Benzinga Radio: Supreme Court to Defrauded Investors: "Sorry, Charlie"

Earlier this week, I spoke with interfluidity author Steve Randy Waldman on Benzinga Radio about a recent Supreme Court reversal on Janus Capital Group, Inc. v. First Derivative Traders, which Waldman summed up nicely in his article entitled, "A license to lie, backdated." The most interesting aspect of this case, in my opinion, is the impact it will have on lawsuits related to the toxic securitized mortgage products sold by investment banks in the run up to the collapse of housing market, which played such a big role in the banking crisis of 2008. We'll get to that. A brief overview of the case, first. The gist of the case is this: Janus Capital Group, Inc. is the publicly-traded parent company of the investment adviser Janus Capital Management, LLC. Janus Capital Management, LLC managed a mutual fund called Janus Investment Fund, a third, separate, legal entity. Back in 2003, Janus came under fire when it was revealed that they had made misstatements in the prospectus of Janus Investment Fund; i.e., they had engaged in a form of securities fraud. Both investors in the mutual fund and shareholders of the parent company suffered as a result. The SEC, who, according to Waldman, typically pays more attention to cases involving retail investors (which must be why they haven't gotten around to clinching any high-profile cases against players in the 2008 financial crisis) settled on behalf of investors in the mutual fund who were affected as a result of the fraud. However, shareholders of the publicly-traded parent company saw share prices of Janus Capital Group, Inc. suffer as a result of the scandal as well. The SEC did not settle on their behalf, so they launched a shareholder lawsuit against the parent company. The Supreme Court a few weeks ago just threw the lawsuit out, saying neither Janus Capital Group, Inc.--nor Janus Capital Management, LLC--could be held liable for statements made by Janus Investment Fund. If you're with me so far, you understand that Janus Capital Management (the investment adviser) is the group of employees who runs the Investment Fund, meaning they are the ones who wrote the prospectus that contained the misstatements in the first place. However, they are now protected through the way they have the legal structure of their businesses set up, making all three entities in question separate. Effectively, the Supreme Court just reinterpreted SEC rule 10b-5, which Waldman describes as a "broad, general securities fraud statute" that serves as a bit of a "catch-all" when it comes to securities fraud. No more lawsuits against parent companies or investment advisers related to securities fraud perpetrated by the investment fund in question, they are saying. Waldman points out that the SEC still has the power to act under rule 10b-5, but shareholders, investors, etc. do not. Can you guess which other purveyors of investment products make sure their investment vehicles are separate legal entities from those managing and selling them? We are thinking about investment banks who package and sell collateralized debt obligations. Forget about investor lawsuits--they're in the hands of the SEC now. A comforting reassurance.

Be sure to check out the full audio of the conversation here: Interfluidity's Waldman discusses Janus case and securities fraud

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