U.S. Supreme Court Limits Reach of Primary Liability in Securities Fraud Cases

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Today, in a 5-4 decision, the U.S. Supreme Court narrowed the circumstances under which a defendant can be held liable in a private action under Rule 10b-5 for “making” a false or misleading statement. The decision, Janus Capital Group, Inc., et al. v. First Derivative Traders, 564 U.S. ___ (2011), No. 09-525, slip op., June 13, 2011, held that an investment adviser did not “make” statements contained in prospectuses of the adviser’s mutual fund clients, even though the adviser may have assisted the mutual funds in preparing the statements. The decision has important implications not just for mutual funds and their advisers, but for all investment advisers, accountants, and others who provide services to issuers of securities. The decision may also have broader ramifications in securities litigation brought under Rule 10b-5.

Janus is another in a long line of cases in which plaintiffs sought to overcome the Supreme Court’s holding in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994). In Central Bank, the Supreme Court rejected a private action for aiding and abetting liability under federal securities laws. Ever since, plaintiffs have struggled to hold secondary actors in the securities markets — such as banks, financial advisers, accountants, and lawyers-liable for securities fraud.

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