Opinion ID: 2802784
Heading Depth: 2
Heading Rank: 2

Heading: Janus Error

Text: Next up is a claim of instructional error. The defendants argue that the jury was incorrectly instructed on what it means to “make” a false statement in violation of the securities laws. 9 (...continued) categories (but not all three), then the model would be accurate after the second statement because at that point had both statements been truthful, the truth would have been fully known and the price would have fallen to the value it did fall to once the truth was disclosed. 28 No. 13-3532 The relevant part of the instruction was as follows (with the offending phrase italicized): To prevail on their 10b-5 claim against any defendant, plaintiffs must prove … : (1) the defendant made, approved, or furnished information to be included in a false statement of fact … during the relevant time period between July 30, 1999 and October 11, 2002 … . After the Phase I trial concluded, and while Phase II proceedings were underway, the Supreme Court issued its decision in Janus narrowly construing what it means to “make” a false statement in violation of Rule 10b-5. The specific issue in Janus was whether a mutual fund investment advisor could be held liable for false statements contained in the prospectuses of its client mutual funds. 131 S. Ct. at 2299. The investment advisor in Janus was wholly owned by the company that created its client mutual funds, and there also was some management overlap. Id. Although the advisor had substantially assisted in the preparation of the prospectuses, it argued that it was not the “maker” of the false statements for purposes of Rule 10b-5. The Supreme Court agreed: For purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its con- tent 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. No. 13-3532 29 And in the ordinary case, attribution within a statement or implicit from surrounding circum- stances is strong evidence that a statement was made by—and only by—the party to whom it is attributed. This rule might best be exemplified by the relationship between a speechwriter and a speaker. Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And it is the speak- er who takes credit—or blame—for what is ultimately said. Id. at 2302. In light of Janus, the defendants moved for a new trial, arguing that the “approved or furnished information” language in the jury instruction misstated the law and had the effect of holding some of them liable for false statements that they did not “make,” as the Supreme Court construed that term. The judge denied the motion, reasoning that the Court’s holding applied only to legally independent third parties (like the investment advisor in Janus itself), not corporate insiders like the individual defendants here, all top executives at Household.10 10 As support for this ruling, the judge relied in part on In re Satyam Computer Services Ltd. Securities Litigation, 915 F. Supp. 2d 450 (S.D.N.Y. 2013), and In re Smith Barney Transfer Agent Litigation, 884 F. Supp. 2d 152 (S.D.N.Y. 2012), but neither case held that Janus does not apply to corporate insiders. Smith Barney held that corporate executives who sign documents are the “makers” of the statements contained in the documents even though (continued...) 30 No. 13-3532 That was error. Nothing in Janus limits its holding to legally independent third parties. The Court interpreted the language of Rule 10b-5, which makes it “unlawful for any person … [t]o make any untrue statement of material fact” in connection with the purchase or sale of securities. 17 C.F.R. § 240.10b-5(b). The Court’s interpretation applies generally, not just to corporate outsiders.11 And there can be little doubt that the instruction used here directly contradicts Janus. The judge instructed the jury that the plaintiffs could prevail on their Rule 10b-5 claim if they proved that the defendant “made, approved, or furnished information to be included in a false statement.” (Emphasis added.) This goes 10 (...continued) the company has the ultimate authority over the documents. 884 F. Supp. 2d at 163–64. And Satyam held that Janus did not overturn the “group pleading doctrine,” 915 F. Supp. 2d at 477 n.16, a pleading rule for alleging scienter that we rejected long before Janus. See Pugh v. Tribune Co., 521 F.3d 686, 693 (7th Cir. 2008). 11 We note that this issue has divided the district courts. Compare, e.g., City of Pontiac Gen. Emps.’ Ret. Sys. v. Lockheed Martin Corp., 875 F. Supp. 2d 359, 374 (S.D.N.Y. 2012) (“Janus … addressed only whether third parties can be held liable for statements made by their clients. … [It] has no bearing on how corporate officers who work together in the same entity can be held jointly responsible … .”), with Haw. Ironworkers Annuity Trust Fund v. Cole, No. 3:10CV371, 2011 WL 3862206, at  (N.D. Ohio Sept. 1, 2011) (“[Janus’s] interpretation of the verb ‘to make’ is an interpretation of the statutory language … and therefore cannot be ignored simply because the defendants are corporate insiders.”), and In re UBS AG Sec. Litig., No. 07 Civ. 11225(RJS), 2012 WL 4471265, at –11 (S.D.N.Y. Sept. 28, 2012), aff’d 752 F.3d 173 (2d Cir. 2014) (rejecting an argument that Janus applies only to third parties and not corporate insiders). No. 13-3532 31 well beyond the narrow interpretation adopted in Janus. See 131 S. Ct. at 2303 (“Adopting the Government’s definition of ‘make’ would … lead to results inconsistent with our precedent … [because it] would permit private plaintiffs to sue a person who ‘provides the false or misleading information that another person then puts into the statement.’”). The instruction plainly misstated the law. Still, we must decide whether this error caused the defendants any prejudice.12 See Jimenez v. City of Chicago, 732 F.3d 710, 717 (7th Cir. 2013). The four defendants in this case are William Aldinger, Household’s CEO; David Schoenholz, the CFO; Gilmer, Vice-Chairman and President of Consumer Lending; and Household itself. Of the 17 actionable false statements, 14 were contained in SEC filings or official Household press releases. The remaining three were delivered by the executives: one was a statement by Gilmer to the media; another was a presentation by Aldinger to Goldman Sachs; and 12 Citing Dawson v. New York Life Insurance Co., 135 F.3d 1158 (7th Cir. 1998), the defendants argue that this kind of error is always prejudicial and automatically requires a new trial. Dawson held that when a jury is instructed on multiple theories, one of which is incorrect, “its verdict must be set aside even if the verdict may have been based on a theory on which the jury was properly instructed.” Id. at 1165. Other cases suggest something similar. See, e.g., Byrd v. Ill. Dept. of Pub. Health, 423 F.3d 696, 709 (7th Cir. 2005); Saturday Evening Post Co. v. Rumbleseat Press, Inc., 816 F.2d 1191, 1197 (7th Cir. 1987); Simmons, Inc. v. Pinkerton’s, Inc., 762 F.2d 591, 599 n.3 (7th Cir. 1985). This line of cases has been displaced by more recent Supreme Court decisions holding that this kind of error is reviewed for harmlessness, even in a criminal case. See Skilling v. United States, 561 U.S. 358, 414 (2010); Hedgpeth v. Pulido, 555 U.S. 57, 59 (2008) (per curiam). 32 No. 13-3532 the third was a presentation by Schoenholz at Household’s annual “Investor Relations Conference.”
The prejudice analysis is easiest for Household, so we’ll start there. The company stipulated that it “made” all statements in its SEC filings and press releases. That leaves only the three false statements delivered by the three executives. Nothing in Janus undid the long-standing rule that “[a] corporation is liable for statements by employees who have apparent authority to make them.” Makor Issues & Rights, Ltd. v. Tellabs, Inc., 513 F.3d 702, 708 (7th Cir. 2008) (citing Am. Soc. of Mech. Eng’rs, Inc. v. Hydrolevel Corp., 456 U.S. 556, 568 (1982)); see also Fulton Cnty. Emps. Ret. Sys. v. MGIC Inv. Corp., 675 F.3d 1047, 1051 (7th Cir. 2012) (noting that executives speak for themselves and for their organization). The instructional error clearly did not prejudice Household.
Aldinger concedes that he “made” all the statements in Household’s SEC filings and in his own presentation to Goldman Sachs. The plaintiffs claim that Aldinger also agrees that he “made” the statements in the press releases, but we can’t find that concession anywhere in the record. We’re hesitant to hold as a matter of law that a CEO “makes” all statements contained in a company press release, as that term was narrowly defined in Janus. We haven’t been No. 13-3532 33 directed to evidence showing that Aldinger’s signature or name appeared in the press releases in the sense of an attribution. See Janus, 131 S. Ct. at 2302 (“[I]n the ordinary case, attribution within a statement … is strong evidence that a statement was made by—and only by—the party to whom it is attributed.”); cf. Peterson v. Winston & Strawn LLP, 729 F.3d 750, 752 (7th Cir. 2013) (noting that the defendant law firm would probably not be liable for the contents of a circular it helped prepare because it “did not sign the document or warrant the truth of its contents”). Nor does it appear that he actually delivered the statements in the press releases himself—say, for example, by reading them at a press conference. See Janus, 131 S. Ct. at 2302 (“One ‘makes’ a statement by stating it.”). Absent either attribution or actual delivery, the Janus inquiry turns on control. Id. at 2303 (“[T]he rule we adopt today [is] that the maker of a statement is the entity with authority over the content of the statement and whether and how to communicate it.”). As CEO, Aldinger of course had authority over the press releases in the sense that he could have exercised control over their content. But if that were enough to satisfy Janus, then CEOs would be liable for any statements made by their employees acting within the scope of their employment. That wouldn’t square with the Court’s reminder about “the narrow scope that we must give the implied private right of action” under Rule 10b-5. Id. Instead, as we understand Janus, Aldinger must have actually exercised control over the content of the press releases and whether and how they were communicated. That’s an inherently fact-bound inquiry, and it can’t be answered on this record. Accordingly, as to Aldinger’s liability 34 No. 13-3532 for the press releases, the Janus error was prejudicial, and he is entitled to a new trial. The error was not prejudicial as to Aldinger’s liability for Gilmer’s false statement to the media, however. The evidence at trial clearly established that Aldinger “made” this statement in the sense meant by Janus. Aldinger drafted the statement in response to growing protests about Household’s predatory lending practices, and he sent it to various executives, including Gilmer, in an e-mail that said, “Attached to this [e-mail] is our media holding statement … .” Gilmer simply read the statement verbatim to the media. As the CEO and the actual author of the statement, Aldinger had the “ultimate authority” over its content and whether and how to communicate it, the touchstone of Janus. Id. at 2302. The defendants contend that the question of prejudice must be considered in light of the jury’s findings on scienter. They note, for example, that the jury found Household and Aldinger responsible for “making” the Gilmer statement knowingly, while Gilmer, who actually delivered it, was found to have made it recklessly. The defendants suggest that this kind of combination is impossible after Janus. We do not see why. Nothing in Janus precludes a single statement from having multiple makers. See In re Pfizer Inc. Sec. Litig., 936 F. Supp. 2d 252, 268–69 (S.D.N.Y. 2013); City of Pontiac, 875 F. Supp. 2d at 374; City of Roseville Emps.’ Ret. Sys. v. EnergySolutions, Inc., 814 F. Supp. 2d 395, 417 (S.D.N.Y. 2011). And it’s not illogical to conclude that Aldinger, who wrote the statement and instructed Gilmer to deliver it, acted knowingly, while Gilmer, who simply parroted it, was merely reckless as to its falsity. No. 13-3532 35 That leaves the presentation by Schoenholz at the Investor Relations Conference. The plaintiffs argue that Aldinger’s presence in the room, and his participation in a question-andanswer session afterward, demonstrate that he controlled the content of the presentation, and that’s enough to satisfy Janus. We agree that post-Janus, liability for “making” a false statement can be established by inferences drawn from surrounding circumstances. But we can’t say with confidence that Aldinger’s actions at the conference satisfy the Janus standard. They may, but a properly instructed jury might conclude otherwise. Finally, the plaintiffs argue that the Janus error cannot have prejudiced Aldinger because he was found secondarily liable under § 20(a) of the Securities Exchange Act, which provides that “[e]very person who … controls any person liable under any provision of this chapter … shall also be liable jointly and severally with and to the same extent as such controlled person.” 15 U.S.C. § 78t(a). The jury found, for purposes of § 20(a), that Aldinger and Schoenholz were controlling persons with respect to each other and with respect to Household and Gilmer. Because Household issued the press releases and Schoenholz gave the presentation, this means that Aldinger is secondarily liable for their statements. Even so, Aldinger may have been affected by the jury’s allocation of responsibility for the plaintiffs’ losses. When multiple defendants are found liable, the jury is required to apportion fault between them. Id. § 78u-4(f)(3). The jury allocated 55% responsibility to Household, 20% to Aldinger, 15% to Schoenholz, and 10% to Gilmer. With a proper 36 No. 13-3532 instruction on what it means to “make” a false statement, the jury might allocate responsibility differently.13 Accordingly, Aldinger is entitled to a new trial on whether he “made” the false statements in Household’s press releases and in Schoenholz’s presentation at the Investor Relations Conference.
Schoenholz’s situation is almost identical to Aldinger’s. He concedes that he “made” the false statements in the SEC filing and in his own presentation at the Investor Relations Conference. He was not found liable for Gilmer’s statement to the media. That leaves only the press releases and Aldinger’s presentation to Goldman Sachs. For the reasons already 13 How exactly this would affect Aldinger legally is somewhat complicated. Liability is generally assigned proportionately using the jury’s determination of responsibility, see 15 U.S.C. § 78u-4(f)(2)(B), but a defendant can be jointly and severally liable if he knowingly violated the law, see id. § 78u-4(f)(2)(A). The jury found him liable for one knowing violation (the one we’ve just described), though it’s not clear whether that makes him jointly and severally liable for all misstatements or only the one he knowingly made. See Regents of Univ. of Cal. v. Credit Suisse First Bos. (USA), Inc., 482 F.3d 372, 404–07 (5th Cir. 2007). Nor is it clear how proportional liability and § 20(a) interact. See Laperriere v. Vesta Ins. Grp., Inc., 526 F.3d 715 (11th Cir. 2008) (per curiam). We don’t need to resolve these issues because even if Aldinger is jointly and severally liable for all 17 misstatements— either through § 78u-4(f)(2)(A) or § 20(a) or some combination thereof—he is still entitled to seek contribution from the other defendants. See Musick, Peeler & Garrett v. Emp’rs Ins. of Wausau, 508 U.S. 286 (1993). So the size of his share of responsibility matters. No. 13-3532 37 discussed, Schoenholz is entitled to a new trial on whether he “made” those particular false statements, as that term was defined in Janus.
As for Gilmer, he actually delivered only one of the 17 actionable false statements. The plaintiffs argue that he was also a “maker” of the false statements in the SEC filings and press releases because as a high-ranking officer, he reviewed and approved them. But the same could have been said for the investment advisor in Janus. And as we’ve already explained, Janus can’t be ignored simply because Gilmer is a corporate insider. So for all but the statement to the media that he himself delivered, the Janus error prejudiced Gilmer.