Supreme Court's Bright Line Test Narrowly Limits Primary Securities Fraud Liability: Janus Capital Group, Inc. v. First Derivative Traders


The federal securities laws prohibit individuals and entities from making material misrepresentations or omissions in connection with the purchase or sale of securities. In Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. ___ (2011), the United States Supreme Court, reversing a decision of the United States Court of Appeals for the Fourth Circuit, largely resolved a disagreement among the lower federal courts regarding the level of involvement required to expose defendants to primary liability for a securities fraud violation. The Court held that primary liability can attach to a statement or omission only if the defendant had "ultimate authority" over its making or, perhaps, if it was publicly attributed to him. As a result, primary liability is no longer a risk for professionals who only prepare or contribute information to the public statement of another, absent explicit public attribution. This will insulate most professionals from primary liability.

The Supreme Court had previously held in Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994), that there is no aiding and abetting liability in private lawsuits under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The Court, in Central Bank, left open whether a secondary actor - like a lawyer, accountant, or bank - who employs a manipulative device or makes a material misstatement or omission on which a purchaser or seller of a security relies may be liable as a primary violator.

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