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First Derivative Traders, individually, and on behalf of various Janus Capital Group ("JCG") shareholders sued JCG and its investment advisor subsidiary Janus Capital Management ("JCM") in the Colorado federal district court (subsequently transferred to the Maryland federal district court) alleging violations of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission. They argued that JCG and JCM unlawfully made misleading statements in prospectuses about various Janus funds, most notably that it did not permit "market timing" of the funds – the practice of rapidly trading in and out of a mutual fund to take advantage of inefficiencies in the way the funds are valued. The district court dismissed the complaint holding that the plaintiffs failed to state a claim.

On appeal, the U.S. Court of Appeals for the Fourth Circuit reversed, holding that investors stated a claim against JCG and JCM by asserting that both were responsible for making misleading statements about the funds' prohibition of market timing. The court reasoned that JCG investors would have inferred that, even if JCM had not itself written the alleged misstatements about JCG's practice of market timing, JCM must have at least approved of the statements.

Did the Fourth Circuit err in concluding that a service provider – in this case JCM – can be held liable in a private securities fraud action for "helping or participating in" another company's misstatements?

Did the Fourth Circuit err in concluding that a service provider – in this case JCM – can be held liable in a private securities fraud action for statements that were not directly and contemporaneously attributable to the service provider?

Yes. The Supreme Court reversed the lower court order in an opinion by Justice Clarence Thomas. "Because the false statements included in the prospectuses were made by Janus Investment Fund, not by JCM, JCM and JCG cannot be held liable in a private action under Rule 10b–5," Justice Thomas wrote. Justice Stephen Breyer dissented, joined by Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan. "The majority has incorrectly interpreted the Rule's word 'make,'" Breyer argued. "Both language and case law indicate that, depending upon the circumstances, a management company, a board of trustees, individual company officers, or others, separately or together, might 'make' statements contained in a firm's prospectus—even if a board of directors has ultimate content-related responsibility."