Thursday, June 16, 2011

The Janus Case: Whither the Supreme Court?

A couple of days ago, I saw some news articles about a Supreme Court decision – Janus Capital Group, Inc. v. First Derivative Traders.   The case essentially held that Janus Capital Group (JCG) and a wholly owned subsidiary, Janus Capital Management (JCM), could not be sued for untrue statements in the prospectuses of Janus Investment Fund, the Massachusetts business trust for Janus mutual funds.  The reason given is that, while Janus Capital Management prepared the prospectuses, it cannot be said to have “ma[d]e” the statements contained in the prospectuses.  Only Janus Investment Fund could be deemed to have made the statements for the purposes of SEC Rule 10b-5.  

The case was decided 5-4, with the Justices appointed by Republican presidents on the winning side and those appointed by Democratic presidents dissenting.  Justice Thomas wrote the decision.  While I do not make a habit of reading Supreme Court opinions, I decided to read this one.

The statements in question have to do with using Janus mutual funds for market timing purposes.  The prospectuses say that a fund “may reject any purchase request…if it believes that any combination of trading activity is attributable to market timing or is otherwise excessive or potentially disruptive to the Fund.”  The opinion describes “market timing” in a footnote to be exploiting the daily NAV calculation of mutual funds, when new information affecting the value of securities has come out after the closing price that the fund uses.  For example, a mutual fund may have used closing prices for foreign securities in its daily net asset value (“NAV”) determination, though significant events may have occurred between the closing time abroad and the time the mutual fund determines its NAV.  Apparently, JCG and JCM had at one time entered into secret agreements allowing certain investors, probably hedge funds, to use some Janus funds for market timing.  The Attorney General of New York proceeded against JCG and JCM for this in September 2003 and, when this became public, the price of JCG stock fell significantly.  First Derivative Traders owned JCG stock.

Justice Thomas tortures the English language in arguing that Janus Capital Management did not “make” the statements in the prospectuses.  Also, JCM’s responsibility is more than that of a speechwriter, though Thomas likens the two.  After all, JCM is managing the funds.  Justice Breyer tellingly comments in his dissent:  “What is to happen when guilty management writes a prospectus (for the board [of a mutual fund]) containing materially false statements and fools both board and public into believing they are true?  Apparently under the majority’s rule, in such circumstances no one could be found to have “ma[d]e” a materially false statement—even though under the common law the managers would likely have been guilty or liable (in analogous circumstances) for doing so as principals (and not as aiders and abettors).”

Some of course applaud this decision out of a belief that private litigation has gotten out of hand.  This is certainly the view of The Wall Street Journal editorial page (“A Thwarted Liability Scheme:  The Supremes dismiss another plaintiffs bar money raid—barely,” published June 14, 2011).  And perhaps the Court’s opinion could have been written more persuasively.  As it is, though, one has to wonder what is happening at the Supreme Court, when, in a decision such as this, which does not involve controversial social issues, the Supreme Court divides on partisan and ideological grounds and the Court’s opinion is much less persuasive than the dissent.  This is not the most momentous of decisions, but the decision does seem to rest entirely on form, not substance, in order to achieve a desired result.  Since the case was not decided on Constitutional grounds, Congress can clarify the law by substituting new language if it desires, though I would not expect that to happen anytime soon.  In the meantime, decisions such as this are not reassuring.   

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