A motion to dismiss a securities shareholder class action complaint was recently denied in part by the Southern District of New York because the plaintiffs sufficiently alleged that a defendant parent corporation had “ultimate authority” and liability for alleged false statements made in a registration statement issued by its subsidiary. City of Roseville Employees’ Retirement System v. EnergySolutions, No. 09 Civ. 8633, 2011 WL 4527328 (S.D.N.Y. Sept. 30, 2011). In doing so, the Court distinguished the United States Supreme Court’s decision in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), which held that only the actual “maker” of a statement may be liable under Section 10(b) of the Securities Exchange Act and Rule 10b-5.
The case stems from a securities class action brought by shareholders against EnergySolutions, Inc. (“ES”), a company that provides services to nuclear power plants, and its parent corporation, ENV Holdings (“ENV”), relative to the initial public offering of ES. The complaint alleged claims for violations of Sections 10(b), 11, 12(a)(2), 15, and 20 of the Securities Exchange Act and Rule 10b-5. According to the complaint, the Registration Statements filed by ES contained false or misleading statements, or omitted material facts relating to the company’s financial opportunities in the nuclear reactor market and potential regulatory restrictions.
Defendants moved to dismiss all claims, including ENV, based on the holding in the Janus case wherein the Supreme Court expressly held that only the actual “maker” of a statement may be held liable under Rule 10b-5. According to the Court in Janus, for purposes of Rule 10b-5, a party can be liable for “making” a false statement only if the party is “the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. Without control, a person or entity can merely suggest what to say, not ‘make’ a statement in its own right. One who prepares or publishes a statement on behalf of another is not its maker.” Accordingly, under Janus a party that only assists in the “making” of a misstatement cannot be held liable.
While the Court granted the motion to dismiss as to certain alleged misrepresentations, it was denied with respect to all material allegations. In doing so, the Court created a significant distinction from Janus by adopting a standard under which a parent corporation with “ultimately authority” over a statement is potentially liable for “making” a misleading public statement even if made by a separate and distinct legal entity. In distinguishing Janus, the Court in Roseville relied on the Registration Statements, which revealed that a.) ENV was the sole owner of stock of ES at the time of the initial public offering; b.) ES was wholly owned by ENV; c.) ENV would retain a controlling interest in ES after the initial public offering; and d.) ENV had authority to determine when and whether to sell the shares being sold.
According to the Court, unlike Janus the Registration Statements in Roseville contained so many indicia of control of ENV over ES that ENV’s role went well beyond that of “a speechwriter drafting a speech” because ENV had control over the content of the message, the underlying subject matter of the message, and the ultimate decision of whether to communicate the message.
Not only is the Roseville Court’s ruling notable because it is one of the first district court applications of the Janus decision, it is also significant in its discussion of both when and why parties may be liable for the alleged misrepresentations of another party. In expanding the scope of who can be held liable, the Court in Roseville focused on the degree of control exercised over the party actually “making” the statement.