Private Securities Fraud Claims Under Section 10(b) Based on False or Misleading Statements: U.S. Supreme Court Holds that Private Actions May Be Brought Only Against Parties With Ultimate Authority Over the Content and Issuance of the Alleged Misstatements

Sullivan & Cromwell LLP - June 14, 2011

In recent years, the U.S. Supreme Court has interpreted the judicially created private right of action for securities fraud under Section 10(b) of the Securities Exchange Act of 1934 to impose liability only on “primary” violators who were actually responsible for making the alleged misstatements in question. In Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), and Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008), the Supreme Court rejected private securities fraud lawsuits that relied on theories of “aiding and abetting” and “scheme liability,” because the defendants did not “make” the alleged misstatements.

In a 5-4 opinion in Janus Capital Group, Inc. v. First Derivative Traders, No. 09-525 (June 13, 2011), the Supreme Court resolved a disagreement among the lower courts over what it means to “make” an alleged misstatement by holding that Section 10(b) claims can be brought only against parties with “ultimate authority” over an alleged misstatement. Accordingly, the Court dismissed claims against a mutual fund adviser for alleged misstatements contained in the prospectuses of mutual funds it advised and managed. In doing so, the Supreme Court held that there was no reason to disregard the corporate separateness of the adviser and the funds, noting that the funds’ board of trustees had ultimate control over the prospectuses the funds issued. Janus has significant implications for individuals and entities that either help securities issuers prepare and publish public disclosures or that may have significant influence over the content of those disclosures.