On May 21, 2015, in Glickenhaus & Company v. Household International, Inc., the US Court of Appeals for the Seventh Circuit held that Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), which clarified what it means to “make” a false statement in connection with the purchase or sale of a security in violation of Rule 10b-5, extends not only to legally independent third parties but also to corporate insiders (No. 13-3532, (7th Cir. May 21, 2015)).

Glickenhaus gave rise to one of the largest judgments to date in a securities fraud class action. In 2002, the plaintiffs filed this securities fraud class action under § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)) and Rule 10b-5 (17 C.F.R. § 240.10b–5) against a mortgage lender and three of its top executives for making false and misleading statements that inflated the company’s share price. The parties stipulated to class certification and most of the issues were tried to a jury, which produced a $2.46 billion judgment for the plaintiffs. The defendants challenged the judgment on many grounds, including raising a claim of instructional error under Janus.

To prevail on a Rule 10b-5 claim, a plaintiff must prove in part that a defendant made a false statement in violation of the securities laws. In Janus, the US Supreme Court narrowly construed what it means to “make” a false statement in violation of Rule 10b-5. The Court held that a mutual fund investment advisor could not be held liable for false statements contained in the prospectuses of its client mutual funds because the advisor was not the “maker” of the false statements for purposes of Rule 10b-5. The Court reasoned that the maker of a statement is the person or entity with ultimate authority and control over the statement; one who merely prepares or publishes a statement on behalf of another is not its maker.

In Glickenhaus, the district court instructed the jury that the plaintiffs could prevail on their Rule 10b-5 claim only if they proved that the defendant “made, approved, or furnished information to be included in a false statement.” In light of Janus, the individual 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 the defendants liable for false statements that they did not “make” as the Supreme Court construed that term. The district court denied the motion, holding that Janus does not apply to corporate insiders like the individual defendants in this case, but instead only to legally independent third parties (like the investment advisor in Janus).

The Seventh Circuit reversed, finding instructional error and holding that the defendants were entitled to a new trial to determine, among other things, whether the three individual defendants “made” certain of the false statements under Janus. In reaching its decision, the court determined that:

The court ordered a new trial limited to whether the individual defendants made certain false statements under Janus's narrow definition of that term.