“A Novel Way to Sidestep Investor Suits - Yahoo Finance” |
| A Novel Way to Sidestep Investor Suits - Yahoo Finance Posted: 02 Dec 2010 05:11 PM PST , On Thursday December 2, 2010, 8:12 pm EST One of the great legal fictions of Wall Street is that mutual funds are independent of the companies that create and run them. It is true such funds have their own boards, nominally elected by fund shareholders, but in practice the funds are run and marketed by the management company. That is a fact that most investors take for granted. But it is not a fact the courts should pay much attention to, at least in the opinion of Janus Capital Group, which runs the Janus family of funds. On Tuesday the Supreme Court will hear an appeal by Janus, which seeks to avoid responsibility for a fraud committed at several of its funds. The case stems from a scandal that got a lot of attention seven years ago, one involving "market timing" of funds. Janus told investors it did take steps to prevent such trading, in which big traders buy or sell fund shares based on outdated values, and thereby profit at the expense of other investors in the fund. But Janus secretly cut deals with some hedge funds to allow such trading in order to increase the assets on which it could collect management fees. The basic facts are not in dispute. Janus settled with the Securities and Exchange Commission in 2004 and paid $100 million in penalties. At the time, an S.E.C. enforcement official said it was clear to the commission that Janus "violated an investment adviser's fiduciary duty to investors." In its settlement with the S.E.C., Janus agreed that its Janus Capital Management subsidiary, known as J.C.M., would "cause the Janus funds to operate" in accordance with governance policies that would prevent such violations in the future. It did not claim that J.C.M. had no control over the funds. But in its brief with the Supreme Court, Janus says that "J.C.M. is neither a primary actor nor a primary violator with respect to the statements" in the prospectuses. "The statements in the Janus Funds' prospectuses were made by the trust comprising the Janus Funds — a separate legal entity, with its own board of trustees and legal counsel — not by J.C.M." After Janus's actions were disclosed in September 2003 by Eliot Spitzer, then the attorney general of New York, its stock price plunged, and investors who owned the stock sued. Seven years later, an index of money-management company stocks that includes Janus is up about 15 percent from just before the disclosure. Janus, the worst performer in the group, is down about 40 percent. The suit has moved slowly. A district court judge dismissed the case, agreeing with Janus that the company was not responsible for what was in the prospectuses. The suit was reinstated by the United States Court of Appeals for the Fourth Circuit. If the Supreme Court upholds that decision, the class-action suit can proceed to trial. It is more likely that it would be settled. The decision by the Supreme Court to even hear the appeal took some by surprise. The court asked the Justice Department to comment, and the department advised against hearing the case. After the court agreed to hear the case, the S.E.C. and the Justice Department urged the justices to rule against Janus. That the case could get this far may be an indication of the hostility the courts have shown to securities class-action suits in recent years. In 1994, the Supreme Court ruled that private suits — as opposed to suits brought by the S.E.C. — could not be filed against those who merely aided and abetted someone else's fraud. In a major case decided in 2008, the court said that two companies that had helped a cable company rig its books could not be sued by investors damaged by the fraud. The issues presented by the Janus case make clear that it is not always easy to distinguish whether someone is a primary player in a fraud, or simply helped. That distinction is, however, critical under the Supreme Court precedents. Janus argued in its Supreme Court brief that it was "not a primary actor because it did not issue the securities" offered by the inaccurate prospectuses. Instead, it only "provided investment advisory services" pursuant to a contract. Janus places great reliance on the fact the prospectus speaks of Janus as a contractor, not the principal. Groups representing accountants and brokerage firms, as well as an insurance company that provides insurance for lawyers, want the court to use the case to make clear that such people as lawyers, underwriters and accountants cannot be viewed as primary actors, and thus are immune from private suits even if they were actively involved in a fraud. It might also be possible for the court to avoid a major decision, as it did last year in another mutual fund industry case, by simply emphasizing the unique nature of mutual funds. That is the course urged on it by the S.E.C. "Whatever the merits of creating categorical restrictions on primary liability for true secondary actors, such as an accountant, lawyer or bank," the S.E.C. argued, "such restrictions should not apply to those who are actually responsible for a fund's statements." Perhaps the least likely ruling by the court would be one that opened up the field of possible defendants in private class-action suits, or that made it much easier for courts to use judgment in determining who was and was not a primary actor. The Supreme Court in recent years has never backed plaintiffs in a class-action suit that the court decided. William A. Birdthistle, a securities law professor at the Chicago-Kent College of Law, said in an interview that if the justices ruled for Janus he expected other kinds of companies to seek legal structures that would insulate them from responsibility for prospectuses they issue. In a friend of the court brief filed in the case, Mr. Birdthistle said Janus was seeking "a novel exemption" for investment managers who had deceived their shareholders. "So long as those managers perpetuate their malfeasance through a business trust" he said, Janus argues "such defendants ought to be impervious to lawsuits brought by shareholders." In its brief, the S.E.C. says that if there was no violation of the law by Janus, it is not clear who committed the violation. "If the funds' trustees were (as seems likely) unaware of the misleading nature of J.C.M.'s conduct," then the funds could not be proved to have intended to violate the law, the commission argued. Janus emphasized that the prospectuses did not attribute the inaccurate statements to Janus, a fact the S.E.C. dismissed, saying it was obvious that Janus controlled the funds. A victory for Janus, the commission argued, "would have the perverse effect of insulating a defendant from suit precisely because it was successful in concealing its identify as the maker of false statements." In the real world, the fact that Janus controls the funds it runs is so obvious as to hardly merit a mention, any more than one would emphasize that General Motors or General Electric control their subsidiaries. But Janus hopes the courts will believe, in Mr. Birdthistle's words, "that the lifeless funds created and controlled by managers enjoy meaningful independent existence and that managers are simply minions of those funds." Follow Yahoo! Finance on ; become a fan on Facebook. This entry passed through the Full-Text RSS service — if this is your content and you're reading it on someone else's site, please read our FAQ page at fivefilters.org/content-only/faq.php |
| You are subscribed to email updates from fictions - Bing News To stop receiving these emails, you may unsubscribe now. | Email delivery powered by Google |
| Google Inc., 20 West Kinzie, Chicago IL USA 60610 | |
0 komentar:
Posting Komentar