some will rob you with a six-gun, and some with a fountain pen

I already posted this on Facebook, so apologies to anybody who’s seeing it twice. But there are a couple of interesting things about a recent Supreme Court decision, Janus Capital Group, Inc. v. First Derivative Traders. The first, as the blog Interfluidity notes, is that it basically gives large corporations license to commit fraud, as long as they set up a shell company to take the fall:

The case concerned a mutual fund whose prospectus was alleged to contain misleading statements that harmed investors. The question before the Supreme Court was not whether the statements were in fact misleading, but who should be construed as having made the statements. The answer, the Court determined, is perhaps nobody at all. Misleading statements were made, but literally no one can be held accountable.

When an ordinary firm issues securities, the firm itself is the “person” who makes the statements that appear in prospectuses and other disclosures. But with dedicated investment vehicles, things are more complicated. Investment vehicles — mutual funds and ETFs, but also securitizations like RMBS and CDOs — segregate the management and operation of the fund from the legal entity whose securities investors hold. If you “own” a Janus mutual fund, the securities you hold are likely claims against an entity called Janus Investment Fund. But Janus Investment Fund exists mostly on paper. Another company, Janus Capital Management, actually does everything. The human beings who make day-to-day investment decisions, as well as the offices they work in and the equipment they work on, are provided by Janus Capital Management. Communications and legal formalities, including prospectuses, are drafted by employees of Janus Capital Management.

The Supreme Court held that, even though employees of Janus Capital Management company actually wrote any misleading statements, even though they managed nearly every substantive aspect of the operation of the fund, they cannot be held responsible because they did not “make” the statements. The “person” under law who made the statements was the entity on whose behalf the offending prospectus was issued, the investment fund, which has no capital other than the money it invests for shareholders. Under Janus, the management company is beyond the reach of aggrieved investors.

Then can the fund be meaningfully held accountable? The fund does have an “independent” board of directors, who in theory work for shareholders and “negotiate” the terms of the management contract. In practice, the management company typically organizes the fund and selects its directors. Still, if the investment fund “made the statement”, then surely those directors would be accountable, right? No. The investment fund’s directors supervise the fund at a very high level. In a large “fund family”, the same directors may be responsible for tens or hundreds of different portfolios. They may not have understood that statements in some prospectus were misleading. A violation under Rule 10b-5 must be knowing or reckless to be actionable. So the fund’s directors may prove beyond reach. Outright lies may be told, yet investors may find they have no practical means of holding anyone accountable….

Plausible deniability is the order of the day. Managers can be as nasty as they wanna be. As long as their misbehavior is obscure enough that fund directors can plead ignorance, nobody gets in trouble. (If directors could be held liable, then the management company might be in jeopardy as well, under Section 20(a) of the Securities Exchange Act. But if the directors are innocent, then so are the managers.)

So that’s point one. Point two is that, along with the recent fight between banks and retailers over credit card swipe fees, this looks like an example the disintegration of the cohesiveness of the capitalist class itself under the theocracy of unregulated free markets.

This is the ultimate end point of the bundle of supposedly “conservative” principles that are said to have “won” after Reagan. And nobody takes these principles more seriously, or gives them more aid, than the members of the right wing of the Court itself. Our congressional representatives’ mad scramble of pandering over swipe fees, to both retailers and banks, is illustrative of what happens when the Court decides that corporations have the right to unlimited, unregulated, tax-deductible campaign spending. That decision (Citizens United) may not have been a bad idea on the merits, but the innocence of the majority opinion regarding human nature was both laughable and shameful:

[T]his Court now concludes that independent expenditures, including those made by corporations, do not give rise to corruption or the appearance of corruption. That speakers may have influence over or access to elected officials does not mean that those officials are corrupt. And the appearance of influence or access will not cause the electorate to lose faith in this democracy.

To believe Justice Kennedy’s above paragraph takes an almost saintly kind of faith. But what religion inspires this faith? That religion’s chief tenets are rarely spoken aloud by the Court’s members, but it generally hinges on a belief that the public good is served by corporations being given maximum freedom and “personhood” — unless that would be inconvenient for those corporations, in which case, forget it.

E.g., when Justice Scalia writes in his concurring opinion in Citizens United that

[Justice Stevens’ dissent] never shows why “the freedom of speech” that was the right of Englishmen did not include the freedom to speak in association with other individuals, including association in the corporate form

he is saying, “Hey, corporations are just groups of people, and people have speech rights, so corporations do, too!”

This is, of course, a very selective reading of what corporations are. For-profit corporations, unlike unions, activist groups, charities, churches, and other “associations” of “individuals,” are required by law to attempt to maximize profit for their shareholders. Corporate officers must act in the pursuit of that interest regardless of their personal feelings about a given policy. So a corporation has political interests that are separate from, and may in some cases bear little resemblance to, the interests of the individuals “associated” therein.

But let us assume that Justice Scalia is sincere in his belief that a corporation is naught but an association of individual officers, pursuing their own interests. Then why, in Janus, does he join with the majority in asserting that the individuals who wrote the fraudulent prospectuses can’t be held liable because:

[T]he 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. Without control, a person or entity can merely suggest what to say, not “make” a statement in its own right.

Got that? The people who wrote the false statements were merely suggesting to the “person” (the corporation Janus Investment Fund) who actually “made” the statements. Just to clarify, the majority opinion continues:

The Court rejects the Government’s contention that “make” should be defined as “create,” thereby allowing private plaintiffs to sue a person who provides the false or misleading information that another person puts into a statement….

[T]he corporate formalities were observed…. Although JCM may have been significantly involved in preparing the prospectuses, it did not itself “make” the statements at issue…. Its assistance in crafting what was said was subject to Janus Investment Fund’s ultimate control.

This is disingenuous in the extreme, and is sensible only to the extent that Janus Investment Fund is specifically not an association of the individuals who do the actual work performed by Janus Investment Fund.

So which is the reality, Justice Scalia?

Sophistry aside, the “reality” is fluid and unprincipled, unless the principle involves giving the wealthy as much latitude to make money as possible, even when that means defrauding other wealthy investors. Good luck, guys.

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3 Responses to some will rob you with a six-gun, and some with a fountain pen

  1. Nathan says:

    I’ve had a general feeling of unease over these rulings but I hadn’t really put all that much thought into them. Now that I’m better filled in…I’m really fucking depressed.

    Thanks for that.


  2. Pingback: interfluidity » A license to lie, backdated

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