In Re: MUTUAL FUNDS INVESTMENT LITIGATION. FIRST DERIVATIVE TRADERS, on behalf of itself and all others similarly situated, Plaintiff-Appellant, and CRAIG WIGGINS, individually and on behalf of all others similarly situated, Plaintiff, v. JANUS CAPITAL GROUP, INCORPORATED, f/k/a Stilwell Securities Laws Financial, Incorporated; JANUS CAPITAL MANAGEMENT, Defendants-Appellees, and MARK B. WHISTON; LOREN M. STARR; GREGORY A. FROST, Defendants.
No. 07-1607
UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT
May 7, 2009
Certiorari granted, June 28, 2010. Reversed by Supreme Court, June 13, 2011. PUBLISHED.
Appeal from the United States District Court for the District of Maryland, at Baltimore. J. Frederick Motz, District Judge. (1:04-cv-00818-JFM; 1:04-md-15863-JFM)
Argued: October 31, 2008
Decided: May 7, 2009
Before MICHAEL, SHEDD, and DUNCAN, Circuit Judges.
Reversed and remanded by published opinion. Judge Michael wrote the opinion, in which Judge Duncan concurred. Judge Shedd wrote a separate concurring opinion.
COUNSEL
OPINION
MICHAEL, Circuit Judge:
Plaintiff First Derivative Traders (First Derivative) appeals the
The district court concluded that plaintiffs had failed to sufficiently plead certain elements of a
I.
Plaintiffs seek to hold JCG and JCM liable for fraud under
The original complaint was filed against JCG in U.S. District Court in Colorado in November 2003 by Craig Wiggins, a purchaser of JCG common stock. On March 26, 2004, the Judicial Panel on Multidistrict Litigation transferred the Wiggins action from the District of Colorado to the District of Maryland for coordination with other actions involving allegations of market timing in the mutual funds industry. After the district court appointed a lead plaintiff (First Derivative) and lead counsel, First Derivative filed an amended complaint in September 2004, which, among other things, added JCM as a defendant. Defendants filed a motion to dismiss this amended complaint in February 2005, and the district court granted dismissal on the narrow ground that plaintiffs’ class definition failed to satisfy the loss causation standard articulated in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005).
First Derivative then filed a second amended complaint (the complaint). The basic facts as alleged by the plaintiffs in the complaint are as follows. Defendant JCG is an asset management firm that, directly or through subsidiaries, sponsors and markets mutual funds and provides investment advisory and administrative services to the funds. Defendant JCM, a wholly-owned subsidiary of JCG, is JCG‘s primary operating company and there is overlap in the executive officers of the two companies. The greater part of JCG‘s revenue is generated by JCM. JCM serves as the investment advisor and administrator to the Janus funds. As investment advisor to the various Janus funds, JCM “is responsible for the day-to-day management of [the] investment portfolio and other business affairs of the funds.” J.A. 206-07. “[A]s a practical matter” JCM runs the Janus family of funds. J.A. 212. First Derivative sues on behalf of persons who bought shares of common stock in JCG between July 21, 2000, and September 2, 2003, and still held shares on September 3, 2003, when their price dropped, allegedly as a result of the public disclosure of defendants’ misconduct with respect to market timing.
Market timing, as it occurred here, refers to the practice of rapidly trading in and out of a mutual fund to take advantage of inefficiencies in the way the fund values its shares. Some funds, including the Janus funds, use stale prices to calculate the value of the securities held in the fund‘s portfolio (net asset values (NAVs)), which may not reflect the fair value of the securities as of the time the NAV is calculated. The use of stale prices to calculate the NAV makes a fund vulnerable to time zone arbitrage and other similar strategies; repeated use of such strategies is referred to as “timing” the fund. Time zone arbitrage can occur when a fund is invested in foreign securities. As we explained in In re Mutual Funds Investment Litig.:
[T]ime zone differences allow market timers to purchase shares of [mutual] funds [that invest in foreign securities] based on events occurring after foreign market closing prices are established, but before the fund‘s NAV calculation. Prior to the daily NAV calculation, which in the United States generally occurs at or near the closing time of the major U.S. securities markets, the fund price would not take into account any changes that have affected the value of the foreign security. Therefore, if the foreign security had increased in value, the NAV for the mutual fund would be artificially low. After purchasing the shares at the low price, the market timer would redeem the fund‘s shares the next day when the fund‘s share price would reflect the increased prices in foreign markets, for a quick profit at the expense of the long-term fund shareholders.
529 F.3d 207, 211 (4th Cir. 2008) (internal citations and quotations omitted). Market timing has the potential to harm other fund investors by diluting the value of shares, increasing transaction costs, reducing investment opportunities for the fund, and producing negative tax consequences.
Plaintiffs charge that statements about market timing appearing in the various Janus fund prospectuses were misleading because they falsely represented that the Janus funds had policies of preventing market timing when, in fact, fund managers explicitly permitted significant market timing and late trading to occur.
Specifically, plaintiffs allege in their complaint that Janus fund prospectuses filed with the SEC and available at the Janus website “included language that said Janus’ funds were ‘not intended for market timing or excessive trading’ and said ‘Janus had measures in place to stop th[is] trading.‘” J.A. 212-13. The complaint also cites numerous passages from prospectuses for individual Janus funds condemning the practice of market timing and outlining steps that would be taken to exclude market timers or excessive traders from the funds. For example, the complaint quotes the “Excessive Trading Policy” as set forth in the February 28, 2003, prospectus for the Janus Mercury Fund:
Frequent trades in your account or accounts controlled by you can disrupt portfolio investment strategies and increase Fund expenses for all Fund shareholders. The fund is not intended for market timing or excessive trading. To deter these activities, the Fund or its
agent may temporarily or permanently suspend or terminate exchange privileges of any investor who makes more than four exchanges out of the Fund in a calendar year and bar future purchases into the Fund by such investor. In addition, the Fund or its agent also may reject any purchase orders (including exchange purchases) by any inves-tor or group of investors indefinitely for any reason, including, in particular, purchase orders that they believe are attributable to market timers or are otherwise excessive or potentially disruptive to the Fund. Orders placed by an investor in violation of the exchange limits or the excessive trading policies or by investors that the Fund believes are market timers may be revoked or cancelled by the Fund . ...
J.A. 213. The complaint repeats this language as it appeared in an earlier Janus Mercury Fund prospectus filed on Form N-1A with the SEC on February 25, 2002, and notes that “[p]rospectuses for the Janus Enterprise Fund, Janus Mercury Fund, Janus High-Yield Fund, Janus Worldwide Fund, and Janus Overseas Fund contain the exact same language in their prospectuses filed on Form N-1A with the Securities and Exchange Commission on February 25, 2002.” J.A. 217. The complaint also identifies similar language in the prospectus for the Janus Advisor Worldwide Fund and the Janus International Growth Fund filed on Form N-1A with the SEC on September 30, 2001, and identifies additional allegedly misleading language in several fund prospectuses.
The complaint alleges that the statements in the prospectuses regarding market timing were misleading because JCG and JCM have subsequently admitted that they “had, for years, entered into secret arrangements to allow several hedge funds to engage in market timing transactions in various Janus Funds.” J.A. 213. Drawing on a complaint filed on September 3, 2003, by the New York Attorney General in a separate action, plaintiffs allege that in 2002 JCG “granted permission for” the Canary Partners hedge fund to market time the Janus Mercury and Janus High Yield Funds. J.A. 230. Thereafter, in 2003 Canary Partners “sought [market] timing capacity in Janus’ offshore funds.” J.A. 231. In response to Canary Partners’ request for additional timing capacity, “a concerned [JCG] employee” sent the following email message to Richard Garland, the CEO of Janus International Growth Fund:
I‘m getting more concerned w/ all of these market timers and how they are affecting our PM‘s [i.e., Portfolio Managers] trading activity. [Portfolio Managers] have voiced their sensitivity on a number of occasions re: this type of activity in JWF1. I spoke to [a Janus employee] and confirmed that this is a big problem domestically and I want to avoid this at all cost before it gets too problematic offshore. Now that we have our exchange limitation in our prospectus, I would feel more comfortable not accepting this type of business because its too difficult to monitor/enforce & it is very disruptive to the PM‘s & operation of the funds. Obviously, your call from the sales side.
J.A. 231 (quoting New York Attorney General‘s complaint) (alterations in First Derivative‘s complaint). Eventually, as described in plaintiffs’ complaint:
- Managing the extensive timing activity in its funds became difficult for Janus. In early June, 2003, it began to consider adopting a consistent policy on market timing. Discussion concerning development
of such a policy was opened up to certain Janus employees. Comments included: - “Our stated policy is that we do not tolerate timers. As such, we won‘t actively seek timers, but when pressed and when we believe allowing a limited/controlled amount of timing activity will be in JCG‘s best interests (increased profitability to the firm) we will make exceptions under these paramaters [sic].”
- “My own personal recommendation is not to allow timing, period, and follow the prospectus. . . . [T]imers often hide multiple accounts and move on the same day which could hurt other investors and enrage the Pms. . . . I don‘t think the static assets that we might be able to hold onto are worth the potential headaches, nor does this fall into our ‘narrow and deep’ focus. I suggest we maintain the timing agreements we have, but allow no more.”
J.A. 232 (quoting New York Attorney General‘s complaint) (internal citations removed; alterations in First Derivative‘s complaint). JCG later admitted to the facts alleged in the Attorney General‘s complaint and to market timing arrangements with at least ten investors.
Plaintiffs assert that the misleading statements in the Janus funds’ prospectuses stating the funds’ policy of deterring market timing fraudulently induced investors to buy shares in the Janus funds. As a result of these investments, the assets in the Janus funds, and JCM‘s management fees, increased. JCM‘s management of the assets in the Janus funds generated more than ninety percent of JCG‘s revenue. Consequently, in September 2003 when the New York Attorney General‘s complaint made public the actions taken by JCG and JCM‘s executives to permit substantial market timing contrary to the Janus funds’ expressed policies, massive withdrawals or redemptions from the funds were triggered. The assets under management by JCM decreased by $14 billion between September 2003 and February 2004. “Relatedly and predictably,” according to the complaint, the Attorney General‘s accusations caused “a crisis of confidence among [JCG] common stock investors,” resulting in a twenty-three percent decrease in the value of JCG common stock. J.A. 204-05.
The district court reviewed the complaint and granted defendants’ motion to dismiss pursuant to
The central question before us is whether plaintiffs have successfully met the pleading requirements for a
Pursuant to
unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange . . . [t]o use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
The Supreme Court has clarified that a plaintiff suing in a typical private action under
Prior to the enactment of the Private Securities Litigation Reform Act (PSLRA) of 1995, Pub.L. No. 104-67, 109 Stat. 737,
Rather, we must look to traditional pleading requirements for fraud claims. At the time of the filing of the complaint in this action,
plaintiffs plead “with particularity . . . ‘the time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what he obtained thereby.‘” Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir. 1999) (quoting 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure: Civil § 1297, at 590 (2d ed. 1990)). For the element of loss causation, we have specifically explained that
a plaintiff purporting to allege a securities fraud claim must not only prove loss causation—that the material misrepresentations or omissions alleged actually caused the loss for which the plaintiff seeks damages—but he must also plead it with sufficient specificity to enable the court to evaluate whether the necessary causal link exists.
Teachers’, 477 F.3d at 186. Consequently, for loss causation, we review plaintiffs’ complaint for sufficient specificity.
A.
We turn first to the adequacy of plaintiffs’ allegations of the element of reliance.
To state a private
Plaintiffs in their complaint allege that the fraud-on-the-market presumption is applicable to their claims. As our court has outlined:
To gain the benefit of the presumption [of fraud-on-the-market], a plaintiff must prove (1) that the defendant made the public misrepresentations; (2) that the misrepresentations were material; (3) that the shares were traded on an efficient market; and (4) that the plaintiff purchased the shares after the misrepresentations but before the truth was revealed.
Gariety v. Grant Thornton, LLP, 368 F.3d 356, 364 (4th Cir. 2004) (internal quotations removed). JCG and JCM dispute only the
1.
We begin by considering whether plaintiffs have pled that JCG and JCM made the allegedly misleading statements about market timing that appeared in the prospectuses for the various Janus funds.
Defendants are correct that a
2.
Our conclusion that the complaint alleges that defendants made the statements in question by participating in the preparation of the prospectuses does not end our reliance inquiry. To satisfy the fraud-on-the-market theory, the defendant must make a “public misrepresentation.” Basic, 485 U.S. at 248 n.27. In other words, the defendant must make a misrepresentation that is public and is attributable to the defendant. This requirement is necessary to ensure that the misleading information “is reflected in the market price of the security.” See Stoneridge, 128 S. Ct. at 769. Here, the allegedly misleading statements about market timing appearing in the Janus funds prospectuses are unquestionably public. The real question is whether these statements were sufficiently attributable to JCG and JCM. While the prospectuses did not explicitly name JCG and JCM as the drafters, plaintiffs nevertheless allege in their complaint that JCG and JCM may be held responsible for the statements in the prospectuses
The courts of appeal have diverged over the degree of attribution required to plead reliance. Disagreement regarding the requirement of attribution extends beyond the context of fraud-on-the-market reliance and traces its origins to the Supreme Court‘s decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994). In Central Bank the Court concluded that there was no separate aiding and abetting liability in private securities actions. A defendant cannot be liable absent a “showing that the plaintiff relied upon the [defendant‘s] statements or actions.” Id. at 180. The Court also made clear, however, that:
The absence of
§ 10(b) aiding and abetting liability does not mean that secondary actors in the securities markets are always free from liability under the securities Acts. Any person or entity, including a lawyer, accountant, or bank, who employs a manipulative device or makes a material misstatement (or omission) on which a purchaser or seller of securities relies may be liable as a primary violator under 10b-5, assuming all of the requirements for primary liability under Rule 10b-5 are met.
Id. at 191 (emphasis in original).
Several courts have interpreted Central Bank to suggest that reliance under
In Wright v. Ernst & Young LLP, 152 F.3d 169, 175 (2d Cir. 1998), the Second Circuit concluded that “a secondary actor cannot incur primary liability under the [Securities Exchange] Act for a statement not attributed to that actor at the time of its dissemination.” Wright involved a claim by shareholders in BT Office Products Inc. (BT) against Ernst & Young, an outside auditor for BT. The shareholders’ claim centered on a statement of financial results in a BT press release setting forth the company‘s financial results and indicating strong growth. The BT shareholders claimed that Ernst & Young was responsible for the financial report despite the fact that the press release specifically stated that the figures were unaudited. Because Ernst & Young had approved the financial information contained in the press release, the shareholders contended that the market understood that the press release was an implied statement by Ernst & Young that the financial information in the press release was accurate. The court concluded that the shareholders had failed to adequately plead reliance. Quoting Shapiro v. Cantor, 123 F.3d 717, 720 (2d Cir. 1997), the court reasoned that
“[i]f Central Bank is to have any real meaning, a defendant must actually make a false or misleading statement in order to be held liable under
§ 10(b) . Anything short of such conduct is merely aiding and abetting, and no matter how substantial the aid may be, it is not enough to trigger liability under Section 10(b).”
Wright, 152 F.3d at 175. Thus, “a defendant must know or should know that his representation would be communicated to investors.” Id. (internal quotations removed).
Wright did not make clear, however, whether the statement itself must be attributed on its face to the defendant or whether a statement that the investing public would infer was drafted or approved
The Eleventh Circuit has also adopted Wright‘s public attribution language. See Ziemba v. Cascade Int‘l, Inc., 256 F.3d 1194 (11th Cir. 2001). “Following the Second Circuit,” the court “conclude[d] that, in light of Central Bank, in order for the defendant to be primarily liable under
The Ninth Circuit, in contrast, has concluded that public attribution is not required to plead reliance; substantial participation or intricate involvement in preparing the misleading statement is sufficient to state a primary violation of
Finally, the Tenth Circuit has staked out what it perceives to be a middle ground. See Anixter v. Home-Stake Prod. Co., 77 F.3d 1215 (10th Cir. 1996); see also S.E.C. v. Wolfson, 539 F.3d 1249 (10th Cir. 2008). In Anixter the court considered the potential primary liability of an outside auditor for his alleged participation in preparing and filing registration statements, program books, and prospectuses, and his certifications and opinion letters verifying a company‘s overall financial health. The court explained that “[t]he critical element separating primary from aiding and abetting violations is the existence of a representation, either by statement or omission, made by the defendant, that is relied upon by the plaintiff.” 77 F.3d at 1225. The court concluded that “[a]n accountant‘s false and misleading representations in connection with the purchase or sale of any security, if made with the proper state of mind and if relied upon by those purchasing or selling a security, can constitute a primary violation.” Id. at 1226.
[F]or an accountant‘s misrepresentation to be actionable as a primary violation, there must be a showing that he knew or should have known that his representation would be communicated to investors because
§ 10(b) andRule 10b-5 focus on fraud made in connection with the sale or purchase of a security.
Id. (internal quotations omitted). That is, “in order for accountants to ‘use or employ’ a ‘deception’ actionable under the antifraud law, they must themselves make a false or misleading statement (or omission) that they know or should know will reach potential investors.” Id.
Our court has declined to adopt either the direct attribution or substantial participation standard for pleading reliance. See Gariety, 368 F.3d at 369-70. Because the question in this case arises in the limited context of fraud-on-the-market, it is not necessary for us to establish an attribution standard for all reliance inquiries. As the Supreme Court has explained, “[t]he fraud on the market theory is based on the hypothesis that, in an open and developed securities market, the price
Here we must determine whether, based on JCM‘s duties as investment advisor to the Janus funds, JCG‘s role as an asset management firm and parent of JCM, and the two defendants’ active dissemination of the Janus fund prospectuses, interested investors would have inferred that either or both defendants played a substantial role in drafting or approving the allegedly misleading prospectuses.
A number of courts, even in circuits that have adopted a direct attribution requirement, have concluded that in certain
circumstances auditors and corporate officers may be responsible for statements issued by the corporation or analysts that were not directly attributed to the auditors or officers. For example, in Global Crossing the Southern District of New York determined that Arthur Andersen, an auditor whose role was “well-known to investors” in Global Crossing, could be liable for statements made by Global Crossing that Andersen reviewed and approved but were not publicly attributed to it. 322 F.Supp.2d at 331. There, Andersen‘s audit reports
were included in all of [Global Crossing (GC)]‘s registration statements and annual reports from 1998 to 2000, and . . . were widely available to shareholders during the class period. Andersen‘s role as GC‘s auditor was thus well known to investors, who could easily have relied on the accounting firm‘s involvement in making any public financial reports, even where a particular statement was not publicly attributed to it.
Id. at 334. The district court further observed that:
Andersen‘s aggressive marketing of the novel accounting strategies promoted in [a paper authored by Andersen], which allegedly “became a ‘must read’ in the telecom industry” . . . raises an inference that sophisticated investors would have known of Andersen‘s role in creating the reporting practices behind GC‘s false statements. These allegations are sufficient to raise a reasonable inference not only that Andersen was one of the
“makers” of the statements, but also that investors viewed it as such.
The District of Massachusetts reached a similar conclusion in In re Lernout & Hauspie Sec. Litig., 230 F.Supp.2d 152 (D. Mass. 2002). There, the court pointed out that:
While [auditor] KPMG U.S. did not sign any of KPMG‘s allegedly fraudulent audit reports or [Lernout & Hauspie]‘s financial statements, Plaintiffs allege that it played a significant role in drafting the financial statements and in conducting the audit, and that KPMG US‘s role as an auditor was publicly disseminated in the annual reports to shareholders.
Id. at 166. On the facts alleged regarding publicly available information about KPMG‘s role as an auditor for the company, the court concluded that “[i]t is . . . appropriate to infer that in 1998 and 1999, investors reasonably attributed the statements contained in the quarterly and annual reports to KPMG US.” Id. at 167.
The Second Circuit has additionally held that plaintiffs may adequately plead reliance against corporate officers for statements appearing in analyst reports not directly attributed to the officers. In Novak v. Kasaks, 216 F.3d 300, 314 (2d Cir. 2000), the Second Circuit rejected the contention that the plaintiffs had “not adequately alleged that statements made by securities analysts can be attributed to the . . . defendants [the corporation and high-level officers]” under the fraud-on-the-market theory of reliance. The court noted that in
In each of these cases, the courts analyzed the precise relationship between the defendant and the entity or analyst issuing the allegedly misleading statement in order to determine whether the statement was attributable to the defendant. We likewise look to the nature of the relationship between the defendants (JCG and JCM) and the Janus funds in the present case to determine whether statements in the Janus fund prospectuses were attributable to JCG or JCM.
According to the complaint, JCM in its role as investment advisor to the Janus funds “is responsible for the day-to-day management of [the] investment portfolio and other business affairs of the funds” and “furnishes advice and recommendations concerning the funds’ investments, as well as administrative, compliance and accounting services for the funds.” J.A. 206-07. “While each mutual fund is in fact its own company, as a practical matter the management company [that is, JCM] runs it.” J.A. 212. And “[t]he portfolio managers who make the investment decisions for the funds and the executives to whom they report are all typically employees of the
Interested investors would know that JCM is listed as investment adviser to the funds in the prospectuses and the statements of additional information for each of the Janus funds, and its duties are detailed in these documents. For example, under the heading “Management of the Fund,” the February 25, 2002, prospectus for the Janus Mercury Fund lists only an investment adviser, JCM,3 and a portfolio manager, Warren Lammert, who was executive vice president of
the fund. The Janus Mercury Fund prospectus explains that the investment adviser “furnishes continuous advice and recommendations concerning the Fund‘s investments” and “also furnishes certain administrative, compliance and accounting services for the Fund.” J.A. 109. The February 25, 2002, statement of additional information for the Janus Equity and Income Funds (supplemented April 2, 2002, May 13, 2002, and May 31, 2002) further explains that JCM, as investment adviser, will “provide office space for the Funds, and pay the salaries, fees and expenses of all Fund officers and of those Trustees who are affiliated with [JCM].” J.A. 366. Pursuant to the advisory agreements between the funds and JCM, “[JCM] furnishes certain other services, including net asset value determination and fund accounting, recordkeeping, and blue sky registration and monitoring services, for which the Funds may reimburse [JCM] for its costs.” Id.
The statement of additional information also notes that Janus Distributors LLC, a wholly-owned subsidiary of JCM, is a distributor of the funds. And the District Court observed previously in a related action that two fund defendants in that action, Janus Investment Fund and Janus Adviser Series, are merely “trusts that hold assets belonging to shareholders of the fund.” In re Mut. Funds Inv. Litig., 384 F.Supp.2d 845, 852-53 n.3 (D. Md. 2005). The defendants in that litigation asserted that the Janus Investment Fund and Janus Adviser Series have no assets separate and apart from those they hold for shareholders. Id. at 853 n.3.
To the interested investor familiar with the organizational structure of mutual funds, plaintiffs’ allegations here would have been readily known or ascertainable. Such an investor would understand that “[a] mutual fund does not operate on its own or employ a full time staff.” Clifford E. Kirsch, Mutual Fund Organizational Structure Powerpoint Presentation, in Nuts & Bolts of Financial Products 2005 (Practising Law Institute 2005), at 359. Consequently, “[m]ost of the operations of a mutual fund are carried out by service provid-ers.” Bibb L. Strench & Kathryn I. Quirk, The Advisory Relationship/Portfolio Management, Outline, in The ABCs of Mutual Funds 2006 (Practising Law Institute 2006), at 207. As the SEC has explained,
Unlike most business organizations . . . mutual funds are typically organized and operated by an investment adviser that is responsible for the day-to-day operations of the fund. In most cases, the investment adviser is separate and distinct from the fund it advises, with primary responsibility and loyalty to its own shareholders.
Role of Independent Directors of Investment Companies; Final Rule, 66 Fed. Reg. 3734, 3735 (Jan. 16, 2001); see also Strench & Quirk at 207 (noting that “the investment adviser[ ] is primarily responsible for the day-to-day management of the
The inference that interested investors would attribute to JCM a role in the preparation or approval of the allegedly misleading prospectuses is further strengthened by the fact that JCG and JCM and the Janus funds held themselves out to the investing public as a single entity: “Janus.” Defendants and the funds maintain a single website which contains prospectuses for all of the Janus funds and which is used to disseminate the prospectuses to the investing public. As the statement of additional information for the Janus Equity and Income Funds explains, “[p]romotional expenses in connection with offers and sales of shares are paid by [JCM],” J.A. 371, indicating an active role by JCM in the promotion and sale of shares in the Janus funds.
We conclude, at the
Our analysis is fully consistent with the Supreme Court‘s decision in Stoneridge. In Stoneridge purchasers of common stock in Charter Communications, Inc. (Charter) brought a
Finally, we hold that plaintiffs’ allegations of attribution, while sufficient to implicate JCM in its role as investment
B.
We turn next to the question of whether plaintiffs have successfully pled the element of loss causation.
In a
The complaint here adequately alleges that the false or misleading statements in the prospectuses drafted and disseminated by defendants were a substantial cause of the decrease in JCG‘s share price when the fraud was publicly revealed. The allegations are as follows. Materially misleading statements regarding defendants’ policies on market timing fraudulently induced investors to purchase shares in the Janus funds, increasing the assets under management by JCM. JCM‘s management of the Janus funds’ assets was responsible for generating more than ninety percent of JCG‘s revenue. Consequently, any decrease in the value of the assets in the various mutual funds would adversely affect JCG‘s revenues and profits.
According to the complaint, when the New York Attorney General broke the news on September 3, 2003, that hedge funds had been permitted to market time the Janus funds, JCG stockholders were damaged in several ways. First, JCG stockholders were damaged directly when JCG was required to pay more than $325 million in fines and penalties to settle claims by regulatory agencies relating to the allegations of improper market timing. Second, JCG stockholders were damaged when the assets under management by JCM decreased by $14 billion between September 2003 and February 2004. The complaint alleges that the large withdrawal of assets during this period, which occurred at more than three and a half times
Plaintiffs’ allegations are therefore sufficiently specific to establish that the misleading statements in the prospectuses were a substantial factor in the decline in the value of JCG‘s common stock. Indeed, plaintiffs note that between September 2 and September 4, 2003, the days immediately preceding and following the public revelation of the Attorney General‘s complaint, the share price of JCG‘s common stock dropped by 12.7 percent from $17.68 to $15.60. The rapid decline of JCG‘s common stock price following the news of market timing in the Janus funds indicates a substantial causal link between the misleading prospectuses used to sell shares in the Janus funds and the value of JCG‘s stock.
III.
We turn now to plaintiffs’ allegations of scheme liability. Plaintiffs assert that:
During the Class Period, defendants carried out a plan, scheme and course of conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing public, including plaintiff and other Class members, as alleged herein and (ii) cause plaintiff and other members of the Class to purchase [JCG] securities at artificially inflated prices.
J.A. 242. Plaintiffs contend that JCG and JCM may be held liable under
After plaintiffs filed their complaint, the Supreme Court decided Stoneridge and clarified the contours of scheme liability in private securities actions. Although Stoneridge did not eliminate scheme liability, the opinion made clear that for a secondary actor to be liable for securities fraud under
IV.
Given our conclusion that the complaint does not plead an adequate claim of primary liability against JCG, the final issue we must resolve is whether plaintiffs have successfully pled a claim of control person liability against JCG under
Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.
We have already determined that the predicate violation requirement has been met; plaintiffs have successfully pled a claim of primary liability against JCM. To plead the control requirement, a plaintiff must
plead[ ] facts showing that the controlling defendant “had the power to control the general affairs of the entity primarily liable at the time the entity violated the securities laws . . . [and] had the requisite power to directly or indirectly control or influence the specific corporate policy which resulted in the primary liability.”
In re MicroStrategy, Inc. Sec. Litig., 115 F.Supp.2d 620, 661 (E.D. Va. 2000) (quoting Brown v. Enstar Group, Inc., 84 F.3d 393, 396 (11th Cir. 1996) (alterations in original)). SEC regulations define “control” as “possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.”
Plaintiffs’ allegations adequately plead control of JCM by JCG. First, plaintiffs have alleged that JCG wholly owned JCM. The Eleventh Circuit has specifically noted that “[t]he legislative purpose in enacting a control person liability provision was to prevent people and entities from using straw parties, subsidiaries, or other agents acting on their behalf to accomplish ends that would be forbidden directly by the securities laws.” Laperriere v. Vesta Ins. Group, Inc., 526 F.3d 715, 721 (11th Cir. 2008) (citing H.R. Rep. No. 73-152, at 12 (1933)). Regarding control in the corporation context, one commentator explained:
An enterprise may control another organization and, indirectly, that organization‘s agents and employees. An enterprise‘s section 15 or 20(a) control of another organization may arise from virtually any source on which any other controlling person‘s status can be based. For example, a corporation may be a controlling person when it owns the majority of the shares of another corporation on the basis of its authority to control (legal control) the subsidiary.
Second, plaintiffs have alleged that JCG and JCM shared a common director, Helen Hayes. Hayes was both a director of JCG during the class period and Managing Director of Investments and a portfolio manager at JCM. The complaint alleges that “[s]he served in a day-to-day supervisory position at [JCM] and had the power to control its operations.” J.A. 245. Additionally, Mark Whiston, the CEO and President of JCG during part of the class period, was previously President of Retail and Institutional Services at JCM. The complaint alleges that Whiston commissioned an inquiry into market timing in the Janus funds. The complaint also includes an excerpt from a September 5, 2003, press release by JCG in which Whiston is quoted as saying that he had long viewed market timing as an industry-wide problem and that “[i]t‘s our hope that the [anti-market timing] measures [JCG is] announcing today will help resolve this situation in a way that recognizes the importance of the matter.” J.A. 233. The complaint alleges that “[a]cting on behalf of [JCG], Mr. Whitson [sic], and through him, [JCG], had and exercised the power to control the activities of [JCM].” J.A. 245.
Finally, the complaint quotes passages from the New York Attorney General‘s complaint in which JCG employees discuss market timing policies and actions taken to prevent timing in a manner indicating presumptive control over the market timing activities. Specifically, the complaint includes a comment from an unnamed JCG source that states: “Our stated policy is that we do not tolerate timers. As such, we won‘t actively seek timers, but when pressed and when we believe allowing a limited/controlled amount of timing will be in JCG‘s best interests (increased profitability to the firm) we will make exceptions under these paramaters [sic].” J.A. 232 (emphasis added).
Taken together, plaintiffs’ allegations of complete ownership of JCM by JCG, overlapping management between JCG and JCM, control of JCM by JCG executives, and presumptive authority by JCG to regulate market timing activity in the Janus funds are sufficient to plead a prima facie case of control person liability.
V.
In sum, we conclude that plaintiffs have pled a viable claim of primary
REVERSED AND REMANDED
SHEDD, Circuit Judge, concurring:
I concur in the judgment of the majority that liability may be imposed as to both JCM and JCG. The majority holds that JCM may be primarily liable under
In order to plead a proper case that JCG is primarily liable, a plaintiff must plead, among other elements, that JCG made a misrepresentation that is public and attributable to JCG. As the majority correctly holds, “the Janus funds prospectuses are unquestionably public.” Majority Op., at 16. Thus, the only question is whether the plaintiffs have properly plead a basis that the statements are sufficiently attributable to JCG as a “maker” of the false statement. I believe they have done so. In their complaint, the plaintiffs allege that JCG makes the most recent prospectus for each Janus Fund available on its website, www.janus.com. These prospectuses, which are given to prospective shareholders, included language that said Janus’ funds were not intended for market timing or excessive trading and said Janus had measures in place to stop the trading. These statements were materially false and misleading. J.A. 212-13. (internal quotation marks omitted). I believe the plaintiffs have properly alleged that JCG made a false statement by publishing these funds’ prospectuses on its website, and a reasonable investor would attribute these public statements to JCG.