WASHINGTON — 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 reviewed a ruling Tuesday 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.
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 percent of the prospectus work.” At the same time, 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, a practice of making frequent, short-term trades at the expense of other investors.
