The Right to Double Speak

The final two rulings of the 2010–2011 Supreme Court term -- on employment discrimination and campaign finance -- showed again how the Roberts Court favors powerful interests that are already greatly overrepresented in the political process. The justices often strained the law to protect corporations, and the Supreme Court's misguided supervision of the electoral process has made it harder for Congress to protect minorities hurt by bad Supreme Court decisions.

These high-profile cases, however, are not the only ones in which a narrow Court majority ruled on behalf of already overrepresented interests. An obscure but very important case on financial regulation decided in the final weeks of the 2011 term reveals both the Court's pro-corporate bias and the extent to which conservatives are happy to give the financial interests that destroyed the economy free rein.

One crucial factor behind the meltdown that caused the Great Recession is the assurance many financial firms gave customers that risky investments were safe. In this context, one would think the Supreme Court would watch out for attempts by dishonest financial executives to evade accountability. But in Janus Capital Group, Inc. v. First Derivative Traders, the Court split 5 to 4 along familiar ideological lines, saying that executives could not be held liable for lies contained in literature distributed by a mutual fund managed by the corporation. The decision is as stark an example as one can imagine of the Court's pro-corporate bias.

While some of the chicanery that caused the meltdown was merely unethical, as opposed to illegal, there is no ambiguity about the legality of lying to investors. Rule 10b-5 of the Securities and Exchange Commission deems it unlawful to "make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made ... not misleading."

Based on this rule, the Janus Corporation was sued by its shareholders because the company's stock price fell after a fraudulent "market timing" scheme was uncovered. Janus Investment Fund, the mutual fund managed by the corporation, had given special treatment to a dozen insiders who were able to make quick profits by exploiting the price difference between a mutual fund and its underlying securities, a practice that harmed the interests of the ordinary investor.

This special treatment was given despite language in the fund's prospectus claiming that this kind of market timing would not be permitted. After this double-dealing was revealed in 2003, the value of Janus Corporation stock plummeted nearly 25 percent in less than a month.

The Supreme Court overruled the Fourth Circuit Court of Appeals and threw out the lawsuit. They did not do so because SEC regulations weren't violated. Rather, the Court held the Janus Corporation and its executives were not responsible for the statements contained in the prospectuses of the mutual fund. The Court reached this strange conclusion despite the fact that, as Justice Stephen Breyer's dissent noted, "each of the Fund's officers is a Janus Management employee. Janus Management, acting through those employees (and other of its employees), manages the purchase, sale, redemption, and distribution of the Fund's investments ... [and] carries out the Fund's daily activities."

The tortured reasoning of Justice Clarence Thomas's opinion rested on hair-splitting about whether Janus Capital executives were actually "making" the statements attributed to them in the literature. Even though the false claims about market timing were made by Janus Capital executives, according to Thomas, they did not "make" the statements in a legal sense. Thomas wrote that "the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it." Since Janus Investment Fund retained this "ultimate authority," Janus Capital could not be "making" the statements its employees in Janus Investment Fund literature (notwithstanding the near total overlap between the two entities).

If you don't understand this reasoning, the fault lies with the Supreme Court, not you. As one securities litigator told me, the Court's newly minted definition of what it means to "make" a statement is "literally unheard of in the history of law." Breyer's dissent -- which is far more cogently argued and persuasive than the majority opinion -- was similarly incredulous. "Every day, hosts of corporate officials make statements with content that more senior officials or the board of directors have 'ultimate authority' to control. So do cabinet officials make statements about matters that the Constitution places within the ultimate authority of the President." By Thomas's logic, since Press Secretary Jay Carney works at the pleasure of the president, the press is wrong to say that he is "making" statements at a press conference. This argument is so silly as to be self-refuting.

That the majority's reasoning is  weak won't stop Janus Capital from having potentially disastrous consequences, however. The Court's opinion provides a blueprint for executives of financial firms who want to profit from defrauding their customers: Just form a subsidiary your company runs, and you can't be held responsible for lying to the customers who choose to do business with you. And this could have ramifications beyond selling mutual funds with willfully dishonest information. Consider, for example, what could happen to initial public offerings. A parent company could spin off subsidiary and sell the IPO with false documents drafted by the parent company's employees. If the subsidiary sold its shares and went bankrupt because it was in a much weaker position than was claimed at the time of the IPO, according to the logic of Janus Capital, the parent company would not be responsible even if it knowingly lied to investors.

In theory, Congress can fix the problem the Court created by clarifying the language of the statute. But here is where the tendency of the Roberts Court to side with the most powerful comes full circle. Because arguments in favor of the constitutionality of campaign-finance regulations have gone zero for five against the Roberts Court, financial interests exert increasingly massive influence in Congress, no matter which party is in charge.

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