This morning, in a 5-4 decision written by Justice Thomas, the Supreme Court ruled that an investment advisor cannot be held liable under Rule 10b-5 for false statements included in the prospectus of one its investment funds. Janus v. FDT (in which I wrote an amicus brief for the respondents) most directly concerns the mutual fund industry, but its implications may be more interesting in the broader business community if corporate counsel attempt to use this ruling as a blueprint for insulating management from securities lawsuits.
Justice Thomas placed great weight on the fact that the advisor is a distinct legal entity from the fund, and then deemed the fund to be the maker of the prospectus (notwithstanding the fact that the advisor drafts the prospectus and then operates the fund in a way that either conforms to or violates the prospectus). Could an operating company (i.e., a business other than an investment fund) separate its management team and its assets into distinct legal entities, then provide all management services for the business via contract (and disclaim subsequent Rule 10b-5 claims by citing Janus)?
In today's case, there was no dispute that Janus permitted market timing after drafting a prospectus stating that Janus funds did not allow market timing. Justice Thomas reasoned that an advisor and its fund are distinct legal entities, and that only the fund "makes" -- and is therefore responsible for the accuracy of -- the contents of its own prospectuses.
Justice Breyer, in dissent with Justices Ginsburg, Sotomayor, and Kagan, argued that "to make" does not possess such a narrow definition, and that the advisor (who forms, incubates, operates, and completely dominates the fund) should reasonably be deemed to have made the misleading statements. Justice Breyer also pointed out that the advisor is the entity that makes the prospectus true or false by its subsequent management of the fund.
Nice legal formalities are of course nothing new in the world of corporate law and, as ever, their bright lines trade a moiety of equity for predictability. Formalities also tend to encourage highly strategic behavior in future.
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