Almost two years after the Supreme Court issued its momentous decision in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), lower courts continue to reach significantly different conclusions concerning its scope. The Supreme Court held that, for purposes of SEC Rule 10b-5, “the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” Id. at 2302. Specifically, in Janus, the Supreme Court held that an investment advisor could not be liable for statements in prospectuses filed by a related, but legally separate entity. Because the investment advisor did not “make” the statements—that is, did not have “ultimate authority” over them—it could not be liable as a primary violator of Rule 10b-5 for any misstatements or omissions contained therein.

Janus established a bright-line rule. But the Southern District of New York, in particular, has split over whether Janus applies beyond the context of private actions brought under Rule 10b-5(b). In the most recent decision from that district to address the issue, SEC v. Garber, No. 12 Civ. 9339, 2013 WL 1732571 (S.D.N.Y. Apr. 22, 2013), Judge Shira A. Scheindlin deepened this divide.

In Garber, the SEC alleged that a group of defendants, including three individuals, purchased over a billion unregistered shares in penny stock companies and resold the shares while falsely claiming that the transactions were exempt from registration with the SEC. Id. at *1. The defendants allegedly obtained opinion letters, authored by outside attorneys, stating that the instruments at issue were securities (when in fact, according to the SEC, they were “akin to an ‘IOU’”). Id. at *2. According to the SEC, the individual defendants knew or were reckless in not knowing that the instruments “were not securities.” Id.

The defendants argued that the SEC’s fraud theory failed as to Rule 10b-5(b), under Janus, because the alleged misrepresentations had been “made” by the attorneys who wrote the opinion letters, not by the defendants. The court rejected this argument. First, the court held that Janus does not apply to SEC enforcement actions brought under Rule 10b-5(a) or (c), which “extend to claims based on schemes to defraud” and “do not focus on the ‘making’ of an untrue statement.” Id. at *4. On this point, the court agreed with two other decisions from the Southern District. See SEC v. Pentagon Capital Mgmt. PLC, 844 F. Supp. 2d 377, 422 (S.D.N.Y. 2012), as amended (Aug. 22, 2012) (Hon. Robert W. Sweet); SEC v. Boock, No. 09 Civ. 8261, 2011 WL 5417106, at *2 (S.D.N.Y. Nov. 9, 2011) (Hon. Denise Cote). The court distinguished another decision, SEC v. Kelly, which dismissed the SEC’s claim under Rule 10b–5(a) and (c) because “the SEC’s scheme liability claim” in that case was “premised on a misrepresentation”—and “neither defendant ‘made’ a misstatement as Janus requires.” 817 F. Supp. 2d 340, 344 (S.D.N.Y. 2011) (Hon. Colleen McMahon).

The court also noted, in Garber, that, “[b]y the same logic, Janus would not affect claims under Section 17(a)(1)” of the Securities Act, “which prohibits ‘employ[ing] any device, scheme, or artifice to defraud.” Garber, 2013 WL 1732571 at *4. In this, the court again diverged from Kelly, 817 F. Supp. 2d at 346—but did not go as far SEC v. Stoker (which concluded that Janus does not apply to Section 17(a)(2), which refers to “obtain[ing] money or property by means of any untrue statement”), or Pentagon Capital Management, which held more broadly that Janus does not “apply to SEC enforcement actions brought pursuant to Section 17(a) of the Securities Act.” See Stoker, 865 F. Supp. 2d 457, 465 (S.D.N.Y. 2012) (Hon. Jed S. Rakoff); Pentagon Capital Mgmt. PLC, 844 F. Supp. 2d at 422 (Hon. Robert W. Sweet).

Garber may be of even more interest, however, for what Judge Scheindlin went on to find even if Janus applied. The court held that “[e]ven under Janus, the ‘making’ of” the statements in the opinion letters “could be attributed to [d]efendants” because they “solicited” the advisory opinion and “had ‘ultimate authority . . . over whether and how to communicate it,’ at least in the context of the alleged scheme.” Garber, 2013 WL 1732571 at *5. The court emphasized that the opinion letters did not have “the intended effect” until the defendants “presented the information in support of their ability to sell the penny stocks without registration.” Id. Whether other courts will adopt similar approaches in applying Janus will be very significant to the breadth of its impact.