The U.S. Supreme Court has ruled that Janus Capital Group Inc. and a subsidiary cannot be held liable in a lawsuit brought by shareholders over allegedly false statements in prospectuses for several Janus mutual funds. By a 5-4 vote, the Justices overturned a ruling by a U.S. appeals court that a class-action securities fraud lawsuit could go forward. In backing Denver-based Janus, one of the largest mutual fund companies, the High Court’s decision will mean few changes for the way big asset managers govern themselves — structures that could have faced a major overhaul if the ruling had gone the other way.
Janus, in appealing to the Supreme Court, argued that the funds were separate legal entities and that neither the parent company nor its subsidiary was responsible for the prospectuses and could not be held liable. Obviously, five members of the High Court agreed, ruling the alleged false statements in the prospectuses were made by an investment fund, not Janus Capital, and that Janus and the subsidiary therefore cannot be held liable in a private securities fraud lawsuit.
Janus paid $225 million in 2004 to settle claims by regulators that it had failed to disclose the trading arrangements to long-term investors. Market timing — allowing favored investors to buy or sell shares based on outdated prices at the expense of other investors — took place at Janus and other fund firms in the last decade. The Obama administration supported the Plaintiffs before the Supreme Court while the Chamber of Commerce business group supported Janus. The High Court previously has issued a number of rulings that limited private shareholder securities fraud lawsuits. Justice Clarence Thomas in the majority opinion said Janus Capital may have assisted the Janus Investment Fund with crafting what it said in the prospectuses, but Janus Capital itself did not actually make those statements.
Janus had argued that technically it is only a service provider to the funds. A federal judge initially sided with Janus. It’s felt by some that the largest impact of this ruling could be to encourage other industries to adopt the split management structure of the mutual funds sector as a way to avoid liability.
Source: Insurance Journal
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