Securities Class Actions: Should Claimants Plead Section 20(b) in Light of Janus?

Securities law practitioners are undoubtedly aware of the U.S. Supreme Court’s decision in Morrison v. Nat’l Australia Bank, which appears to have significantly narrowed the scope of a plaintiff’s implied right of action under Section 10 of the Securities and Exchange Act of 1934 (the “Exchange Act”).  This past summer, the Supreme Court decided Janus Capital Group v. First Derivative Traders, 131 S. Ct. 2296 (2011), which further narrowed the scope of private securities fraud actions with regards to who, for the purposes of a Section 10 violation, is the maker of an actionable statement. 

Justice Thomas, who is no stranger to controversy, wrote the majority opinion in Janus, holding that one who has the “ultimate authority over the statement, including its content and whether and how to communicate [the statement],” made the statement. Janus, 131 S. Ct. at 2302.  In his dissent, Justice Breyer noted that the majority’s rule creates a loophole for defendants who disseminate fraudulent information through innocent parties.  Those innocents may have ultimate authority over whether and how the information is disseminated, but may unknowingly communicate information that is fraudulent. Janus, 131 S. Ct. at 2310.  But, the majority said that it “[did] not address whether Congress created liability for entities that act through innocent intermediaries in [Section 20(b) of the Exchange Act].” 

Does this mean that Janus has no bearing on a Section 20(b) claim?

Section 20(b) states that “It shall be unlawful for any person, directly or indirectly, to do any act or thing which it would be unlawful for such person to do under the provisions of [the Exchange Act]  or any rule or regulation thereunder through or by means of any other person” (Emphasis added). Section 20(b) appears to hold primarily liable persons who dupe others into communicating fraudulent information, even if the communication is attributed to, i.e.“made” by, the innocent.  In fact, Justice Breyer suggested that, in light of the majority’s holding,  the Janus plaintiffs should have been permitted to amend their complaint in order to add a Section 20(b) claim. Janus, 131 S. Ct. at 2311. 

Under case law related to Section 20(b) claims, a plaintiff must also establish that a fraudster, who knowingly duped the innocent into making fraudulent statements, legally controlled the innocent. See e.g. Cohen v. Citibank, N.A. 954 F. Supp. 621, 630 (1996).  The Supreme Court may have sent a clue to practitioners that relief cut off by Janus may be found under Section 20(b), although that relief has its limits.

Abbey Spanier, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.