SCOTUS’ Janus Decision Leaves Key Question Open
Although the Supreme Court issued its Janus opinion just months ago, several district courts have already split on a key issue left open by the decision. The issue is whether the Court’s “ultimate authority” requirement for establishing primary liability under Rule 10b-5 applies to corporate insiders.
In considering whether a mutual fund’s investment advisor may be held primarily liable under Rule 10b-5 for alleged misleading statements in a fund’s prospectus, the Court in Janus Capital Group, Inc. v. First Deriv. Traders, Inc., 131 S. Ct. 2296 (U.S. June 13, 2011), held that primary liability applies only to the “maker” of the statement, defined as those with “ultimate authority” over the statement, in that case, the fund itself. The Court concluded that “the maker of a statement is the entity with authority over the content of the statement and whether and how to communicate it.” Because the fund (and not its investment advisor, which was a separate corporate entity) possessed the "ultimate authority" to determine what would go into its prospectuses, it was the "maker" of the alleged misstatements.
The question, however, of whether a corporate insider may escape primary liability by establishing that they did not have “ultimate authority” over issuance of a misleading corporate statement, was left open by the fact that Janus involved separate and independent entities involved in the creation of the prospectus. The district courts to consider the issue thus far have reached divergent conclusions.
In In re Merck & Co., Inc. Sec., Derivative & "ERISA" Litigation, 2011 WL 3444199 (D.N.J. Aug. 8, 2011) the company’s executive vice president for science and technology argued that he did not have “ultimate authority” over the statements attributed to him in Merck’s public filings. The court found that the holding in Janus was limited to cases involving a “separate and independent entity” and could not “be read to restrict liability for Rule 10b-5 claims against corporate officers to instances in which a plaintiff can plead, and ultimately prove, that those officers - as opposed to the corporation itself - had ‘ultimate authority’ over the statement.” Accordingly, the court declined to dismiss the claims against the Merck officer on that basis.
Applying similar analysis, the district court in Local 703, I.B. of T. Grocery & Food Emp. Welfare Fund v. Regions Fin. Corp., 2011 U.S. Dist. LEXIS 93873 (N.D. Ala. Aug. 23, 2011), refused to apply Janus to officers and directors who sign the SOX certifications in companies’ public filings. The district court reasoned that “[n]othing in Janus stands for the proposition that CEOs and CFOs cannot be liable for false and misleading statements in their own company’s financial statements, for which they signed Sarbanes-Oxley certifications.” The district court also explained that “unlike the separate legal entities in Janus, the defendants here are in ultimate authority over their statements” and can be held liable as the makers of those statements.
Less than one month later, however, another district court disagreed with this analysis. In Hawaii Ironworkers Annuity Trust Fund v. Cole, 2011 WL 3862206 (N.D. Ohio Sept. 1, 2011), the court found that “nothing in the Court’s decision in Janus limits the key holding - the definition of the phrase ‘to make . . . a statement’ under Rule 10b-5 - to legally separate entities.” However, the court determined that the facts of the case supported that the defendants involved did not have ultimate authority over the misstatements at issue because, unlike in the Merck case, they were not specifically attributed to the defendants (a fact that might otherwise be sufficient to establish “ultimate authority”). The court therefore dismissed the Rule 10b-5(b) claims against the defendants for making false statements, but declined to dismiss the related Rule 10b-5(a) and (c) claims based on deceptive conduct.
These recent district court decisions provide insight regarding just how far the holding in Janus might reach. We can anticipate that defendants will use the “ultimate authority” test to attempt to dismiss corporate insider defendants in securities cases, but thus far the balance is being struck in favor of plaintiffs. |
