District Courts Differ Over Interpretation of Janus in SEC Enforcement Actions

In the wake of Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), in which the U.S. Supreme Court held that secondary actors could not be held liable for false statements made by others, the SEC has attempted to circumvent Janus by seeking to establish primary liability through sections of the securities laws not discussed in Janus. The Supreme Court in Janus held that primary liability under Section 10(b) and Rule 10b-5(b) of the Securities Exchange Act of 1934 can only exist against the maker of a false statement where the maker is defined as the party that has “ultimate authority over the statement, including its content and whether and how to communicate it.” Janus enhanced the Supreme Court’s long-standing restriction on liability against “secondary actors” such as investment banks, financial advisors, lawyers and accountants who merely participate in drafting or distributing false or misleading statements made by others, as originally established in Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994). Two recent cases in which the SEC has attempted an end-run around Janus have reached different results.

In SEC v. Kelly, the Southern District of New York held that Janus applied to Rule 10b-5(b) but not to Rule 10b-5(a) or (c). In Kelly, the SEC brought an enforcement action against two former AOL executives for false statements allegedly made in order to inflate AOL’s revenues. While the SEC conceded that the defendants did not make the false statements at issue and could not be liable under Section 10(b) in light of Janus, the SEC argued that defendants should still be liable under subsections (a) and (c) of Rule 10b-5, which deal with scheme liability. The court granted the defendants’ motion for judgment on the pleadings and held that the SEC could not circumvent the requirements of Janus, which only apply to Section 10(b), by recasting a false statement claim as a fraudulent scheme using subsections (a) and (c) to expand primary liability by invoking scheme liability. However, the court did extend Janus to apply to Section 17(a)(2) of the Securities Act of 1933 on the basis that the elements of a Section 17(a)(2) claim are essentially the same as those for a Rule 10b-5(b) claim.

The Northern District of California, in SEC v. Daifotis, reached the opposite result and held that Janus does not apply to Section 17(a)(2). In Daifotis, the court looked to the language of Section 17(a)(2) and held that because it does not contain the word “make,” unlike Rule 10b-5(b), Janus could not be extended to apply to Section 17(a)(2) claims. This case did not address subsections (a) or (c) of Rule 10b-5.

While Janus has made it easier for individuals and entities who participate in drafting or distributing statements made by others to escape liability under Rule 10b-5(b), it may be possible for liability to attach under Rule 10b-5(a) or (c) or Section 17(a)(2). Such individuals and entities should be aware of this until the reach of Janus is properly clarified by the appellate courts.

SEC v. Kelly, No. 08 CV 4612, 2011 WL 4431161 (S.D.N.Y. Sept. 22, 2011)

SEC v. Daifotis, No. C 11-00137 WHA, 2011 WL 3295139 (N.D. Cal. Aug. 1, 2011)