Janus Causes Court to Reconsider Securities Fraud Claims against Dana Executives
Susan M. Greenwood | Bloomberg Law
Pursuant to the Supreme Court’s decision in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), narrowing securities fraud liability, the U.S. District Court for the Northern District of Ohio granted in part the motion for reconsideration by former executives of Dana Corporation (Dana) Bernard Cole, William Hennessey, Dennis Hodge, and Robert Steimle (collectively, Defendants). Although Janus forced the Court to dismiss plaintiff’s securities fraud claims under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5(b) thereunder, the Court held that neither Janus nor Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008), required dismissal of claims for deceptive conduct under Rules 10b-5(a) and (c).
Securities Fraud Claims Survive First Motion to Dismiss
As the Court explained, plaintiff alleges that Defendants “worked together to falsify financial information about the financial circumstances of an important Dana unit.” As a result, Dana misstated its financials, which led to a restatement and bankruptcy petition. On Defendants’ original motion to dismiss, the Court held that Defendants were liable for primary violations of the Exchange Act because “‘those who spoke directly to the investing public merely conveyed to the public the defendants’ conduct that was at the heart of the fraud.’” For more on the Court’s decision, see Bloomberg Law Reports®—Securities Law, Accounting Fraud Claims Survive Argument that Defendants Were Not Primary Actors (Apr. 5, 2011).
New Analysis for “Ultimate Authority”
Janus, the Court explained, “changed the doctrine of securities liability under Rule 10b-5″ with “an extremely limited interpretation of the verb ‘to make.’” “Reading all nuance and any implication of ‘creating’ out of the word,” the Supreme Court tied liability to those with “ultimate authority” over a statement. For more on Janus, see Bloomberg Law Reports®—Securities Law, Supreme Court Narrows Securities Fraud Liability to Persons with “Ultimate Authority” over a Statement (June 13, 2011).
Plaintiff attempted to distinguish Janus on the grounds that the defendant in that case was a separate legal entity from the issuer of the alleged misleading statements. Here, however, Defendants are corporate insiders. The Court found nothing in Janus that limited its ruling to separate legal entities, although it noted that “[t]he degree of separation between entities naturally will inform the analysis of where ultimate authority lies.”
Turning to the question of ultimate authority, the Court rejected plaintiff’s argument that Defendants had complete control over the false financial information they provided to Dana. It observed that the complaint specifically alleges that Defendants reported numbers based on a “‘mandatory 6% profit margin increase for each of Dana’s plants and divisions.’” Although Defendants manipulated financial results to meet this mandatory directive, the Court concluded that “this description of defendants’ roles cannot be reconciled with plaintiff’s current assertion that ‘Dana’s CEO, CFO, or its Board of Directors had no discretion to alter the result that defendants had sent.’”
Deceptive Conduct Survives Janus and Stoneridge
“[T]he Supreme Court has unequivocally held that conduct can be deceptive and provide a basis for primary liability,” said the Court. Moreover, a claim under Rules 10b-5(a) and (c) does not require direct attribution. As the Court explained, Janus “makes no reference to attribution,” even though the Supreme Court referenced Stoneridge. As for Stoneridge itself, the Court said that that case “did not impose a blanket specific attribution requirement on deceptive conduct claims, to be applied regardless of the relationship of the parties.” The Court acknowledged that where—as in Janus and Stoneridge—the defendant is a “legally independent third party, reliance becomes particularly difficult to show, and therefore attribution, or lack thereof, that much more significant.” Yet, the Court determined during the first motion to dismiss that reliance was pled sufficiently. Accordingly, the lack of direct attribution did not provide grounds for dismissal.
Similarly, Defendants’ supposed lack of a duty to disclose their deceptive conduct did not warrant dismissal. Defendants, the Court continued, “cite[d] no binding caselaw espousing such requirement for all 10b-5(a) or (c) claims outside of an omissions case.” In fact, the Sixth Circuit directly contradicted Defendants’ argument in a ruling that a defendant can be liable as a “‘participant in [an] allegedly fraudulent scheme,’” even if that defendant is not liable for a failure to disclose. The Court found that Stoneridge also supports the Sixth Circuit’s reasoning. As the Supreme Court held: “‘[c]onduct itself can be deceptive’; there need not be ‘a specific oral or written statement before there could be liability under § 10(b) or Rule 10b-5.’” Citing additional case law from district courts in multiple circuits, the Court concluded that neither Janus nor Stoneridge “alter the landscape of 10b-5(a) and (c) violations to add a duty to disclose requirement.”
Future Effect of Janus
Although plaintiff’s securities fraud claims survived in part, the Court’s decision demonstrates that the bright-line test set forth in Janus could drastically affect claims under Rule 10b-5(b), potentially causing a wave of dismissals similar to that which followed the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010). See Bloomberg Law Reports®—Securities Law, Courts Seize on Morrison to Dismiss Securities Fraud Claims against Foreign Companies (Jan. 3, 2011).
Potential dismissals under Janus, however, implicate a concern raised by the Janus dissent. Those Justices worried:
What is to happen when guilty management writes a prospectus (for the board) containing materially false statements and fools both board and public into believing they are true? Apparently under the majority’s rule, in such circumstances no one could be found to have “ma[d]e” a materially false statement — even though under the common law the managers would likely have been guilty or liable (in analogous circumstances) for doing so as principals (and not as aiders and abettors).
This concern seems to have actualized in the case at bar as Defendants allegedly fooled their superiors and Dana, which issued financial statements containing Defendants’ allegedly falsified numbers. Shut off from claims for primary liability and aiding and abetting, plaintiff must now rely on deceptive conduct under Rules 10b-5(a) and (c). The question then is whether claims for deceptive conduct will become a standard part of securities fraud litigation.
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