The US Supreme Court spared the mutual fund giant Janus a lot of trouble recently when it excused the firm from responsibility for misleading its customers. But the 5-4 ruling, which lets Janus and similar companies hide false information in a complicated organization chart, can only undermine public confidence in the mutual fund industry over time.
The legal case revolves around Janus’s assertions in the prospectuses for some mutual funds that it had taken steps to prevent market-timing — a practice in which sophisticated investors exploit delays in when share prices are updated. In reality, Janus had worked with hedge funds to do just that. An institutional shareholder called First Derivative Traders sued, claiming a violation of federal rules forbidding false statements.
The mutual fund company replied that while its subsidiary Janus Management wrote the false prospectuses, they were actually filed by a separate legal entity called Janus Investment Fund. This fund is essentially a dummy corporation; employees of the parent company run it. But Janus maintained that only the fund, not the parent company or Janus Management, should be held liable for the misstatements.
Astonishingly, the Supreme Court’s five conservative judges endorsed this legal gamesmanship. In his majority opinion, Justice Clarence Thomas accepted the notion that, because the different parts of Janus were set up as separate entities, they should be treated as if they were independent of one another.
“We decline this invitation,’’ he declared, “to disregard the corporate form.’’ He also likened Janus Management to a speechwriter. The majority opinion dovetailed with concerns by business groups, as detailed in a brief that the US Chamber of Commerce filed in the case, that holding Janus Management liable would expose whole new categories of “lawyers, accountants, investment bankers, and other service providers’’ to class-action suits.
But Janus Management is not some independent company that Janus Investment Fund hired out of the phone book. And in its eagerness to prevent a proliferation of class-action lawsuits — a desire that may or may not be warranted — the court is letting one branch of a major financial company mislead the customers of another branch.
This is bad for business in any industry, but especially for the mutual fund business. As defined-benefit pensions wane, and Americans take on more of the burden of planning their own retirement, they’ll become increasingly reliant on Janus and companies like it — but only if they can trust the information that mutual fund companies are legally required to file.
It would be far better for consumers — and ultimately for the mutual fund industry, too — if Congress and the Securities and Exchange Commission were to clarify the law so that, yes, Janus has to tell the truth.