access.
Using this approach, the Court considered the meaning of “make” in the SEC’s Rule 10b-5: “It shall be unlawful for any person, directly or indirectly…[to] make any untrue statement of a material fact.” It noted that to “make a statement” is to state it, relying on the Oxford English Dictionary (OED) and Webster’s New International Dictionary to interpret the construction of “‘make’…paired with a noun expressing the action of a verb.” Thus, it articulated the principle that, “for the 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.” In a footnote, the Court asserted that the meaning of “make” is not ambiguous. Despite the assistance that JCM provided, it noted that “the corporate formalities were observed,” and JCM was independent of the Janus Investment Fund, meaning that JCG/JCM could not be considered to have “made” the alleged misstatements and could not be held liable in a private suit.
The Court acknowledged that the SEC advocated for defining “make” as “create” and thereby finding accountability. The Court rejected that approach as inconsistent with the result in Stoneridge. The Court stated that the statute was not ambiguous and therefore the agency’s view was not entitled to deference. The Court then took aim at the government for supporting court access: “We note, however, that we have previously expressed skepticism over the degree to which the SEC should receive deference regarding the private right of action. See Piper v. Chris–Craft Industries, Inc., 430 U.S. 1 (1977) (noting that the SEC’s presumed expertise ‘is of limited value’ when analyzing ‘whether a cause of action should be implied by judicial interpretation in favor of a particular class of litigants’).”
Justice Breyer’s dissent failed to push back on the majority’s approach to implied private rights of action and the majority’s dismissal of the government’s support of court access. The dissent distinguished Stoneridge on factual grounds. And then the dissent argued about the interpretation of the word “make.” The dissent disputed both the majority’s understanding of “make” in the English language and the precedents upon which it relied. Focusing on “common” or “ordinary English,” it observed, “Nothing in the English language prevents one from saying that several different individuals, separately or together, ‘make’ a statement that each has a hand in producing.” The dissent noted in this case, that “[t]he relationship between Janus Management and the Fund could hardly have been closer.”