Janus Can Use Settlement Money Paid to Funds as Offset, Precluding Section 36(b) Recovery

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Alex Kreonidis | Bloomberg Law Gaines v. Janus Capital Mgmt., LLC, No. 10-01207, 2011 BL 304462 (4th Cir. Dec. 2, 2011) In an unpublished opinion, the U.S. Court of Appeals for the Fourth Circuit affirmed a district court's grant of summary judgment in favor of three mutual fund trusts (Trusts), two of their service providers, and an affiliate (collectively, Defendants). Plaintiffs held shares in certain of the funds comprising the Trusts and brought derivative claims against Defendants under Sections 36(b) and 47(b) of the Investment Company Act of 1940 (Investment Company Act), alleging improper market timing arrangements and breach of fiduciary duty. In affirming the district court's grant of summary judgment, the Fourth Circuit addressed whether (1) Defendants were entitled to claim certain "offset damages," (2) plaintiffs could recover "flight damages," and (3) plaintiffs were entitled to rescission. The Fourth Circuit declined to rule on whether plaintiffs had standing to sue on behalf of funds they did not own.

Janus Funds and Defendants

As the Fourth Circuit explained, the Janus family of mutual funds included approximately 60 separate funds (Janus Funds) organized under three Trusts: (1) Janus Investment Fund; (2) Janus Adviser Series; and (3) Janus Aspen Series. Janus Capital Management LLC (JCM) acted as investment adviser to the Janus Funds, and Janus Distributors LLC (JD) served as their distributor. Although plaintiffs held shares in only some of the Janus Funds at issue, they brought suit against the Trusts, JCM, JD, and JCM's parent Janus Capital Group Inc., on behalf of all of them.

SEC Settlement

Plaintiffs' allegations are based on substantially the same conduct alleged by the Securities and Exchange Commission (SEC) in an earlier settlement with JCM. In its settlement order (Order), the SEC alleged that JCM permitted 12 traders to unlawfully market time the affected Janus Funds. JCM paid $100 million into a fair fund to be distributed to investors first. It comprised a $50 million civil penalty and $50 million in disgorgement. The Order provided that the $50 million in disgorgement could be used to offset damage claims in private actions against JCM related to market timing, but the $50 million penalty could not. After an independent distribution consultant (IDC) distributed more than $50 million to investors from the fair fund, the IDC credited approximately $19 million to the affected Janus Funds. The IDC also determined that JCM earned $819,541 in advisory fees on assets invested by market timers during the relevant period.

Offsetting Damages

The Fourth Circuit held that the Order's offset provision precluded recovery under Section 36(b). Even if plaintiffs prevailed, the most they could recover on behalf of the affected Janus Funds was the $819,541 in fees JCM received. That amount was more than offset by the $19 million JCM credited to the Janus Funds. The Court rejected plaintiffs' argument that the first $50 million paid to investors be treated as disgorgement and the $19 million paid to the Janus Funds as part of the penalty. The Court found that nothing in the Order mandated full distribution of disgorgement monies before monies from the civil penalty, and the Court was unaware of any case establishing such a rule. Plaintiffs' argument also ignored the fungible nature of money, the Court said, and would create an arbitrary rule if adopted. According to the Court, allowing JCM to offset the $19 million that had already been credited to the affected Janus Funds did not undermine the deterrent goals of the Order. Even if JCM offset the entire $50 million disgorgement portion, JCM still was required to pay the full $50 million civil penalty.

Flight Damages

The Fourth Circuit also held that Section 36(b) did not provide plaintiffs with a cause of action or remedy for "flight damages." Flight damages, the Court explained, "are transactional and administrative expenses that accrued when, upon learning of the state and federal actions against Defendants, investors redeemed their shares." According to the Court, Section 36(b) is focused on actual damages resulting from the "'receipt of compensation for services,' not costs accruing from disclosure of the market timing investigations to investors."


The Fourth Circuit further found that plaintiffs were not entitled to rescission under Section 36(b). The Court rejected plaintiffs' argument that "because Section 36(b) allows for 'other relief,' and because Section 47(b) includes the remedy of rescission, the two work in tandem to allow parties aggrieved under Section 36(b) to rescind." Although Section 36(b) does state that "no damages or other relief shall be granted against any person other than the recipient of such compensation or payments," the Court did not interpret this language to mean that the statute "encompasses any relief that plaintiffs might want or a court might be tempted to award. Rather, this language is a prohibition against awarding remedies against anyone other than the recipient of the compensation." The Court also noted that while Section 47(b) does make contracts entered into by a mutual fund unenforceable if the contracts violate the Investment Company Act, "there is no private cause of action to enforce Section 47(b)."


Lastly, the Fourth Circuit declined to rule on whether plaintiffs had standing to sue on behalf of all of the Janus Funds at issue. Although plaintiffs owned shares in some of the Janus Funds comprising each Trust, plaintiffs did not own shares in all of them. The Court noted that even if plaintiffs had standing to sue on behalf of all of them, Defendants' right to offset still would preclude any recovery. DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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