Showing that any losses are due to some other cause is an affirmative defense.So mutual fund managers argue, often successfully, that the proximate cause of investor losses are declines in the value of portfolio assets, declines which are unrelated to any misstatement on their part.
The Janus decision gives CDO arrangers a huge get-out-of-lawsuits-free card.When material mistruths about an ordinary firm are exposed, its share price typically drops.This provides a measure of the loss “caused” by the misstatement.The SEC relied in part on Rule 10b-5 in prosecuting Goldman Sachs for its failure to disclose material facts regarding the ABACUS deal. Investors in securitizations can hold literally no one accountable for lies or misstatements in the offering documents.(The directors and trustees of an SPV have little substantive role in managing its operations or controlling its communications, so they would almost certainly be “innocent”.) In theory, Rule 10b-5 is not investors’ only redress against securities fraud.The answer, the Court determined, is perhaps nobody at all.
Misleading statements were made, but literally no one can be held accountable.
In a party-line, 5 to 4 split, the Supreme Court last week severely curtailed investors’ practical ability to hold financial intermediaries accountable for fraud. The decision limits the reach of Rule 10b-5: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, The case concerned a mutual fund whose prospectus was alleged to contain misleading statements that harmed investors.
The Supreme Court has eliminated the danger of their being investigated and sued by the people whom they fleeced.
The fund does have an “independent” board of directors, who in theory work for shareholders and “negotiate” the terms of the management contract.
In practice, the management company typically organizes the fund and selects its directors.
The Supreme Court held is that, even though employees of Janus Capital Management company actually wrote any misleading statements, even though they managed nearly every substantive aspect of the operation of the fund, they cannot be held responsible because they did not “make” the statements.