Suit filed by shareholder over statements made in firm's fund prospectuses could cause 'flood tide of additional securities litigation,' critics claim
The Securities Industry and Financial Markets Association and the U.S. Chamber of Commerce are among five organizations that have come to the defense of Janus Capital Group Inc. as the U.S. Supreme Court prepares to hear a class-action lawsuit against the mutual fund company.
In their filings, both organizations argue that if the Supreme Court agrees with an earlier appellate ruling, it would have detrimental implications for everyone in the securities industry, and would boost costs for investors.
The suit, Janus Capital Group v. First Derivative Traders, stems from the 2003 market-timing lawsuits in which a number of mutual fund companies, including Janus, allowed certain investors to make rapid trades of shares of their funds to the detriment of longer-term investors.
Janus settled the charges with regulators. But in this case, First Derivatives, which was a shareholder of Janus — not its funds — is claiming that the parent company should be held liable for statements made in its fund prospectuses. A U.S. District judge in Maryland dismissed the case in 2005, but the U.S. Court of Appeals for the Fourth Circuit reversed that decision.
On June 28, the Supreme Court agreed to hear the case, with oral arguments scheduled to commence on Dec. 7.
In a Sept. 3 brief filed with the Supreme Court, Janus argues that Congress has made clear that advisers are to be independent of the funds they advise. “[Janus Capital Management] as a secondary actor, cannot be held primarily liable for unattributed statements made by another company in that company's prospectus,” the firm argued in its brief. Mark A. Perry, a partner at Gibson Dunn & Crutcher LLP and the outside counsel for Janus, declined to comment.
If the Fourth Circuit decision stands it would cause “crippling uncertainty in the securities markets,” by allowing lawsuits to be filed on a case-by-case basis, rather than establishing a clear line where suits could be brought up, SIFMA argued in its Sept. 10 filing.
That lack of clarity could lead to a rash of suits, SIFMA said in its petition. “If they uphold the decision, there will be a flood tide of additional securities litigation taking advantage of this ambiguity,” said Jonathan Cohn, a partner at Sidley Austin LLP who is the counsel of record for SIFMA. “The costs of these suits are often passed on to investors.”
A Supreme Court ruling in favor of First Derivatives would “open the door to a very amorphous test about who can be a defendant in these class action lawsuits,” said Richard Bernstein, lead counsel in the case for the U.S. Chamber of Commerce.
Such a ruling also could mean that mutual fund prospectuses would become harder to understand, said Robert W. Helm, a partner at Dechert LLP, which also filed a friend-of-the-court brief. “The purpose of mutual fund disclosures isn't to educate the shareholders of the parent company, it's to educate the shareholders of the fund,” Mr. Helm said.
The Center for Audit Quality, anon-profit organization representing auditors, and the Liability Assurance Society Inc., a mutual insurance company for a number of law firms, also filed friend-of-the-court brief.
