Supreme Court Term In Review, Part II: Wall Street’s License To Lie

Securities and Exchange Commission regulations make it illegal to “make any untrue statement of a material fact . . . in connection with the purchase or sale of any security.” And, according to a complaint filed by the New York Attorney General’s office, an investment company named Janus did exactly that. Essentially, the complaint maintains, Janus promised its investors that it would prevent any new investors from engaging in a particular kind of price manipulation while secretly entering into agreements permitting that manipulation to occur.

Yet, thanks to the Court’s recent 5–4 decision in Janus Capital Group, Inc. v. First Derivative Traders, Janus and hundreds of other Wall Street firms now effectively enjoy a license to lie.

The license works like this: Janus set up two companies. Janus Investment Fund (JIF), which has no assets other than those owned by investors, and Janus Capital Management (JCM), which makes the investment decisions regarding how JIF’s investors’ money will be invested. At some point during this arrangement, JCM made allegedly false statements that made investing in JIF seem like it was a better idea than it actually turned out to be. So this should have been a slam dunk of a case. The SEC regulation does not allow anyone to “make any untrue statement . . . in connection with the purchase or sale of any security,” and JCM allegedly made an untrue statement in connection with the purchase or sale of a security.

Rather than follow the plain and obvious meaning of this regulatory language, however, Justice Thomas’ majority opinion instead invokes a strange metaphor involving a speechwriter:

For purposes of Rule 10b–5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. Without control, a person or entity can merely suggest what to say, not “make” a statement in its own right. One who prepares or publishes a statement on behalf of another is not its maker. And in the ordinary case, attribution within a statement or implicit from surrounding circumstances is strong evidence that a statement was made by — and only by — the party to whom it is attributed. This rule might best be exemplified by the relationship between a speechwriter and a speaker. Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit — or blame — for what is ultimately said.

This is, to say the least, a very odd understanding of the word “make.” As Justice Breyer explains in dissent, JCM drafted the allegedly false statements and it disseminated them to the public, actions that fall clearly within the ordinary meaning of the word “make.” Simply put, “[t]he English language does not impose upon the word ‘make’ boundaries of the kind the majority finds determinative.”

The practical result of this decision is that investment companies can completely immunize themselves from lawsuits under this SEC regulation simply by adopting Janus’ two-company structure. Under the Court’s decision JIF can still be sued, but since JIF also has no real assets such a lawsuit would be an entirely useless undertaking. Less than three years after Wall Street nearly destroyed our economy through incomprehensible investments and potentially criminal “shitty deals,” the Supreme Court has now given much of Wall Street a license to lie.