Janus Capital Group: How "Making" a Statement Leads to Insulation from Liability
Talia, Colin, Journal of Corporation Law
In the fall of 2001, the collapse of Enron Corporation shook the American stock market to its core. The once renowned energy and securities company completed a stunning collapse, fueled by management fraud and deceit, on December 2, 2001, by filing for bankruptcy.1 In February 2001, newly appointed CEO Jeffrey Skilling bragged to analysts that Enron stock should be trading at around $126 per share.2 Just days before filing for bankruptcy, however, the stock closed for the last time at a mere 26¢ per share.3
It was only after Enron's collapse that the extent of fraud and deceit among Enron's management became fully known to the public.4 For years, Enron misled the public about the financial state of the company, inflating its financial statements to reveal a company with healthy profits and excess cash on hand.5 In reality, however, Enron bled billions of dollars in liabilities, which its financial statements did not reflect.6
In 2002, Enron shareholders filed suit against dozens of Enron executives, several prominent banks, and a few notable law firms.7 The banks included J.P. Morgan Chase, Citigroup, and Merrill Lynch;8 the law firms included Vinson and Elkins, and Kirkland and Ellis.9 The financial institutions named in the complaint allegedly helped Enron set up secretly controlled partnerships, disguise loans via offshore companies, and sell overvalued Enron assets.10 This activity allowed Enron to shiftbillions of dollars offof its balance sheets, creating an artificial stock price, and ultimately misleading investors.11
The complaint alleged that the law firms helped issue false legal opinions, helped structure non-arm's length transactions, and helped Enron in its preparation of submitting false documents to the Securities and Exchange Commission (SEC).12 Aside from helping Enron inflate its balance sheets, the banks, as underwriters of Enron securities, misled the public by approving incomplete or incorrect company statements.13 The banks also engaged in complex financial maneuvers on behalf of Enron, intending to increase the value of Enron stock.14
Ultimately, the shareholders in the suit did not prevail, with the Fifth Circuit not allowing securities fraud claims to extend to secondary actors who did not make any misrepresentations or omissions.15 The Enron scandal influenced Congress to enact the Sarbanes-Oxley Act in 2002.16 The collapse of Enron, although an extreme example, highlights the enormous impact securities fraud can have on investors and individuals.
"Securities fraud" is an umbrella term for several causes of action, some of which are forms of core fraud and some of which are forms of misrepresentation.17 The laws of securities fraud are extremely broad despite the amount of statutes and rules that govern them.18 There are mainly three types of actions that can arise as a result of securities fraud: private lawsuits, SEC actions, and criminal prosecutions.19 Of the three, this Note focuses on private actions.
Part II of this Note discusses section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, which allows investors to recover from fraudulent actors in securities markets. Part II also discusses the United States Supreme Court decisions in Central Bank of Denver v. First Interstate Bank of Denver, Stoneridge Investment Partners v. Scientific-Atlanta, and Janus Capital Group v. First Derivate Traders. The cases deal with investors and their ability to hold primary and secondary actors liable for violations of section 10(b) via private causes of action. Finally, Part II discusses the decision of the Court in Janus and explains in detail why the Court decided Janus Capital Management (JCM) did not "make" the statement First Derivate Traders relied on.
Part III begins by explaining why, despite the Court's holding otherwise, JCM for all intents and purposes did, in fact, make the misstatements that First Derivate Traders relied on. …