The Supreme Court decision in Janus Capital Group v. First Derivative Traders is one of those cases that takes your breath away. The case astonishingly holds that an investment advisor is not liable for fraud in the prospectus of a sponsored mutual fund because the investment advisor is not the “maker” of those statements – even though the fund’s officers are all employees of the advisor (and paid for that service by the advisor) and the advisor prepares, files, and distributes the prospectus. Nevertheless, says the Supreme Court majority, the advisor did not “make” the fraudulent statement, because the fund, a legally separate entity, had “ultimate authority over the statement, including its content and whether and how to communicate it.”

Okay, we get that the Supreme Court is hostile to the implied private right of action under Rule 10b-5 yet seems to regard its existence as a “super-precedent.” But Janus Capital Group does real damage. First, the Court seems willfully to deny what it should have learned about the functioning of mutual funds in last term’s advisory fee case, Jones v. Harris Associates. A mutual fund is hardly a free-standing entity bargaining at arm’s length with a supplier of advisory services, notwithstanding the “independence” of the fund’s directors. At a time when an increasingly large share of investment activity occurs through large pools of capital, the decision exacerbates the problem of “agency capitalism” – the tendency of the managing agents to pursue their own objectives at the expense of the ultimate beneficiaries. Why strain to find ways to insulate wrong-doers from accountability systems?

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