In Re Mutual Funds Investment Litigation

Certiorari granted, June 28, 2010
Reversed by Supreme Court, June 13, 2011

PUBLISHED

UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

In Re: MUTUAL FUNDS INVESTMENT 
LITIGATION.

FIRST DERIVATIVE TRADERS, on
behalf of itself and all others
similarly situated,
Plaintiff-Appellant,
and
CRAIG WIGGINS, individually and
on behalf of all others similarly
situated,
Plaintiff,  No. 07-1607
v.
JANUS CAPITAL GROUP,
INCORPORATED, f/k/a Stilwell
Securities Laws Financial,
Incorporated; JANUS CAPITAL
MANAGEMENT,
Defendants-Appellees,
and
MARK B. WHISTON; LOREN M.
STARR; GREGORY A. FROST,
Defendants.

2 IN RE MUTUAL FUNDS INVESTMENT LITIGATION
Appeal from the United States District Court
for the District of Maryland, at Baltimore.
J. Frederick Motz, District Judge.
(1:04-cv-00818-JFM; 1:04-md-15863-JFM)

Argued: October 31, 2008

Decided: May 7, 2009

Before MICHAEL, SHEDD, and DUNCAN, Circuit Judges.

Reversed and remanded by published opinion. Judge Michael
wrote the opinion, in which Judge Duncan concurred. Judge
Shedd wrote a separate concurring opinion.

COUNSEL

ARGUED: Ira M. Press, KIRBY MCINERNEY, L.L.P., New
York, New York, for Appellant. Mark Andrew Perry, GIB-
SON, DUNN & CRUTCHER, L.L.P., Washington, D.C., for
Appellees. ON BRIEF: Amanda M. Rose, GIBSON, DUNN
& CRUTCHER, L.L.P., Washington, D.C., for Appellees.

OPINION

MICHAEL, Circuit Judge:

Plaintiff First Derivative Traders (First Derivative) appeals
the Rule 12(b)(6) dismissal of its putative class action com-
plaint, which alleges violations of § 10(b) and § 20(a) of the
Securities Exchange Act of 1934 (Act) and Securities and
Exchange Commission (SEC) Rule 10b-5. First Derivative,
individually and on behalf of certain shareholders of Janus
 IN RE MUTUAL FUNDS INVESTMENT LITIGATION 3
Capital Group Inc. (JCG), filed the operative complaint
against JCG and its wholly-owned subsidiary Janus Capital
Management LLC (JCM). JCM is the investment advisor to
the Janus mutual funds. The complaint alleges that JCG and
JCM were responsible for certain misleading statements
appearing in prospectuses for a number of the individual
Janus funds during the class period. These statements repre-
sented that the funds’ managers did not permit, and took
active measures to prevent, "market timing" of the funds. First
Derivative contends that class members (plaintiffs) bought
JCG shares at inflated prices and thereafter lost money when
market timing practices authorized by JCG and JCM became
known to the public.

The district court concluded that plaintiffs had failed to suf-
ficiently plead certain elements of a § 10(b) securities fraud
action against either JCG or JCM. Additionally, the district
court determined that plaintiffs’ claim of control person liabil-
ity against JCG under § 20(a) failed because plaintiffs had not
pled a viable § 10(b) securities fraud claim against JCM.
After reviewing the allegations on our own, we reach a differ-
ent conclusion. We hold that plaintiffs’ § 10(b) primary liabil-
ity claim against JCM and plaintiffs’ § 20(a) control person
liability claim against JCG are sufficiently pled to overcome
defendants’ motion to dismiss. Accordingly, we reverse the
district court’s order granting defendants’ motion to dismiss
and remand the case for further proceedings.

I.

Plaintiffs seek to hold JCG and JCM liable for fraud under
§ 10(b) of the Act, 15 U.S.C. § 78j(b), and SEC Rule 10b-5,
17 C.F.R. § 240.10b-5. In addition, plaintiffs allege that JCG
is liable under § 20(a) of the Act, 15 U.S.C. § 78t(a), as a con-
trol person of JCM.

The original complaint was filed against JCG in U.S. Dis-
trict Court in Colorado in November 2003 by Craig Wiggins,
4 IN RE MUTUAL FUNDS INVESTMENT LITIGATION
a purchaser of JCG common stock. On March 26, 2004, the
Judicial Panel on Multidistrict Litigation transferred the Wig-
gins action from the District of Colorado to the District of
Maryland for coordination with other actions involving alle-
gations of market timing in the mutual funds industry. After
the district court appointed a lead plaintiff (First Derivative)
and lead counsel, First Derivative filed an amended complaint
in September 2004, which, among other things, added JCM as
a defendant. Defendants filed a motion to dismiss this
amended complaint in February 2005, and the district court
granted dismissal on the narrow ground that plaintiffs’ class
definition failed to satisfy the loss causation standard articu-
lated in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336
(2005).

First Derivative then filed a second amended complaint (the
complaint). The basic facts as alleged by the plaintiffs in the
complaint are as follows. Defendant JCG is an asset manage-
ment firm that, directly or through subsidiaries, sponsors and
markets mutual funds and provides investment advisory and
administrative services to the funds. Defendant JCM, a
wholly-owned subsidiary of JCG, is JCG’s primary operating
company and there is overlap in the executive officers of the
two companies. The greater part of JCG’s revenue is gener-
ated by JCM. JCM serves as the investment advisor and
administrator to the Janus funds. As investment advisor to the
various Janus funds, JCM "is responsible for the day-to-day
management of [the] investment portfolio and other business
affairs of the funds." J.A. 206-07. "[A]s a practical matter"
JCM runs the Janus family of funds. J.A. 212. First Derivative
sues on behalf of persons who bought shares of common
stock in JCG between July 21, 2000, and September 2, 2003,
and still held shares on September 3, 2003, when their price
dropped, allegedly as a result of the public disclosure of
defendants’ misconduct with respect to market timing.

Shares in the Janus funds were offered for sale by prospec-
tuses that JCG and JCM "caused . . . to be issued" and "made
 IN RE MUTUAL FUNDS INVESTMENT LITIGATION 5
. . . available to the investing public." J.A. 203. The prospec-
tuses were made available to potential investors on a joint
Janus funds-JCG-JCM website, www.janus.com. The pro-
spectuses for a number of the individual Janus funds stated
that the funds had policies of discouraging market timing and
that the funds engaged in measures to deter such behavior.

Market timing, as it occurred here, refers to the practice of
rapidly trading in and out of a mutual fund to take advantage
of inefficiencies in the way the fund values its shares. Some
funds, including the Janus funds, use stale prices to calculate
the value of the securities held in the fund’s portfolio (net
asset values (NAVs)), which may not reflect the fair value of
the securities as of the time the NAV is calculated. The use
of stale prices to calculate the NAV makes a fund vulnerable
to time zone arbitrage and other similar strategies; repeated
use of such strategies is referred to as "timing" the fund. Time
zone arbitrage can occur when a fund is invested in foreign
securities. As we explained in In re Mutual Funds Investment
Litig.:

[T]ime zone differences allow market timers to pur-
chase shares of [mutual] funds [that invest in foreign
securities] based on events occurring after foreign
market closing prices are established, but before the
fund’s NAV calculation. Prior to the daily NAV cal-
culation, which in the United States generally occurs
at or near the closing time of the major U.S. securi-
ties markets, the fund price would not take into
account any changes that have affected the value of
the foreign security. Therefore, if the foreign secur-
ity had increased in value, the NAV for the mutual
fund would be artificially low. After purchasing the
shares at the low price, the market timer would
redeem the fund’s shares the next day when the
fund’s share price would reflect the increased prices
in foreign markets, for a quick profit at the expense
of the long-term fund shareholders.
6 IN RE MUTUAL FUNDS INVESTMENT LITIGATION
529 F.3d 207, 211 (4th Cir. 2008) (internal citations and quo-
tations omitted). Market timing has the potential to harm other
fund investors by diluting the value of shares, increasing
transaction costs, reducing investment opportunities for the
fund, and producing negative tax consequences.

Plaintiffs charge that statements about market timing
appearing in the various Janus fund prospectuses were mis-
leading because they falsely represented that the Janus funds
had policies of preventing market timing when, in fact, fund
managers explicitly permitted significant market timing and
late trading to occur.

Specifically, plaintiffs allege in their complaint that Janus
fund prospectuses filed with the SEC and available at the
Janus website "included language that said Janus’ funds were
‘not intended for market timing or excessive trading’ and said
‘Janus had measures in place to stop th[is] trading.’" J.A. 212-
13. The complaint also cites numerous passages from pro-
spectuses for individual Janus funds condemning the practice
of market timing and outlining steps that would be taken to
exclude market timers or excessive traders from the funds.
For example, the complaint quotes the "Excessive Trading
Policy" as set forth in the February 28, 2003, prospectus for
the Janus Mercury Fund:

Frequent trades in your account or accounts con-
trolled by you can disrupt portfolio investment strat-
egies and increase Fund expenses for all Fund
shareholders. The fund is not intended for market
timing or excessive trading. To deter these activities,
the Fund or its agent may temporarily or perma-
nently suspend or terminate exchange privileges of
any investor who makes more than four exchanges
out of the Fund in a calendar year and bar future pur-
chases into the Fund by such investor. In addition,
the Fund or its agent also may reject any purchase
orders (including exchange purchases) by any inves-
 IN RE MUTUAL FUNDS INVESTMENT LITIGATION 7
tor or group of investors indefinitely for any reason,
including, in particular, purchase orders that they
believe are attributable to market timers or are other-
wise excessive or potentially disruptive to the Fund.

Orders placed by an investor in violation of the
exchange limits or the excessive trading policies or
by investors that the Fund believes are market timers
may be revoked or cancelled by the Fund . . . .

J.A. 213. The complaint repeats this language as it appeared
in an earlier Janus Mercury Fund prospectus filed on Form N-
1A with the SEC on February 25, 2002, and notes that
"[p]rospectuses for the Janus Enterprise Fund, Janus Mercury
Fund, Janus High-Yield Fund, Janus Worldwide Fund, and
Janus Overseas Fund contain the exact same language in their
prospectuses filed on Form N-1A with the Securities and
Exchange Commission on February 25, 2002." J.A. 217. The
complaint also identifies similar language in the prospectus
for the Janus Advisor Worldwide Fund and the Janus Interna-
tional Growth Fund filed on Form N-1A with the SEC on
September 30, 2001, and identifies additional allegedly mis-
leading language in several fund prospectuses.

The complaint alleges that the statements in the prospec-
tuses regarding market timing were misleading because JCG
and JCM have subsequently admitted that they "had, for
years, entered into secret arrangements to allow several hedge
funds to engage in market timing transactions in various Janus
Funds." J.A. 213. Drawing on a complaint filed on September
3, 2003, by the New York Attorney General in a separate
action, plaintiffs allege that in 2002 JCG "granted permission
for" the Canary Partners hedge fund to market time the Janus
Mercury and Janus High Yield Funds. J.A. 230. Thereafter, in
2003 Canary Partners "sought [market] timing capacity in
Janus’ offshore funds." J.A. 231. In response to Canary Part-
ners’ request for additional timing capacity, "a concerned
8 IN RE MUTUAL FUNDS INVESTMENT LITIGATION
[JCG] employee" sent the following email message to Rich-
ard Garland, the CEO of Janus International Growth Fund:

I’m getting more concerned w/ all of these market
timers and how they are affecting our PM’s [i.e.,
Portfolio Managers] trading activity. [Portfolio Man-
agers] have voiced their sensitivity on a number of
occasions re: this type of activity in JWF[1]. I spoke
to [a Janus employee] and confirmed that this is a
big problem domestically and I want to avoid this at
all cost before it gets too problematic offshore. Now
that we have our exchange limitation in our prospec-
tus, I would feel more comfortable not accepting this
type of business because its too difficult to moni-
tor/enforce & it is very disruptive to the PM’s &
operation of the funds. Obviously, your call from the
sales side.

J.A. 231 (quoting New York Attorney General’s complaint)
(alterations in First Derivative’s complaint). Eventually, as
described in plaintiffs’ complaint:

• Managing the extensive timing activity in its
funds became difficult for Janus. In early June, 2003,
it began to consider adopting a consistent policy on
market timing. Discussion concerning development
of such a policy was opened up to certain Janus
employees. Comments included:

• "Our stated policy is that we do not tolerate tim-
ers. As such, we won’t actively seek timers, but
when pressed and when we believe allowing a limit-
ed/controlled amount of timing activity will be in
JCG’s best interests (increased profitability to the
firm) we will make exceptions under these para-
maters [sic]."
1
Janus Worldwide Fund.
 IN RE MUTUAL FUNDS INVESTMENT LITIGATION 9
• "My own personal recommendation is not to
allow timing, period, and follow the prospectus. . . .
[T]imers often hide multiple accounts and move on
the same day which could hurt other investors and
enrage the Pms. . . . I don’t think the static assets that
we might be able to hold onto are worth the potential
headaches, nor does this fall into our ‘narrow and
deep’ focus. I suggest we maintain the timing agree-
ments we have, but allow no more."

J.A. 232 (quoting New York Attorney General’s complaint)
(internal citations removed; alterations in First Derivative’s
complaint). JCG later admitted to the facts alleged in the
Attorney General’s complaint and to market timing arrange-
ments with at least ten investors.

Plaintiffs assert that the misleading statements in the Janus
funds’ prospectuses stating the funds’ policy of deterring mar-
ket timing fraudulently induced investors to buy shares in the
Janus funds. As a result of these investments, the assets in the
Janus funds, and JCM’s management fees, increased. JCM’s
management of the assets in the Janus funds generated more
than ninety percent of JCG’s revenue. Consequently, in Sep-
tember 2003 when the New York Attorney General’s com-
plaint made public the actions taken by JCG and JCM’s
executives to permit substantial market timing contrary to the
Janus funds’ expressed policies, massive withdrawals or
redemptions from the funds were triggered. The assets under
management by JCM decreased by $14 billion between Sep-
tember 2003 and February 2004. "Relatedly and predictably,"
according to the complaint, the Attorney General’s accusa-
tions caused "a crisis of confidence among [JCG] common
stock investors," resulting in a twenty-three percent decrease
in the value of JCG common stock. J.A. 204-05.

The district court reviewed the complaint and granted
defendants’ motion to dismiss pursuant to Rule 12(b)(6). The
court held that plaintiffs failed to state a claim against JCG
10 IN RE MUTUAL FUNDS INVESTMENT LITIGATION
under § 10(b) of the Act because the complaint "contains no
allegations that JCG actually made or prepared the prospec-
tuses, let alone that any statements contained therein were
directly attributable to it," and there can be no aiding and
abetting liability in private securities fraud actions. J.A. 612-
13 (citing Cent. Bank of Denver, N.A. v. First Interstate Bank
of Denver, N.A., 511 U.S. 164 (1994)). The district court fur-
ther held that JCG’s alleged dissemination of the prospectuses
did not rise to the level of making a misstatement for securi-
ties fraud purposes. The district court determined that plain-
tiffs failed to state a claim against JCM because § 10(b)
requires a plaintiff to demonstrate that the alleged fraud
occurred in connection with the purchase or sale of a security,
and since the district court had previously held that a mutual
fund investment adviser owes no duty to its parent’s share-
holders, there was no nexus between plaintiffs as JCG share-
holders and JCM. The court ruled, finally, that plaintiffs’
claim of control person liability against JCG pursuant to
§ 20(a) of the Act must be dismissed because plaintiffs had
failed to plead a viable § 10(b) claim against JCM. Plaintiffs
appeal.

II.

The central question before us is whether plaintiffs have
successfully met the pleading requirements for a § 10(b) or
Rule 10b-5 securities fraud claim. We review de novo the dis-
trict court’s dismissal for failure to state a claim. Teachers’
Ret. Sys. of La. v. Hunter, 477 F.3d 162, 170 (4th Cir. 2007).
And "[w]e must accept as true all well-pleaded allegations
and view the complaint in the light most favorable to" the
plaintiffs. Hatfill v. New York Times Co., 416 F.3d 320, 329
(4th Cir. 2005).

Pursuant to § 10(b) of the Act, it is

unlawful for any person, directly or indirectly, by the
use of any means or instrumentality of interstate
 IN RE MUTUAL FUNDS INVESTMENT LITIGATION 11
commerce or of the mails, or of any facility of any
national securities exchange . . . [t]o use or employ,
in connection with the purchase or sale of any secur-
ity . . . any manipulative or deceptive device or con-
trivance in contravention of such rules and
regulations as the Commission may prescribe as nec-
essary or appropriate in the public interest or for the
protection of investors.

15 U.S.C. § 78j (2006).

Rule 10b-5 makes it unlawful

(a) To employ any device, scheme, or artifice to
defraud,

(b) 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, in the light of the cir-
cumstances under which they were made, not mis-
leading, or

(c) To engage in any act, practice, or course of busi-
ness which operates or would operate as a fraud or
deceit upon any person,

in connection with the purchase or sale of any secur-
ity.

17 C.F.R. § 240.10b-5 (2008). Rule 10b-5, of course, "encom-
passes only conduct already prohibited by § 10(b)."
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., __
U.S. __, 128 S. Ct. 761, 768 (2008).

The Supreme Court has clarified that a plaintiff suing in a
typical private action under § 10(b) must prove six elements:
"(1) a material misrepresentation or omission by the defen-
dant; (2) scienter; (3) a connection between the misrepresenta-
12 IN RE MUTUAL FUNDS INVESTMENT LITIGATION
tion or omission and the purchase or sale of a security; (4)
reliance upon the misrepresentation or omission; (5) eco-
nomic loss; and (6) loss causation" (that is, the economic loss
must be proximately caused by the misrepresentation or omis-
sion). Id. Defendants challenge the sufficiency of plaintiffs’
complaint for elements (4) and (6): reliance and loss causa-
tion.

Prior to the enactment of the Private Securities Litigation
Reform Act (PSLRA) of 1995, Pub.L. No. 104-67, 109 Stat.
737, § 10(b) fraud claims in this circuit "were governed by
Federal Rule of Civil Procedure 9(b), not Rule 8." Pub.
Employees’ Ret. Ass’n of Colo. v. Deloitte & Touche LLP,
551 F.3d 305, 311 (4th Cir. 2009). The PSLRA, however, has
modified the pleading requirements applicable to private
securities fraud actions "(1) by requiring a plaintiff to plead
facts to state a claim and (2) by authorizing the court to
assume that the plaintiff has indeed stated all of the facts upon
which he bases his allegation of a misrepresentation or omis-
sion." Teachers’, 477 F.3d at 172. Because "Congress only
addressed misrepresentations and scienter in § 78u-4(b) [of
the PSLRA]," the other elements of a securities fraud claim
are analyzed under the pleading standards of the Federal
Rules of Civil Procedure. Id. Consequently, the PSLRA’s
heightened pleading requirements do not govern our analysis
of the elements of reliance or loss causation.

Rather, we must look to traditional pleading requirements
for fraud claims. At the time of the filing of the complaint in
this action, Rule 9(b) provided that "[i]n all averments of
fraud or mistake, the circumstances constituting fraud or mis-
take shall be stated with particularity."2 Rule 9(b) requires that
2
After the complaint in this case was filed, the text of Rule 9(b) was
changed to make it "more easily understood and to make style and termi-
nology consistent throughout the rules." Fed. R. Civ. P. 9 advisory com-
mittee’s notes (2007 Amendment). The advisory committee note makes
clear that "[t]hese changes are intended to be stylistic only." Id.
 IN RE MUTUAL FUNDS INVESTMENT LITIGATION 13
plaintiffs plead "with particularity . . . ‘the time, place, and
contents of the false representations, as well as the identity of
the person making the misrepresentation and what he obtained
thereby.’" Harrison v. Westinghouse Savannah River Co., 176
F.3d 776, 784 (4th Cir. 1999) (quoting 5 Charles Alan Wright
& Arthur R. Miller, Federal Practice and Procedure: Civil
§ 1297, at 590 (2d ed. 1990)). For the element of loss causa-
tion, we have specifically explained that

a plaintiff purporting to allege a securities fraud
claim must not only prove loss causation—that the
material misrepresentations or omissions alleged
actually caused the loss for which the plaintiff seeks
damages—but he must also plead it with sufficient
specificity to enable the court to evaluate whether
the necessary causal link exists.

Teachers’, 477 F.3d at 186. Consequently, for loss causation,
we review plaintiffs’ complaint for sufficient specificity.

A.

We turn first to the adequacy of plaintiffs’ allegations of
the element of reliance.

To state a private § 10(b) securities fraud claim, a plaintiff
must allege that it relied on the defendant’s false or mislead-
ing statement in purchasing or selling the defendant’s securi-
ties. Reliance may be proven directly or, under certain
circumstances, a plaintiff may seek the benefit of a rebuttable
presumption of reliance. The Supreme Court has determined
that a rebuttable presumption of reliance may apply in two
distinct situations. First, when "there is an omission of a mate-
rial fact by one with a duty to disclose, the investor to whom
the duty was owed need not provide specific proof of reli-
ance." Stoneridge, 128 S. Ct. at 769 (citing Affiliated Ute Citi-
zens of Utah v. United States, 406 U.S. 128, 154 (1972)).
Second, "under the fraud-on-the-market doctrine, reliance is
14 IN RE MUTUAL FUNDS INVESTMENT LITIGATION
presumed when the statements at issue become public. The
public information is reflected in the market price of the
security. Then it can be assumed that an investor who buys or
sells stock at the market price relies upon the statement."
Stoneridge, 128 S. Ct. at 769 (citing Basic Inc. v. Levinson,
485 U.S. 224, 247 (1988)).

Plaintiffs in their complaint allege that the fraud-on-the-
market presumption is applicable to their claims. As our court
has outlined:

To gain the benefit of the presumption [of fraud-on-
the-market], a plaintiff must prove (1) that the defen-
dant made the public misrepresentations; (2) that the
misrepresentations were material; (3) that the shares
were traded on an efficient market; and (4) that the
plaintiff purchased the shares after the misrepresen-
tations but before the truth was revealed.

Gariety v. Grant Thornton, LLP, 368 F.3d 356, 364 (4th Cir.
2004) (internal quotations removed). JCG and JCM dispute
only the first of these elements: that is, whether plaintiffs suf-
ficiently alleged that defendants made the public misrepresen-
tations. JCG and JCM press two distinct aspects of this
pleading requirement, arguing that plaintiffs do not ade-
quately allege either (1) that defendants made the statements
in the prospectuses or (2) that the statements contained in the
prospectuses were sufficiently publicly attributable to defen-
dants to hold them responsible.

1.

We begin by considering whether plaintiffs have pled that
JCG and JCM made the allegedly misleading statements
about market timing that appeared in the prospectuses for the
various Janus funds.

Defendants are correct that a § 10(b) securities fraud claim
requires "a material misrepresentation or omission by the
 IN RE MUTUAL FUNDS INVESTMENT LITIGATION 15
defendant." Stoneridge, 128 S. Ct. at 768 (emphasis added).
Under Rule 9(b) a plaintiff must plead with particularity "the
identity of the person making the misrepresentation." Harri-
son, 176 F.3d at 784. In this case, although the individual
fund prospectuses are unattributed on their face, the clear
essence of plaintiffs’ complaint is that JCG and JCM helped
draft the misleading prospectuses. Specifically, the complaint
alleges that defendants "wrote and represented [their] policy
against market timers," J.A. 211, and "publicly issued false
and misleading statements," J.A. 240. The complaint also
alleges that defendants "represented that [their] mutual funds
were designed to be long-term investments for ‘buy and hold’
investors and were therefore favored investment vehicles for
retirement plans." J.A. 202. According to the complaint,
defendants made these representations by "caus[ing] mutual
fund prospectuses to be issued for Janus mutual funds and
ma[king] them available to the investing public," J.A. 203,
through filings with the SEC and dissemination on a joint
Janus website. These statements, taken together, allege that
JCG and JCM, by participating in the writing and dissemina-
tion of the prospectuses, made the misleading statements con-
tained in the documents. Cf. In re Global Crossing, Ltd. Sec.
Litig., 322 F.Supp.2d 319, 334 (S.D.N.Y. 2004) ("Allegations
that [auditor Arthur] Andersen ‘prepared, directed or con-
trolled,’ ‘helped create’ or ‘materially assisted in’ preparing
false statements issued by Global Crossing place its involve-
ment well beyond the realm of ‘aiding and abetting’ liability
precluded by Central Bank."). And the allegations are suffi-
ciently clear as to the identity of the entities making the mis-
leading statements to meet the pleading standards of Rule
9(b).

2.

Our conclusion that the complaint alleges that defendants
made the statements in question by participating in the prepa-
ration of the prospectuses does not end our reliance inquiry.
To satisfy the fraud-on-the-market theory, the defendant must
16 IN RE MUTUAL FUNDS INVESTMENT LITIGATION
make a "public misrepresentation." Basic, 485 U.S. at 248
n.27. In other words, the defendant must make a misrepresen-
tation that is public and is attributable to the defendant. This
requirement is necessary to ensure that the misleading infor-
mation "is reflected in the market price of the security." See
Stoneridge, 128 S. Ct. at 769. Here, the allegedly misleading
statements about market timing appearing in the Janus funds
prospectuses are unquestionably public. The real question is
whether these statements were sufficiently attributable to JCG
and JCM. While the prospectuses did not explicitly name JCG
and JCM as the drafters, plaintiffs nevertheless allege in their
complaint that JCG and JCM may be held responsible for the
statements in the prospectuses because "as a practical matter
[JCM] runs" the Janus funds, J.A. 212, defendants dissemi-
nated the prospectuses on a joint Janus website and, conse-
quently, the public would attribute the misstatements in the
prospectuses to defendants.

The courts of appeal have diverged over the degree of attri-
bution required to plead reliance. Disagreement regarding the
requirement of attribution extends beyond the context of
fraud-on-the-market reliance and traces its origins to the
Supreme Court’s decision in Central Bank of Denver, N.A. v.
First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994).
In Central Bank the Court concluded that there was no sepa-
rate aiding and abetting liability in private securities actions.
A defendant cannot be liable absent a "showing that the plain-
tiff relied upon the [defendant’s] statements or actions." Id. at
180. The Court also made clear, however, that:

The absence of § 10(b) aiding and abetting liability
does not mean that secondary actors in the securities
markets are always free from liability under the
securities Acts. Any person or entity, including a
lawyer, accountant, or bank, who employs a manipu-
lative device or makes a material misstatement (or
omission) on which a purchaser or seller of securities
relies may be liable as a primary violator under 10b-
 IN RE MUTUAL FUNDS INVESTMENT LITIGATION 17
5, assuming all of the requirements for primary lia-
bility under Rule 10b-5 are met.

Id. at 191 (emphasis in original).

Several courts have interpreted Central Bank to suggest
that reliance under § 10(b), even outside the context of fraud-
on-the-market, requires direct attribution of the allegedly mis-
leading statement to the defendant.

In Wright v. Ernst & Young LLP, 152 F.3d 169, 175 (2d
Cir. 1998), the Second Circuit concluded that "a secondary
actor cannot incur primary liability under the [Securities
Exchange] Act for a statement not attributed to that actor at
the time of its dissemination." Wright involved a claim by
shareholders in BT Office Products Inc. (BT) against Ernst &
Young, an outside auditor for BT. The shareholders’ claim
centered on a statement of financial results in a BT press
release setting forth the company’s financial results and indi-
cating strong growth. The BT shareholders claimed that Ernst
& Young was responsible for the financial report despite the
fact that the press release specifically stated that the figures
were unaudited. Because Ernst & Young had approved the
financial information contained in the press release, the share-
holders contended that the market understood that the press
release was an implied statement by Ernst & Young that the
financial information in the press release was accurate. The
court concluded that the shareholders had failed to adequately
plead reliance. Quoting Shapiro v. Cantor, 123 F.3d 717, 720
(2d Cir. 1997), the court reasoned that

"[i]f Central Bank is to have any real meaning, a
defendant must actually make a false or misleading
statement in order to be held liable under § 10(b).
Anything short of such conduct is merely aiding and
abetting, and no matter how substantial the aid may
be, it is not enough to trigger liability under Section
10(b)."
18 IN RE MUTUAL FUNDS INVESTMENT LITIGATION
Wright, 152 F.3d at 175. Thus, "a defendant must know or
should know that his representation would be communicated
to investors." Id. (internal quotations removed).

Wright did not make clear, however, whether the statement
itself must be attributed on its face to the defendant or
whether a statement that the investing public would infer was
drafted or approved by the defendant would qualify. The
Southern District of New York’s more recent decision in
Global Crossing (discussed below) suggests that the latter
may be sufficient to satisfy the attribution requirement.

The Eleventh Circuit has also adopted Wright’s public attri-
bution language. See Ziemba v. Cascade Int’l, Inc., 256 F.3d
1194 (11th Cir. 2001). "Following the Second Circuit," the
court "conclude[d] that, in light of Central Bank, in order for
the defendant to be primarily liable under § 10(b) and Rule
10b-5, the alleged misstatement or omission upon which a
plaintiff relied must have been publicly attributable to the
defendant at the time that the plaintiff’s investment decision
was made." Id. at 1205. The Eleventh Circuit explicitly
rejected the argument that "primary liability should attach to
those who were never identified to investors as having played
a role in the misrepresentations." Id. at 1206. And the First
Circuit in dicta in an SEC enforcement action noted that "pub-
lic attribution, like direct reliance, is necessary in a private
[securities] action." S.E.C. v. Tambone, 550 F.3d 106, 139
(1st Cir. 2008).

The Ninth Circuit, in contrast, has concluded that public
attribution is not required to plead reliance; substantial partici-
pation or intricate involvement in preparing the misleading
statement is sufficient to state a primary violation of § 10(b).
See In re Software Toolworks Inc. Sec. Litig., 50 F.3d 615,
628-29 & n.3 (9th Cir. 1994); Howard v. Everex Sys., Inc.,
228 F.3d 1057, 1061 n.5 (9th Cir. 2000).

Finally, the Tenth Circuit has staked out what it perceives
to be a middle ground. See Anixter v. Home-Stake Prod. Co.,
 IN RE MUTUAL FUNDS INVESTMENT LITIGATION 19
77 F.3d 1215 (10th Cir. 1996); see also S.E.C. v. Wolfson, 539
F.3d 1249 (10th Cir. 2008). In Anixter the court considered
the potential primary liability of an outside auditor for his
alleged participation in preparing and filing registration state-
ments, program books, and prospectuses, and his certifica-
tions and opinion letters verifying a company’s overall
financial health. The court explained that "[t]he critical ele-
ment separating primary from aiding and abetting violations
is the existence of a representation, either by statement or
omission, made by the defendant, that is relied upon by the
plaintiff." 77 F.3d at 1225. The court concluded that "[a]n
accountant’s false and misleading representations in connec-
tion with the purchase or sale of any security, if made with the
proper state of mind and if relied upon by those purchasing
or selling a security, can constitute a primary violation." Id.
at 1226.

[F]or an accountant’s misrepresentation to be action-
able as a primary violation, there must be a showing
that he knew or should have known that his repre-
sentation would be communicated to investors
because § 10(b) and Rule 10b-5 focus on fraud made
in connection with the sale or purchase of a security.

Id. (internal quotations omitted). That is, "in order for accoun-
tants to ‘use or employ’ a ‘deception’ actionable under the
antifraud law, they must themselves make a false or mislead-
ing statement (or omission) that they know or should know
will reach potential investors." Id.

Our court has declined to adopt either the direct attribution
or substantial participation standard for pleading reliance. See
Gariety, 368 F.3d at 369-70. Because the question in this case
arises in the limited context of fraud-on-the-market, it is not
necessary for us to establish an attribution standard for all
reliance inquiries. As the Supreme Court has explained, "[t]he
fraud on the market theory is based on the hypothesis that, in
an open and developed securities market, the price of a com-
20 IN RE MUTUAL FUNDS INVESTMENT LITIGATION
pany’s stock is determined by the available material informa-
tion regarding the company and its business," and
"[m]isleading statements will therefore defraud purchasers of
stock even if the purchasers do not directly rely on the mis-
statements." Basic, 485 U.S. at 241-42 (internal quotations
omitted). Consequently, for the public attribution element of
the reliance inquiry, we hold that a plaintiff seeking to rely on
the fraud-on-the-market presumption must ultimately prove
that interested investors (and therefore the market at large)
would attribute the allegedly misleading statement to the
defendant. See Global Crossing, 322 F.Supp.2d at 334. At the
complaint stage a plaintiff can plead fraud-on-the-market reli-
ance by alleging facts from which a court could plausibly
infer that interested investors would have known that the
defendant was responsible for the statement at the time it was
made, even if the statement on its face is not directly attri-
buted to the defendant. See Bell Atlantic Corp. v. Twombly,
550 U.S. 544 (2007) (clarifying pleading standards in context
of 12(b)(6) dismissal). Direct attribution of a public statement,
while undoubtedly sufficient to establish fraud-on-the-market
reliance, is an inexact proxy for determining whether inves-
tors will attribute a publicly available statement to a particular
person or entity. We conclude that the attribution determina-
tion is properly made on a case-by-case basis by considering
whether interested investors would attribute to the defendant
a substantial role in preparing or approving the allegedly mis-
leading statement.

Here we must determine whether, based on JCM’s duties
as investment advisor to the Janus funds, JCG’s role as an
asset management firm and parent of JCM, and the two defen-
dants’ active dissemination of the Janus fund prospectuses,
interested investors would have inferred that either or both
defendants played a substantial role in drafting or approving
the allegedly misleading prospectuses.

A number of courts, even in circuits that have adopted a
direct attribution requirement, have concluded that in certain
 IN RE MUTUAL FUNDS INVESTMENT LITIGATION 21
circumstances auditors and corporate officers may be respon-
sible for statements issued by the corporation or analysts that
were not directly attributed to the auditors or officers. For
example, in Global Crossing the Southern District of New
York determined that Arthur Andersen, an auditor whose role
was "well-known to investors" in Global Crossing, could be
liable for statements made by Global Crossing that Andersen
reviewed and approved but were not publicly attributed to it.
322 F.Supp.2d at 331. There, Andersen’s audit reports

were included in all of [Global Crossing (GC)]’s reg-
istration statements and annual reports from 1998 to
2000, and . . . were widely available to shareholders
during the class period. Andersen’s role as GC’s
auditor was thus well known to investors, who could
easily have relied on the accounting firm’s involve-
ment in making any public financial reports, even
where a particular statement was not publicly attri-
buted to it.

Id. at 334. The district court further observed that:

Andersen’s aggressive marketing of the novel
accounting strategies promoted in [a paper authored
by Andersen], which allegedly "became a ‘must
read’ in the telecom industry" . . . raises an inference
that sophisticated investors would have known of
Andersen’s role in creating the reporting practices
behind GC’s false statements. These allegations are
sufficient to raise a reasonable inference not only
that Andersen was one of the "makers" of the state-
ments, but also that investors viewed it as such.

Id.

The District of Massachusetts reached a similar conclusion
in In re Lernout & Hauspie Sec. Litig., 230 F.Supp.2d 152 (D.
Mass. 2002). There, the court pointed out that:
22 IN RE MUTUAL FUNDS INVESTMENT LITIGATION
While [auditor] KPMG U.S. did not sign any of
KPMG’s allegedly fraudulent audit reports or [Lern-
out & Hauspie]’s financial statements, Plaintiffs
allege that it played a significant role in drafting the
financial statements and in conducting the audit, and
that KPMG US’s role as an auditor was publicly dis-
seminated in the annual reports to shareholders.

Id. at 166. On the facts alleged regarding publicly available
information about KPMG’s role as an auditor for the com-
pany, the court concluded that "[i]t is . . . appropriate to infer
that in 1998 and 1999, investors reasonably attributed the
statements contained in the quarterly and annual reports to
KPMG US." Id. at 167.

The Second Circuit has additionally held that plaintiffs may
adequately plead reliance against corporate officers for state-
ments appearing in analyst reports not directly attributed to
the officers. In Novak v. Kasaks, 216 F.3d 300, 314 (2d Cir.
2000), the Second Circuit rejected the contention that the
plaintiffs had "not adequately alleged that statements made by
securities analysts can be attributed to the . . . defendants [the
corporation and high-level officers]" under the fraud-on-the-
market theory of reliance. The court noted that in § 10(b) liti-
gation a corporation and its officers could be liable for mis-
leading information appearing in analyst reports when the
corporation and its officers either "(1) ‘intentionally foster[ed]
a mistaken belief concerning a material fact’ that was incor-
porated into reports; or (2) adopted or placed their ‘imprima-
tur’ on the reports." Id. (quoting Elkind v. Liggett & Myers,
Inc., 635 F.2d 156, 163-64 (2d Cir. 1980)) (alterations in orig-
inal). The plaintiffs’ complaint in Novak alleged, among other
things, that the defendants made numerous misleading state-
ments that were used by analysts in forming their opinions
about the prospects of the company. See Novak v. Kasaks, 997
F.Supp. 425, 427-28 (S.D.N.Y. 1998). The Second Circuit
found sufficient attribution in the plaintiffs’ allegations that
the defendants "made misstatements that were later incorpo-
 IN RE MUTUAL FUNDS INVESTMENT LITIGATION 23
rated into analysts’ reports and [the defendants] subsequently
(at least implicitly) adopted the contents of those reports." 216
F.3d at 314.

In each of these cases, the courts analyzed the precise rela-
tionship between the defendant and the entity or analyst issu-
ing the allegedly misleading statement in order to determine
whether the statement was attributable to the defendant. We
likewise look to the nature of the relationship between the
defendants (JCG and JCM) and the Janus funds in the present
case to determine whether statements in the Janus fund pro-
spectuses were attributable to JCG or JCM.

According to the complaint, JCM in its role as investment
advisor to the Janus funds "is responsible for the day-to-day
management of [the] investment portfolio and other business
affairs of the funds" and "furnishes advice and recommenda-
tions concerning the funds’ investments, as well as adminis-
trative, compliance and accounting services for the funds."
J.A. 206-07. "While each mutual fund is in fact its own com-
pany, as a practical matter the management company [that is,
JCM] runs it." J.A. 212. And "[t]he portfolio managers who
make the investment decisions for the funds and the execu-
tives to whom they report are all typically employees of the
same management company, not the mutual funds them-
selves." J.A. 212.

Interested investors would know that JCM is listed as
investment adviser to the funds in the prospectuses and the
statements of additional information for each of the Janus
funds, and its duties are detailed in these documents. For
example, under the heading "Management of the Fund," the
February 25, 2002, prospectus for the Janus Mercury Fund
lists only an investment adviser, JCM,3 and a portfolio man-
ager, Warren Lammert, who was executive vice president of
3
At the time the investment advisor was called Janus Capital Corpora-
tion. It has since been renamed JCM, and we refer to it as JCM.
24 IN RE MUTUAL FUNDS INVESTMENT LITIGATION
the fund. The Janus Mercury Fund prospectus explains that
the investment adviser "furnishes continuous advice and rec-
ommendations concerning the Fund’s investments" and "also
furnishes certain administrative, compliance and accounting
services for the Fund." J.A. 109. The February 25, 2002,
statement of additional information for the Janus Equity and
Income Funds (supplemented April 2, 2002, May 13, 2002,
and May 31, 2002) further explains that JCM, as investment
adviser, will "provide office space for the Funds, and pay the
salaries, fees and expenses of all Fund officers and of those
Trustees who are affiliated with [JCM]." J.A. 366. Pursuant to
the advisory agreements between the funds and JCM, "[JCM]
furnishes certain other services, including net asset value
determination and fund accounting, recordkeeping, and blue
sky registration and monitoring services, for which the Funds
may reimburse [JCM] for its costs." Id.

The statement of additional information also notes that
Janus Distributors LLC, a wholly-owned subsidiary of JCM,
is a distributor of the funds. And the District Court observed
previously in a related action that two fund defendants in that
action, Janus Investment Fund and Janus Adviser Series, are
merely "trusts that hold assets belonging to shareholders of
the fund." In re Mut. Funds Inv. Litig., 384 F.Supp.2d 845,
852-53 n.3 (D. Md. 2005). The defendants in that litigation
asserted that the Janus Investment Fund and Janus Adviser
Series have no assets separate and apart from those they hold
for shareholders. Id. at 853 n.3.

To the interested investor familiar with the organizational
structure of mutual funds, plaintiffs’ allegations here would
have been readily known or ascertainable. Such an investor
would understand that "[a] mutual fund does not operate on
its own or employ a full time staff." Clifford E. Kirsch,
Mutual Fund Organizational Structure Powerpoint Presenta-
tion, in Nuts & Bolts of Financial Products 2005 (Practising
Law Institute 2005), at 359. Consequently, "[m]ost of the
operations of a mutual fund are carried out by service provid-
 IN RE MUTUAL FUNDS INVESTMENT LITIGATION 25
ers." Bibb L. Strench & Kathryn L. Quirk, The Advisory
Relationship/Portfolio Management, Outline, in The ABCs of
Mutual Funds 2006 (Practising Law Institute 2006), at 207.
As the SEC has explained,

Unlike most business organizations . . . mutual funds
are typically organized and operated by an invest-
ment adviser that is responsible for the day-to-day
operations of the fund. In most cases, the investment
adviser is separate and distinct from the fund it
advises, with primary responsibility and loyalty to its
own shareholders.

Role of Independent Directors of Investment Companies;
Final Rule, 66 Fed. Reg. 3734, 3735 (Jan. 16, 2001); see also
Strench & Quirk at 207 (noting that "the investment adviser[ ]
is primarily responsible for the day-to-day management of the
mutual funds’ investment portfolio"). The investment adviser
"determines the composition of assets of the mutual funds,
including the instruments to be purchased, exchanged,
retained or sold, the amounts of cash and other investments,
and the timing of the execution of these actions." Strench &
Quirk at 207. The SEC has also noted that "[a]s a result of
their extensive involvement, and the general absence of share-
holder activism, investment advisers typically dominate the
funds they advise." 66 Fed. Reg. at 3735 n.3.

The inference that interested investors would attribute to
JCM a role in the preparation or approval of the allegedly
misleading prospectuses is further strengthened by the fact
that JCG and JCM and the Janus funds held themselves out
to the investing public as a single entity: "Janus." Defendants
and the funds maintain a single website which contains pro-
spectuses for all of the Janus funds and which is used to dis-
seminate the prospectuses to the investing public. As the
statement of additional information for the Janus Equity and
Income Funds explains, "[p]romotional expenses in connec-
tion with offers and sales of shares are paid by [JCM]," J.A.
26 IN RE MUTUAL FUNDS INVESTMENT LITIGATION
371, indicating an active role by JCM in the promotion and
sale of shares in the Janus funds.

We conclude, at the Rule 12(b)(6) stage, that given the pub-
licly disclosed responsibilities of JCM, interested investors
would infer that JCM played a role in preparing or approving
the content of the Janus fund prospectuses, particularly the
content pertaining to the funds’ policies affecting the purchase
or sale of shares. It was publicly known that JCM furnished
advice and recommendations concerning the Janus funds’
investment decisions and even made NAV determinations,
which in part enabled market timing. In light of the publicly
available material, interested investors would have inferred
that if JCM had not itself written the policies in the Janus fund
prospectuses regarding market timing, it must at least have
approved these statements. This circumstance is sufficient to
support the adequacy of plaintiff’s pleading of fraud-on-the-
market reliance as to JCM.

Our analysis is fully consistent with the Supreme Court’s
decision in Stoneridge. In Stoneridge purchasers of common
stock in Charter Communications, Inc. (Charter) brought a
§ 10(b) action alleging violations by a number of parties
including Scientific-Atlanta, Inc. and Motorola, Inc., two sup-
pliers of Charter. According to the allegations, Charter
engaged in economically substanceless transactions with sup-
pliers that inflated Charter’s revenue. 128 S. Ct. at 766-67.
Suppliers in their own financial statements booked the trans-
actions as a wash in accordance with generally accepted
accounting principles. Id. at 767. On the facts before it the
Court concluded that the suppliers’ "deceptive acts, which
were not disclosed to the investing public, are too remote to
satisfy the requirement of reliance." Id. at 770. The Court rea-
soned that "[i]t was Charter, not respondents, that misled its
auditor and filed fraudulent financial statements; nothing
respondents did made it necessary or inevitable for Charter to
record the transactions as it did." Id. While Stoneridge makes
clear that the fraud-on-the-market presumption does not apply
 IN RE MUTUAL FUNDS INVESTMENT LITIGATION 27
to transactions that are not publicly disclosed, the holding in
Stoneridge has no application to a situation in which the alleg-
edly misleading statements are indisputably public and the
inquiry is focused solely on whether the investing public
would have attributed a particular statement to a particular
defendant.

Finally, we hold that plaintiffs’ allegations of attribution,
while sufficient to implicate JCM in its role as investment
advisor, are insufficient to reach JCG. As we have noted, an
investment advisor is well known to be intimately involved in
the day-to-day operations of the mutual funds it manages. We
cannot say, however, that it would be apparent to the invest-
ing public that the investment advisor’s parent company,
which sponsors a family of funds, participates in the drafting
or approving of prospectuses issued by the individual funds.
Although JCG, like JCM, played a role in the dissemination
of the fund prospectuses on the Janus website, this fact, taken
by itself, is insufficient in this case for us to infer that inter-
ested investors would believe JCG had prepared or approved
the Janus fund prospectuses.

B.

We turn next to the question of whether plaintiffs have suc-
cessfully pled the element of loss causation.

In a § 10(b) case, "when courts require a showing of dam-
ages proximately caused by the defendant’s conduct for liabil-
ity, they require only that the plaintiff show that the
defendant’s conduct was a substantial cause of its injury."
Miller v. Asensio & Co., Inc., 364 F.3d 223, 229 (4th Cir.
2004) (emphasis in original); see also Teachers’, 477 F.3d at
186. That is, "as long as the misrepresentation is one substan-
tial cause of the investment’s decline in value, other contribut-
ing forces will not bar recovery under the loss causation
requirement." Miller, 364 F.3d at 233 (quoting Robbins v.
Koger Props., Inc., 116 F.3d 1441, 1447 n.5 (11th Cir.
28 IN RE MUTUAL FUNDS INVESTMENT LITIGATION
1997)); see also In re Daou Sys., Inc. Sec. Litig., 411 F.3d
1006, 1025 (9th Cir. 2005) (same). The facts alleged in the
complaint therefore need not conclusively show that the
securities’ decline in value is attributable solely to the alleged
fraud rather than to other intervening factors. See Miller, 364
F.3d at 229 (noting that it is during the damages inquiry, not
the earlier proximate cause inquiry, "that the exact amount of
damages solely caused by the defendant’s conduct must be
calculated") (emphasis in original). As explained above,
plaintiffs must plead loss causation "with sufficient specificity
to enable [this] court to evaluate whether the necessary causal
link exists." Teachers’, 477 F.3d at 186.

The complaint here adequately alleges that the false or mis-
leading statements in the prospectuses drafted and dissemi-
nated by defendants were a substantial cause of the decrease
in JCG’s share price when the fraud was publicly revealed.
The allegations are as follows. Materially misleading state-
ments regarding defendants’ policies on market timing fraud-
ulently induced investors to purchase shares in the Janus
funds, increasing the assets under management by JCM.
JCM’s management of the Janus funds’ assets was responsi-
ble for generating more than ninety percent of JCG’s revenue.
Consequently, any decrease in the value of the assets in the
various mutual funds would adversely affect JCG’s revenues
and profits.

According to the complaint, when the New York Attorney
General broke the news on September 3, 2003, that hedge
funds had been permitted to market time the Janus funds, JCG
stockholders were damaged in several ways. First, JCG stock-
holders were damaged directly when JCG was required to pay
more than $325 million in fines and penalties to settle claims
by regulatory agencies relating to the allegations of improper
market timing. Second, JCG stockholders were damaged
when the assets under management by JCM decreased by $14
billion between September 2003 and February 2004. The
complaint alleges that the large withdrawal of assets during
 IN RE MUTUAL FUNDS INVESTMENT LITIGATION 29
this period, which occurred at more than three and a half
times the rate during the previous eight months, was causally
connected to the Attorney General’s revelations of fraud.
Because JCG’s profitability, as conceded in its Form 10-K,
was directly linked to the amount of assets under JCM’s man-
agement (that is, the amount of assets in the Janus funds), it
was inevitable that the significant withdrawal of assets from
the Janus funds would impact JCG’s common stockholders.

Plaintiffs’ allegations are therefore sufficiently specific to
establish that the misleading statements in the prospectuses
were a substantial factor in the decline in the value of JCG’s
common stock. Indeed, plaintiffs note that between Septem-
ber 2 and September 4, 2003, the days immediately preceding
and following the public revelation of the Attorney General’s
complaint, the share price of JCG’s common stock dropped
by 12.7 percent from $17.68 to $15.60. The rapid decline of
JCG’s common stock price following the news of market tim-
ing in the Janus funds indicates a substantial causal link
between the misleading prospectuses used to sell shares in the
Janus funds and the value of JCG’s stock.

III.

We turn now to plaintiffs’ allegations of scheme liability.
Plaintiffs assert that:

During the Class Period, defendants carried out a
plan, scheme and course of conduct which was
intended to and, throughout the Class Period, did: (i)
deceive the investing public, including plaintiff and
other Class members, as alleged herein and (ii) cause
plaintiff and other members of the Class to purchase
[JCG] securities at artificially inflated prices.

J.A. 242. Plaintiffs contend that JCG and JCM may be held
liable under § 10(b) for their participation in this fraudulent
scheme.
30 IN RE MUTUAL FUNDS INVESTMENT LITIGATION
After plaintiffs filed their complaint, the Supreme Court
decided Stoneridge and clarified the contours of scheme lia-
bility in private securities actions. Although Stoneridge did
not eliminate scheme liability, the opinion made clear that for
a secondary actor to be liable for securities fraud under
§ 10(b), that actor "must satisfy each of the elements or pre-
conditions for liability." 128 S. Ct. at 769. That is, the exis-
tence of a fraudulent scheme does not permit a plaintiff to
avoid proving any of the traditional elements of primary lia-
bility, such as scienter and reliance. Since we have already
analyzed the challenged elements for primary liability for
each of the defendants above, there is no need for us to con-
duct a separate inquiry on scheme liability.

IV.

Given our conclusion that the complaint does not plead an
adequate claim of primary liability against JCG, the final
issue we must resolve is whether plaintiffs have successfully
pled a claim of control person liability against JCG under
§ 20(a) of the Act. Pursuant to § 20(a):

Every person who, directly or indirectly, controls
any person liable under any provision of this chapter
or of any rule or regulation thereunder shall also be
liable jointly and severally with and to the same
extent as such controlled person to any person to
whom such controlled person is liable, unless the
controlling person acted in good faith and did not
directly or indirectly induce the act or acts constitut-
ing the violation or cause of action.

15 U.S.C. § 78t(a) (2006). A claim of control person liability
must allege: (1) a predicate violation of § 10(b) and (2) con-
trol by the defendant over the primary violator. Maher v.
Durango Metals, Inc., 144 F.3d 1302, 1305 (10th Cir. 1998).
"[O]nce the plaintiff establishes the prima facie case [of con-
 IN RE MUTUAL FUNDS INVESTMENT LITIGATION 31
trol], the burden shifts to the defendant to show lack of culpa-
ble participation or knowledge." Id.

We have already determined that the predicate violation
requirement has been met; plaintiffs have successfully pled a
claim of primary liability against JCM. To plead the control
requirement, a plaintiff must

plead[ ] facts showing that the controlling defendant
"had the power to control the general affairs of the
entity primarily liable at the time the entity violated
the securities laws . . . [and] had the requisite power
to directly or indirectly control or influence the spe-
cific corporate policy which resulted in the primary
liability."

In re MicroStrategy, Inc. Sec. Litig., 115 F.Supp.2d 620, 661
(E.D. Va. 2000) (quoting Brown v. Enstar Group, Inc., 84
F.3d 393, 396 (11th Cir. 1996) (alterations in original)). SEC
regulations define "control" as "possession, direct or indirect,
of the power to direct or cause the direction of the manage-
ment and policies of a person, whether through the ownership
of voting securities, by contract, or otherwise." 17 C.F.R.
§ 240.12b-2 (2008); see also H.R. Rep. No. 73-1383, at 26
(1934) ("[W]hen reference is made to ‘control’, the term is
intended to include actual control as well as what has been
called legally enforceable control."). In making the determina-
tion of whether a defendant possessed the requisite control,
"the courts have given heavy consideration to the power or
potential power to influence and control the activities of a per-
son, as opposed to the actual exercise thereof." Rochez Bros.,
Inc. v. Rhoades, 527 F.2d 880, 890-91 (3d Cir. 1975). And,
ultimately, as a "complex factual question," S.E.C. v. Coffey,
493 F.2d 1304, 1318 (6th Cir. 1974), assessing control person
liability is "not ordinarily subject to resolution on a motion to
dismiss," and dismissal should be granted only when "a plain-
tiff does not plead any facts from which it can reasonably be
inferred the defendant was a control person," Maher, 144 F.3d
32 IN RE MUTUAL FUNDS INVESTMENT LITIGATION
at 1306; see also In re Cabletron Sys., Inc., 311 F.3d 11, 41
(1st Cir. 2002) ("Control is a question of fact that ‘will not
ordinarily be resolved summarily at the pleading stage.’ The
issue raises a number of complexities that should not be
resolved on such an underdeveloped record.") (quoting 2
Thomas Lee Hazen, Treatise on the Law of Securities Regula-
tion § 12.24(1) (4th ed. 2002)) (internal citation omitted).

Plaintiffs’ allegations adequately plead control of JCM by
JCG. First, plaintiffs have alleged that JCG wholly owned
JCM. The Eleventh Circuit has specifically noted that "[t]he
legislative purpose in enacting a control person liability provi-
sion was to prevent people and entities from using straw par-
ties, subsidiaries, or other agents acting on their behalf to
accomplish ends that would be forbidden directly by the
securities laws." Laperriere v. Vesta Ins. Group, Inc., 526
F.3d 715, 721 (11th Cir. 2008) (citing H.R. Rep. No. 73-152,
at 12 (1933)). Regarding control in the corporation context,
one commentator explained:

An enterprise may control another organization and,
indirectly, that organization’s agents and employees.
An enterprise’s section 15 or 20(a) control of another
organization may arise from virtually any source on
which any other controlling person’s status can be
based. For example, a corporation may be a control-
ling person when it owns the majority of the shares
of another corporation on the basis of its authority to
control (legal control) the subsidiary.

Loftus C. Carson, II, The Liability of Controlling Persons
Under the Federal Securities Acts, 72 Notre Dame L. Rev.
263, 314 (1997); see also Borden, Inc. v. Spoor Behrins
Campbell & Young, Inc., 735 F.Supp. 587, 590-91 (S.D.N.Y.
1990) (holding that plaintiffs’ allegation that defendants were
sole shareholders of the allegedly controlled corporation
"clearly meets" the § 20(a) standard).
 IN RE MUTUAL FUNDS INVESTMENT LITIGATION 33
Second, plaintiffs have alleged that JCG and JCM shared
a common director, Helen Hayes. Hayes was both a director
of JCG during the class period and Managing Director of
Investments and a portfolio manager at JCM. The complaint
alleges that "[s]he served in a day-to-day supervisory position
at [JCM] and had the power to control its operations." J.A.
245. Additionally, Mark Whiston, the CEO and President of
JCG during part of the class period, was previously President
of Retail and Institutional Services at JCM. The complaint
alleges that Whiston commissioned an inquiry into market
timing in the Janus funds. The complaint also includes an
excerpt from a September 5, 2003, press release by JCG in
which Whiston is quoted as saying that he had long viewed
market timing as an industry-wide problem and that "[i]t’s our
hope that the [anti-market timing] measures [JCG is]
announcing today will help resolve this situation in a way that
recognizes the importance of the matter." J.A. 233. The com-
plaint alleges that "[a]cting on behalf of [JCG], Mr. Whitson
[sic], and through him, [JCG], had and exercised the power to
control the activities of [JCM]." J.A. 245.

Finally, the complaint quotes passages from the New York
Attorney General’s complaint in which JCG employees dis-
cuss market timing policies and actions taken to prevent tim-
ing in a manner indicating presumptive control over the
market timing activities. Specifically, the complaint includes
a comment from an unnamed JCG source that states: "Our
stated policy is that we do not tolerate timers. As such, we
won’t actively seek timers, but when pressed and when we
believe allowing a limited/controlled amount of timing will be
in JCG’s best interests (increased profitability to the firm) we
will make exceptions under these paramaters [sic]." J.A. 232
(emphasis added).

Taken together, plaintiffs’ allegations of complete owner-
ship of JCM by JCG, overlapping management between JCG
and JCM, control of JCM by JCG executives, and presump-
tive authority by JCG to regulate market timing activity in the
34 IN RE MUTUAL FUNDS INVESTMENT LITIGATION
Janus funds are sufficient to plead a prima facie case of con-
trol person liability.

V.

In sum, we conclude that plaintiffs have pled a viable claim
of primary § 10(b) liability against JCM and have adequately
pled that JCG may be liable as a control person of JCM under
§ 20(a). We therefore reverse the district court’s grant of
defendants’ motion to dismiss as to both defendants. We
remand the case to the district court for further proceedings
consistent with this opinion.

REVERSED AND REMANDED

SHEDD, Circuit Judge, concurring:

I concur in the judgment of the majority that liability may
be imposed as to both JCM and JCG. The majority holds that
JCM may be primarily liable under § 10(b) and JCG may be
liable as a control person under § 20(a). While I agree with
these holdings, I would also hold that the plaintiffs have prop-
erly plead a claim that JCG is primarily liable for making
false statements in the Janus funds’ prospectuses under
§ 10(b). I believe JCG’s alleged involvement and facilitating
access to the false statements is sufficient to impose primary
liability on JCG.

In order to plead a proper case that JCG is primarily liable,
a plaintiff must plead, among other elements, that JCG made
a misrepresentation that is public and attributable to JCG. As
the majority correctly holds, "the Janus funds prospectuses are
unquestionably public." Majority Op., at 16. Thus, the only
question is whether the plaintiffs have properly plead a basis
that the statements are sufficiently attributable to JCG as a
"maker" of the false statement. I believe they have done so.
In their complaint, the plaintiffs allege that JCG
 IN RE MUTUAL FUNDS INVESTMENT LITIGATION 35
makes the most recent prospectus for each Janus
Fund available on its website, www.janus.com.
These prospectuses, which are given to prospective
shareholders, included language that said Janus’
funds were not intended for market timing or exces-
sive trading and said Janus had measures in place to
stop the trading. These statements were materially
false and misleading.

J.A. 212-13. (internal quotation marks omitted). I believe the
plaintiffs have properly alleged that JCG made a false state-
ment by publishing these funds’ prospectuses on its website,
and a reasonable investor would attribute these public state-
ments to JCG.