The Supreme Court has ruled that a mutual fund investment adviser cannot be held liable in a private action Rule 10b–5 for false statements included in its client mutual funds’ prospectuses. The investment adviser did not make the statements in the prospectuses, said the Court, in a 5-4 opinion, and could not be held liable for any misstatements. Janus Capital Group, Inc. v. First Derivatives Traders, Dkt. No. 09-525.
For purposes of Rule 10b–5, said Justice Thomas, the maker of a statement is the person or entity with ultimate authority over the statement, reasoned the Court, including its content and whether and how to communicate it. Without control, a person or entity can merely suggest what to say, not “make” a statement in its own right. One who prepares or publishes a statement on behalf of another is not its maker. And in the ordinary case, attribution within a statement or implicit from surrounding circumstances is strong evidence that a statement was made by, and only by, the party to whom it is attributed.
This rule might best be exemplified by the relationship between a speechwriter and a speaker. Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit, or blame, for what is ultimately said
This rule follows from First Interstate Bank of Denver, N. A., 511 U. S. 164 (1994), in which the Court held that Rule 10b–5’s private right of action does not include suits against aiders and abettors. Such suits, against entities that contribute substantial assistance to the making of a statement but do not actually make it, may be brought by the SEC, but not by private parties. A broader reading of “make,” including persons or entities without ultimate control over the content of a statement, would substantially undermine Central Bank, said the Court, If persons or entities without control over the content of a statement could be considered primary violators who “made” the statement, then aiders and abettors would be almost nonexistent
But for Central Bank to have any meaning, emphasized the Court, there must be some distinction between those who are primarily liable (and thus may be pursued in private suits) and those who are secondarily liable (and thus may not be pursued in private suits).The Court has drawn a clean line between the two, the maker is the person or entity with ultimate authority over a statement and others are not. In contrast, the dissent’s only limit on primary liability is not much of a limit at all, said the Court. It would allow for primary liability whenever the specific relationships alleged warrant that conclusion, whatever that may mean.
The Court rejected the contention that both the adviser and the fund might have made the misleading statements within the meaning of Rule 10b–5 because the adviser was significantly involved in preparing the prospectuses. But this assistance, subject to the ultimate control of the fund, does not mean that the adviser “made” any statements in the prospectuses. Although the adviser, like a speechwriter, may have assisted the fund with crafting what the fund said in the prospectuses, the adviser itself did not “make” those statements for purposes of Rule 10b–5.
Further, that the adviser provided access to the fund’s prospectuses on its web site is also not a basis for liability. Merely hosting a document on a web site does not indicate that the hosting entity adopts the document as its own statement or exercises control over its content.In doing so, the adviser had not made any of the statements in the fund’s prospectuses for purposes of Rule 10b–5 liability, just as the SEC does not make the statements in the many prospectuses available on its web site.