The
U.S. Supreme Court
has ruled that a
mutual fund
investment adviser
cannot be held
liable in a private
action under
Exchange Act Rule
10b-5 for false
statements included
in its client mutual
funds’ prospectuses.
The investment
adviser did not make
the material
misstatements in the
prospectuses, said
the court, in a 5-4
opinion, and could
not be held liable
for any
misstatements.
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, 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 follows from
Central Bank of
Denver, N.A. v.
First Interstate
Bank of Denver, N.A,
(1993-1994 CCH Dec.
¶98,178), 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.
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.
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.
□
Janus Capital Group,
Inc. v. First
Derivatives Traders
(US Sup Ct) is
reported at ¶96,327.