The Fourth Circuit Court of Appeals delivered an opus today on whether a mutual fund investment advisor could be primarily liable under the federal securities laws for allegedly misleading statements in prospectuses issued by the mutual funds.

The case, First Derivative Traders v. Janus Capital Group, involves alleged misrepresentations by the Janus family of mutual funds about their position on allowing market timing in the funds. The principal focus was whether the statements in the prospectuses were "sufficiently publicly attributable" to the advisor to make out reliance under a fraud-on-the-market theory of liability.

The Circuit courts have gone off in different directions on this issue, with some (the 2nd and 11th) requiring "direct attribution of the allegedly misleading statement to the defendant," another (the 9th) saying that "substantial participation or intricate involvement in preparing the misleading statement is sufficient," and another (the 10th) with yet another standard.

The Fourth Circuit went its own way today, reversing the District Court’s grant of a motion to dismiss and holding:

for the public attribution element of the reliance inquiry, we hold that a plaintiff seeking to rely on the fraud-on-the-market presumption must ultimately prove that interested investors (and therefore the market at large) would attribute the allegedly misleading statement to the defendant.  At the complaint stage a plaintiff can plead fraud-on-the-market reliance by alleging facts from which a court could plausibly infer that interested investors would have known that the defendant was responsible for the statement at the time it was made, even if the statement on its face is not directly attributed to the defendant.

The conclusion of the Court was that "given the publicly disclosed responsibilities of [the advisor], interested investors would infer that [the advisor] played a role in preparing or approving the content of the Janus fund prospectuses, particularly the content pertaining to the funds’ policies affecting the purchase or sale of shares."

The opinion also discusses loss causation and control person liability.