A Recent District Court Decision Undermines the Supreme Court's Ruling in Janus

Summary:  In its June 13, 2011 decision in Janus Capital Group, Inc. v. First Derivative Traders, the Supreme Court adopted a bright line test to determine who is a primary actor for the purposes of Rule 10b-5, expressly holding that only the actual maker of the statement may be held liable. In a September 30 decision released by the United States District Court in the Southern District of New York in City of Roseville Employees’ Retirement System v. EnergySolutions, the court seized on the Supreme Court’s phrase “ultimate control” to deny a motion to dismiss a complaint seeking to hold a parent corporation liable for alleged misrepresentations in a registration statement issued by its subsidiary. In doing so, the district court has potentially created a huge exception to Janus that is inconsistent with the Supreme Court’s ruling.

Under the district court’s analysis, a parent that is the sole owner of the issuer could be per se liable under Janus. The district court has adopted a standard that is substantially weaker than the standard for veil piercing as well as the requirements under Section 20 of the 1934 Act, potentially making any controlling shareholder liable. This client alert discusses the implications of this decision and the liability risks created for parent corporations or controlling shareholders.