Supreme Court Limits False Statement Liability Under Rule 10b-5 To Those Who Actually Make Misstatements

June 13, 2011

On June 13, 2011, the U.S. Supreme Court issued an important decision clarifying the scope of liability for "making" false statements under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.  While some lower courts previously had held that a person can only be liable for making a statement when it is publicly attributed to him or her at the time of dissemination, other courts had held that a person could be liable for substantially participating in formulating the statement, at least where the person knew or should have known that the representation would be communicated to investors.[1]  In Janus Capital Group, Inc. v. First Derivative Traders, No. 09-525, a divided Supreme Court resolved this issue by rejecting the substantial participation approach.  The Court held that a person or entity generally does not "make" a statement within the meaning of Section 10(b) unless that person actually states it.  Slip op. at 6.  Further, the Court reasoned that attribution to a particular person or entity should be treated as "strong evidence that a statement was made by—and only by—the party to whom it is attributed." Id.  In so doing, the Supreme Court rejected the notion that individuals who help "create" statements made by others fall within the contours of Section 10(b) and Rule 10b-5.  The Janus decision should eliminate liability under Section 10(b) and Rule 10b-5 for secondary actors, such as accountants, lawyers and investment banks, in respect of statements not attributed to them.


The Janus case concerned alleged false statements regarding investment strategy in prospectuses issued by Janus Investment Fund, a mutual fund company.  Specifically, the prospectuses represented that the Janus mutual funds were not intended for market timing, and that the funds' investment advisor, Janus Capital Management (JCM), would adopt policies intended to prevent investors from engaging in market timing.  Slip Op. at 2-3.  The plaintiffs alleged that these representations were false because JCM had secretly agreed with certain investors to permit market timing in some of the funds.  Id. at 3.  JCM is an affiliate of Janus Investment Fund.  While the two entities share common officers, they are legally separate, and only one of Janus Investment Fund's trustees was associated with JCM.  Id. at 2.  The plaintiffs brought claims against JCM under Section 10(b) and Rule 10b-5, asserting that JCM had caused Janus Investment Fund to issue the prospectuses containing the allegedly false representations.  Id. at 4.


The case was dismissed by the federal district court in Maryland, but the U.S. Court of Appeals for the Fourth Circuit reversed, holding that JCM had "made"the allegedly false statements in the prospectuses within the meaning of Section 10(b) and Rule 10b-5, because JCM had substantially participated in the writing and dissemination of the prospectuses that were issued by its affiliate.  Id.  The Supreme Court granted certiorari and reversed.  On the facts before it, a majority of the Supreme Court held that the claims against JCM had to be dismissed because JCM did not make the allegedly false statements in the prospectuses, and nothing "on the face of the prospectuses indicate that any statements therein came from JCM rather than Janus Invesment Fund—a legally independent entity with its own board iof trustees." Id. at 11.


In the majority opinion by Justice Thomas (who was joined by Chief Justice Roberts and Justices Scalia, Kennedy and Alito), the majority held that "[o]ne 'makes' a statement by stating it," and that "the maker of the statement is the person or entity with the ultimate authority over the statement, including its content and whether and how to communicate it." Id. at 6.  The majority explained that those who merely participate in crafting a statement, even when their participation is substantial, can only "suggest what to say, not 'make' a statement in [their] own right." Id.  The majority's rule was necessary both to prevent the expansion of the judicially created, private right of action under rule 10b-5, id. at 8, as well as to preserve the holding of the Court's earlier decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), which held that there is no private right of action for aiding and abetting violations of Rule 10b-5.  The majority concluded that any other rule would turn what is essentially aiding and abetting liability into a primary violation of Rule 10b-5, and would vitiate Central Bank's holding.  Id.  In addition, the majority indicated that its holding is supported by its earlier decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008), which held that dismissal of the case was proper where "the public could not have relied on the entities' undisclosed deceptive acts." Janus Capital Group, slip op. at 7-8.


Justice Breyer, writing for Justices Ginsburg, Sotomayor and Kagan, dissented.  The dissent argued that neither the language of Rule 10b-5 nor the Court's decisions in Central Bank or Stoneridge required the rule that the majority had articulated.  Id., dissenting op. at 3-6.  The dissent also expressed concern that the majority's rule would foreclose liability where a person "exploits another as an innocent intermediary for [the person's] misstatements," id., dissenting op. at 9-10, despite the majority's express reservation that it was not reaching that issue, id., slip op. at 10. 


See a copy of the decision.


[1] Compare AFFCO Invs. 2001 LLC v. Proskauer Rose LLP, 625 F.3d 185, 194 (5th Cir. 2010); Pac. Inv. Mgmt. Co. v. Mayer Brown LLP, 603 F.3d 144, 155 (2d Cir. 2010) with Howard v. Everex Sys., Inc., 228 F.3d 1057, 1061 n.5 (9th Cir. 2000); In re Software Toolworks Inc. Sec. Litig., 50 F.3d 615, 625 (9th Cir. 1994) and Anixter v. Home-Stake Prod. Co., 77 F.3d 1215, 1226 (10th Cir. 1996); Ziemba v. Cascade Int'l, Inc., 256 F.3d 1194, 1205 (11th Cir. 2001).


If you have any questions regarding this newsflash, please contact any of the lawyers listed below or your regular Davis Polk contact.

Michael P. Carroll 212 450 4547
Michael S. Flynn 212 450 4766
Nora M. Jordan 212 450 4684
Edmund Polubinski III 212 450 4695
Lawrence Portnoy 212 450 4874
Neal A. Potischman 650 752 2021
James P. Rouhandeh 212 450 4835
Robert F. Wise, Jr. 212 450 4512
Daniel J. Schwartz 212 450 4581


Notice: This is a summary that we believe may be of interest to you for general information. It is not a full analysis of the matters presented and should not be relied upon as legal advice. If you would rather not receive these memoranda, please respond to this email and indicate that you would like to be removed from our distribution list. If you have received this email in error, please notify the sender immediately and destroy the original message, any attachments thereto and all copies. Please refer to the firm's privacy policy located at for important information on this policy.
© 2011 Davis Polk & Wardwell LLP