JCG stockholders alleged that Janus Capital Management LLC — which distributes Janus Funds — misstated in its fund prospectuses its policies with regard to market timing. In particular, the prospectuses said that: the funds “were not intended for market timing or excessive trading,” and Janus had measures in place to prevent the practice, but allowed several hedge funds to engage in market timing, making the prospectuses misleading.
The plaintiffs said that the JCG should be liable because it “assisted in the preparation and filing of these allegedly misleading prospectuses and therefore should be deemed to have made these statements.”
U.S. District Judge Frederick Motz asserted that a mutual fund company cannot be liable under Section 10(b) for alleged misinterpretations made to mutual fund shareholders, because the shareholders of the parent company purchased no mutual fund shares. He further said that shareholders could not prove that the company made a false statement or omitted a material fact – evidence that is required in order to prove that JCG breached 10(b).
Motz continued: “â€¦ the present action contains no allegations that JCG actually made or prepared the prospectuses, let alone that any statements contained therein were directly attributable to it.” He rejected the plaintiffs’ argument that simply because the “prospectuses bore Janus’ logo, name and website should alone render JCG liable for allegedly misleading statements.”
The court also said that the fact JCG disseminated the prospectuses is not enough to hold it liable.
With regard to claims against subsidiary JCM, the court found no connection between plaintiffs, JCG shareholders, and JCM, the funds’ investment adviser.
The allegations against Janus reach back to September 2003, as other beleaguered mutual fund companies were feeling the heat from market timing/late trading allegations. The news that Janus, too, was accused of market timing, prompted mutual fund investors to withdraw their investments.
The scandal provoked the resignation of Janus Chief Executive Officer and board member Mark Whiston, who was said to have been aware about the trades in November 2002 (See Janus CEO Whiston Steps Down ). Following Whiston’s exit, the company reached a settlement agreement in 2004 with the SEC and the attorneys general of New York and Colorado to pay $226 million to put to rest civil fraud charges that firm allowed market timing (SeeFeds ID Biggest Janus Market Timer Contact).
The case is Wiggins v. Janus Capital Group Inc. (In re Mutual Funds Investment Litigation), D. Md., No. JFM-04-818, 5/21/07.