WASHINGTON—A mutual fund management company cannot be held liable for the alleged misstatements in the prospectuses of mutual funds it administered because legally separate corporate entities are involved, the U.S. Supreme Court ruled Monday in a split decision.

According to the 5-4 ruling in Janus Capital Group Inc. vs. First Derivative Traders, Janus Capital Group, a publicly traded firm, created the Janus family of mutual funds, which are organized in a Massachusetts business trust, the Janus Investment Fund.

The Janus Investment Fund retained Janus Capital Group's wholly owned subsidiary, Janus Capital Management, to be its investment adviser and administrator. However, Janus Investment Fund is a separate legal entity owned entirely by mutual fund investors.

According to the ruling the prospectuses for several Janus funds represented that they were not suitable for market timing, which is a trading strategy that exploits the time delay in mutual funds' daily valuation system.

Alleged secret arrangements

However, in September 2003, New York's attorney sued Janus Capital Group and Janus Capital Management alleging that the former had entered into secret arrangements to permit market timing by several funds run by Janus Capital Management. This resulted in investors withdrawing significant money from the Janus Investment Fund mutual funds, and the resulting loss of value affected Janus Capital Group's value as well.

The litigation was filed by plaintiffs who owned Janus Capital Group stock and contended that Janus Capital Group and Janus Capital Management “materially misled the investment public,” according to the decision.

Overturning a lower court opinion, the 4th U.S. Circuit Court of Appeals in Richmond, Va., held in 2009 that “by participating in the writing and dissemination of the prospectuses,” Janus Capital Group and Janus Capital Management “made the misleading statements contained in the documents.”

Did not make statements

However, in an opinion written by Justice Clarence Thomas, the U.S. Supreme Court majority ruled Monday that Janus Capital Management “cannot be held liable because it did not make the statements in the prospectuses.”

Although First Derivative and those filing amicus briefs “persuasively argue that investment advisers exercise significant influence over their client funds…JCM and Janus Investment Fund remain legally separate entities,” the Supreme Court ruled. “Any reapportionment of liability in the securities industry in light of the close relationship between investment advisers and mutual funds is properly the responsibility of Congress and not the courts.”

Janus Capital Management “did not ‘make' any of the statements in the Janus Investment Fund prospectuses; Janus Investment Fund did,” the majority ruled in overturning the appeals court.

Among cases cited in the opinion are the court's decisions in Stoneridge Investment Partners L.L.C. vs. Scientific-Atlantic Inc. and Central Bank of Denver N.A. vs. First Interstate Bank of Denver N.A., which limited the cases in which defrauded investors could seek recovery from third parties.

In his dissent for the minority, Justice Stephen Breyer said he can find nothing “suggesting that Congress in enacting the securities laws, intended a loophole of the kind that the majority's rule may well create.”