United States: Distinguishing "Janus": District Court Sustains Complaint Against Holding Company Even Though It Did Not Author The Allegedly Misleading Statements

In one of the first cases interpreting the U.S. Supreme Court's June 2011 decision in Janus Capital Group, Inc. v. First Derivative Traders,¹ Judge John Koeltl of the United States District Court for the Southern District of New York issued a recent decision² that has important ramifications for Section 10(b)/Rule 10b-5 liability in private securities fraud actions. Following Judge Koeltl's reasoning, parties that have ultimate authority over an offering are potentially liable for "making" misleading public statements in connection with that offering, even if those statements are made by a registrant that is a separate and distinct legal entity.

As we reported in our June 13, 2011 Securities Litigation and Enforcement Update E-communication, the U.S. Supreme Court held in Janus that a defendant can only be liable for "making" a false statement if the defendant is "the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. . . . One who prepares or publishes a statement on behalf of another is not its maker."³ Thus in Janus, the Supreme Court rejected a claim for liability against an investment advisor who assisted a mutual fund in preparing prospectuses for the issuance of mutual fund shares, but who did not author those prospectuses. In Roseville, Judge Koeltl distinguished Janus, holding that the plaintiffs sufficiently alleged that a holding company defendant had "ultimate authority" over the alleged false statements of the registrant defendant, and accordingly, refused to dismiss the plaintiffs' Section 10(b) and Rule 10b-5 claim against the holding company.⁴

The plaintiffs in Roseville were investors in EnergySolutions, Inc. (ES), a company that provided engineering, spent fuel management, and decontamination and decommissioning services to nuclear power plants and other facilities.⁵ ES had been formed by three private equity firms that purchased and integrated existing companies through a company called ENV Holdings, Inc. (ENV).⁶ Plaintiffs, alleging that ES's Registration Statements contained various false statements of material fact and material omissions,⁷ sued ES, ENV, and underwriter and individual defendants. The defendants moved to dismiss the complaint.⁸

With respect to ENV, the court confronted the question of whether the plaintiffs sufficiently pleaded that ENV, in addition to ES, "made" ES's statements, notwithstanding that ENV and ES were legally distinct entities. The court ruled in the affirmative, noting that the Registration Statements at issue contained "many indicia of control," such that the claim against ENV could be distinguished from the claim rejected in Janus.⁹ Specifically, the Registration Statements at issue disclosed, among other things, that: (i) at the time of ES's IPO, ENV was the sole owner of outstanding stock in ES and was the selling stockholder in the IPO and in a subsequent offering; (ii) ES was wholly owned by ENV; (iii) ENV would retain a controlling interest in ES after the IPO; and (iv) certain "Sponsors and Management" that wholly owned ENV would "have the ability to effectively control all matters requiring stockholder approval" and could "cause [ES] to . . . issue additional shares of common stock."¹⁰

The court in Roseville distinguished Janus because it concluded that ENV had "ultimate authority" over the offerings to which the Registration Statements pertained. In contrast, although the investment advisor defendant may have drafted or otherwise been involved in creating the statements at issue in Janus, the Supreme Court held that the investment advisor served in an advisory "speechwriter" role. Judge Koeltl wrote in Roseville: "Although the Registration Statements did speak in the voice of ES and were signed by the Individual Defendants in their capacities as directors or officers of ES, these explicit attributions do not preclude attribution to ENV as well. Indeed, Janus recognized that attribution could be 'implicit from surrounding circumstances.'. . . . ENV had control over the content of the message, the underlying subject matter of the message, and the ultimate decision of whether to communicate the message."¹¹

Roseville is important as it is one of the first attempts by a district court judge to apply the Supreme Court's holding in Janus. We expect that other courts that confront this issue may reach a different conclusion, especially since Roseville's holding appears to impose primary liability based on conduct that could also trigger control person liability under a separate provision of the Securities Exchange Act.  

Footnotes

1 131 S. Ct. 2296 (2011).

2 City of Roseville Emps. Ret. Sys. v. EnergySolutions, Inc., 2011 WL 4527328 (S.D.N.Y. Sept. 30, 2011).

3 131 S. Ct. at 2302.

4 2011 WL 4527328 at *16-18.

5 Id. at *2.

6 Id.

7 Id. at *4-8.

8 Id. at *8.

9 Id. at *16-18.

10 Id.

11 Id. (internal citation omitted).

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