Supreme Court Decision Holds Back “Floodgates” Of Lawsuits Against Advisors And Other Sellers Of Mutual Funds

Monday, June 13, 2011 14:37
Supreme Court Decision Holds Back “Floodgates” Of Lawsuits Against Advisors And Other Sellers Of Mutual Funds

Tags: mutual funds

A key decision today by the Supreme Court means you can sell mutual funds without being held liable for statements made in the fund prospectuses.  In Janus Capital Group v. First Derivative Traders, the high court ruled 5-4 that Janus is not responsible for alleged false statements made in the prospectuses of some of its investment funds. 


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An opposite result could have “opened the floodgates” of lawsuits against any entity involved with selling mutual funds, including financial advisors. 


The high court’s decision overturned a 2005 Court of Appeals ruling that a class-action securities fraud lawsuit could go forward for those who bought Janus stock from mid-2000 through early September 2003. The lawsuit alleged that the prospectuses of several Janus funds created the false or misleading impression that the company would adopt measures to curb market timing -- when in fact secret arrangements with several hedge funds permitted such transactions, to the detriment of long-term investors.


“One who prepared or published a statement on behalf of another is not its maker,” wrote Justice Clarence Thomas in the opinion. “Even when a speechwriter drafts a speech, the content is entirely in control of the person who delivers it. And it is the speaker who takes credit or blame for what is ultimately said,” Mr. Thomas said.


The writing is very clear: as long as there are separate legal entities, even if management dominates all aspects, there's no liability. With the win for sellers of mutual funds, the status quo remains, and few changes will likely take place for how big asset managers govern themselves. If Janus had lost the lawsuit, a major overhaul would have been likely.


Watch for other industries to adopt the split management structure of the mutual funds sector as a way to avoid liability.  


Read the full Supreme Court opinion.

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