Supreme Court Limits 10b-5 Liability to Those Who "Make" Misstatements, Rejecting "Substantial Participation" Theory

The U.S. Supreme Court, in Janus Capital Group, Inc. v. First Derivative Traders, No. 09-525, 2011 WL 2297762, surprised many who expected it to focus narrowly on the mutual fund industry, or adopt the SEC's view that the term "make" in Rule 10b-5(b) encompasses behind-the-scenes assistance in the creation of misstatements uttered by others. Instead, the Court announced a bright-line rule limiting liability in most cases to the speakers and those who control them. The Court's opinion is good news for account-ants, attorneys, investment banks and other service providers who assist in but do not control the preparation of public statements to be made by others; a contrary ruling might have left them exposed to securities fraud litigation. As it is, Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008) and Janus, taken together, will deter or defeat many claims that might otherwise be filed against service providers with deep pockets. Only time will tell, but putting aside manipulation cases, all that might be left of non-speaker liability is the "innocent intermediaries" theory, discussed below.

The Split in the Circuits
In Central Bank, the Court held that Rule 10b-5's private right of action does not include suits against aiders and abettors, but only against primary violators. Then, in Stoneridge, the Court held that Rule 10b-5's private right of action does not include suits against those who neither have a duty to speak, nor said or did anything known or relied upon by the securities markets, but nonetheless were alleged to have participated in schemes that allowed someone else to make material misrepresentations to the marketplace. Both opinions left open the question of whether one could be primarily liable under Rule 10b-5 without either uttering a falsehood to the marketplace, or controlling someone who did. After Stoneridge most circuits said "no," but the U.S. Court of Appeals for the Fourth Circuit in Janus (reported below as In re Mutual Funds Litig., 566 F.3d 111 (4th Cir. 2009)), said "yes," holding that a defendant could be held liable where the reader would likely attribute a "substantial role" to the defendant in the creation of the misstatement, even if the defendant did not utter the misstatement or have it expressly attributed to him. This set up a split in the circuits. Even so, Janus seemed an unlikely vehicle for a broad pronouncement on this subject, arising as it did out of the highly specialized world of mutual funds.

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