U.S. Supreme Court justices, hearing arguments in a case involving Janus Capital Group, signaled they are divided about restricting securities fraud suits by shareholders of mutual fund companies.
The court on Tuesday reviewed a ruling that let shareholders sue Janus and a subsidiary for helping produce allegedly misleading prospectuses for Janus mutual funds. Janus contends the funds are separate legal entities and that neither the parent company nor the subsidiary was responsible for the prospectuses.
The case is a follow-up to a 2008 Supreme Court decision that curbed securities suits against a company’s banks and business partners. That decision divided the court along ideological lines, and Tuesday’s hour-long argument in Washington suggested the likelihood of a similar split, possibly leaving Justice Anthony Kennedy as the deciding vote.
Mr. Kennedy hinted that he is uncomfortable with the prospect of absolving parent companies when they exercise total control over a unit that misleads the public. He asked whether a mutual fund company could be sued if it “did 100% of the prospectus work.”
At the same time, Mr. Kennedy suggested that shareholders must show that misleading statements were openly attributed to the parent — something he said the Janus investors hadn’t done.
The mutual fund fight stems from allegations that Janus allowed preferred clients to engage in market timing.
The prospectuses said the funds had taken steps to deter market timing. In the lawsuit, Janus shareholders say those assurances were revealed to be false in 2003 when New York state officials filed a complaint against the company, causing its share price to fall. Denver-based Janus later agreed to pay $201 million and cut fees by $125 million to settle claims by state and federal regulators.
The shareholders are seeking to sue both Janus Capital Group and Janus Capital Management, which serves as the investment adviser to the funds and has day-to-day responsibility for their management. The Obama administration is backing the shareholders at the Supreme Court, arguing the suit should be allowed to go forward.