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June 14, 2011

Securities Litigation Alert: Supreme Court Narrows Scope of Primary Liability in Federal Securities Fraud Actions

On June 13, 2011, the Supreme Court issued its decision in Janus Capital Group, Inc. v. First Derivative Traders, concerning the scope of primary liability in private damages actions under Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5. The Court held that primary liability for an alleged false statement rests with the "maker" of the statement, and that the "maker" of a statement is only "the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it." In Janus itself, the Court applied that rule to conclude that an investment advisor did not "make," and therefore could not have primary liability to private plaintiffs for, alleged fraudulent statements in the prospectuses of mutual funds it managed. The Court's logic, and the narrow view it took of the implied private right of action under Section 10(b) and Rule 10b-5, strongly suggest parallel limitations on the potential liability of underwriters, auditors, attorneys and other outside professionals who advise issuers in connection with their disclosures.

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