Gloria Steinberg v. Janus Capital Management, LLC

Filing

UNPUBLISHED PER CURIAM OPINION filed. Originating case number: 1:04-cv-00518-JFM,1:04-md-15863-JFM Copies to all parties and the district court/agency. [998734712].. [10-1207]

Appeal: 10-1207

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Date Filed: 12/02/2011

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UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 10-1207

GLORIA STEINBERG; MICHAEL GAINES; SHARON GAINES; ROGER
BAILEY; JOSEPH CORDANI; BARBARA CORDANI; MICHAEL LIPSTEIN;
JAMES E. SCHULTZ; RHONDA VLADIMIR; ROBERT K. FINNELL;
SHERRY CHAIT; GERALD CHAIT; MEI HUNG; JASON HUNG; ROBIN
RESNICK; DOREEN DUKE; LAURI C. BADER; SYLVIA VOLIN; GEORGE
TSETSEKOS; LAWRENCE A. STIGAS; JEAN STIGAS; ERIK P. GAGNON;
MARK J. KEANE; REIKO GAGNON; KATHARINE CLARK,
Plaintiffs - Appellants,
v.
JANUS
CAPITAL
MANAGEMENT,
LLC;
JANUS
CAPITAL
GROUP,
INCORPORATED; JANUS INVESTMENT FUND, Nominal Defendant;
JANUS ASPEN SERIES, Nominal Defendant; JANUS ADVISER SERIES,
Nominal Defendant; JANUS DISTRIBUTORS, LLC,
Defendants – Appellees,
and
CANARY CAPITAL PARTNERS, LLC; CANARY INVESTMENT MANAGEMENT,
LLC; CANARY CAPITAL PARTNERS, LLC; EDWARD J. STERN; BANC OF
AMERICA SECURITIES, LLC; BANK OF AMERICA CORPORATION; CIBC
WORLD MARKETS; CIBC SECURITIES, INCORPORATED; WALL STREET
GLOBAL, LLC; TRAUTMAN WASSERMAN & COMPANY, INCORPORATED;
SMITH BARNEY CITIGROUP; PRITCHARD CAPITAL PARTNERS, LLC;
GOLDEN
GATE
FINANCIAL
GROUP,
LLC;
AURUM
SECURITIES
CORPORATION; AURUM CAPITAL MANAGEMENT CORPORATION; PERKINS
WOLF MCDONNELL & COMPANY; BAY ISLAND FINANCIAL, LLP;
ENHANCED INVESTMENT TECHNOLOGIES, LLC,
Defendants.

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Appeal from the United States District Court for the District of
Maryland, at Baltimore.
J. Frederick Motz, District Judge.
(1:04-cv-00518-JFM)

Argued:

September 20, 2011

Decided:

December 2, 2011

Before SHEDD and WYNN, Circuit Judges, and Damon J. KEITH,
Senior Circuit Judge of the United States Court of Appeals for
the Sixth Circuit, sitting by designation.

Affirmed by unpublished per curiam opinion.

ARGUED:
Timothy
N.
Mathews,
CHIMICLES
&
TIKELLIS,
LLP,
Haverford, Pennsylvania, for Appellants.
Mark Andrew Perry,
GIBSON, DUNN & CRUTCHER, LLP, Washington, D.C., for Appellees.
ON BRIEF: Nicholas E. Chimicles, Denise Davis Schwartzman,
CHIMICLES
&
TIKELLIS,
LLP,
Haverford,
Pennsylvania,
for
Appellants.
Jill M. Pfenning, GIBSON, DUNN & CRUTCHER, LLP,
Washington, D.C., for Appellees.

Unpublished opinions are not binding precedent in this circuit.

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PER CURIAM:
This case concerns mutual funds, their administration, and
improper

practices

by

Plaintiff-Appellants

the

companies

(APlaintiffs@)

hired

are

to

manage

individuals

them.

who

held

shares in about one-third of the mutual funds managed by Janus
Capital Management LLC (AJCM@). Pursuant to Sections 36(b) and
47(b) of the Investment Company Act of 1940 (AICA@), Plaintiffs
brought derivative claims against JCM, Janus Capital Group Inc.
(of

Distributors

LLC

(which distributes shares of the funds that JCM advises),

as

well

which

as

JCM

three

is

a

subsidiary),

trusts,

Janus

and

Janus

Investment

Fund,

Janus

Adviser

Series, and Janus Aspen Series (collectively ADefendants@).

The

district court granted Defendants’ motion for summary judgment
regarding Plaintiffs’ claims brought under Section 36(b), and
dismissed

Plaintiffs=

claims

brought

under

Section

Plaintiffs appealed the grant of summary judgment.

47(b).

This Court

must therefore determine: (i) whether Defendants are entitled to
claim offset damages; (ii) whether Plaintiffs can recover Aflight
damages@; (iii) whether Plaintiffs are entitled to rescission;
and (iv) whether Plaintiffs have standing to sue on behalf of
mutual funds in which they owned no shares.

For the reasons

discussed below, we AFFIRM the district court=s grant of summary
judgment in Defendants’ favor.

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I.
A mutual fund is a pooled investment vehicle that collects
money from many investors and invests it in securities such as
stocks, bonds, and short-term money market instruments.
mutual

fund

ownership

of

share
the

represents

fund=s

portfolio

an

investor=s

assets

and

Each

proportionate
the

income

(or

losses) generated by those assets, net of fees and expenses.
Mutual funds are subject to regulation under the ICA.
During the relevant time period, the Janus family of mutual
funds (the AJanus Funds@)

comprised about sixty separate funds

organized under the three business trusts Plaintiffs sued.
trust includes a series of mutual funds.

Each

The mutual funds are

managed by investment advisors who enter into annual advisory
contracts with the funds.
Janus Funds.

JCM is an investment adviser to the

It provides investment management services to each

of the funds, and in exchange, the funds pay JCM a management
fee.
In September 2003, the New York Attorney General=s Office
announced that it was filing a complaint against a hedge fund
for Amarket timing@ in certain mutual funds, including the Janus
Funds.

The

Securities

and

launched an investigation.
of

frequent

trading

at

Exchange

Commission

(ASEC@)

also

Market timing refers to a strategy

off-peak

times,

and

is

designed

to

exploit inefficiencies in the way that mutual funds are priced
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Date Filed: 12/02/2011

under federal law.

Page: 5 of 16

Because American mutual funds are priced

once each day following the close of financial markets at 4:00
p.m. in New York, purchase orders for mutual fund shares placed
after 4:00 p.m. are priced on the following day=s value.

Thus,

in a classic example of market timing, where a U.S. mutual fund
invests in Japanese securities, the opportunity arises to game
the valuation system:

Because the Japanese stock market closes

at 2:00 a.m. Eastern time, the valuations occurring at 4:00 p.m.
are based on market information that is fourteen hours old.

If

world markets rise during the interim period, a trader knows
that

the

Japanese

securities

Japanese market opens.

will

increase

as

soon

as

the

Thus, the trader can purchase a U.S.

mutual fund invested in Japanese securities which has a stale
price, knowing that a profit will accrue when Japanese markets
open.

Because

mutual

fund

managers

cannot

instantaneously

invest the trader=s money in the Japanese security at the stale
price, the manager is holding the trader=s uninvested money while
the trader receives a cut of the mutual fund=s profit on the
Japanese security.

This results in a dilution of the mutual

fund=s assets.
Many mutual funds expressly forbid market timingCincluding
the

Janus

Funds,

whose

prospectuses

made

clear

that

market

timing was prohibited. The investigations revealed that, despite
the apparent prohibition on market timing, JCM employees had
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entered

into

Date Filed: 12/02/2011

discretionary

market

Page: 6 of 16

timing

agreements

that

involved several of the Janus Funds between November 2001 and
September 2003.
Ultimately, JCM entered into a settlement with the SEC, the
terms of which are stated in an Order Instituting Administrative
and Cease-and-Desist Proceedings (Athe Order@).

Pursuant to the

Order, JCM agreed to pay $100 million into a AFair Fund@ to be
distributed to investors, comprising $50 million in disgorgement
and a $50 million civil penalty.
$50

million

in

disgorgement

can

The Order provides that the
be

used

to

offset

monetary

recoveries in private actions against JCM related to the market
timing: ATo preserve the deterrent effect of the civil penalties,
JCM agrees that it shall not, after offset or reduction in any
Related Investor Action for the amount of the disgorgement paid
by it, further benefit by offset or reduction of any part of the
civil penalties paid by it.@

(A “Related Investor Action” is

defined as a private damages action brought against JCM by or on
behalf of one or more investors based on substantially the same
facts as those set forth in the Order.)
The

SEC

settlement

also

provided

for

an

Independent

Distribution Consultant (AIDC@) to distribute the Fair Fund=s $100
million.

Investors were to receive, in order of priority, a

proportionate

share

of

losses

suffered

by

the

funds

due

to

market timing and a proportionate share of advisory fees paid by
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funds

that

aggregate

suffered
losses

amounted

Date Filed: 12/02/2011

to

individual

$21

such

borne

losses.

by

million,

accounts.

The

Page: 7 of 16

The

IDC

determined

the

seven

affected

and,

thus,

that

remainder

was

amount

compensation,

all

leftover

funds

Funds

went

to

available

made

compensate investors for other harms, if any.
that

Janus

that

to

Subsequent to

were

placed

in

an

AUndistributed Funds Account@ and given directly to the seven
affected Janus Funds in proportion to their losses.

As of June

19, 2009, after the last disbursements were sent to investors,
undistributed funds totaled $19,257,589, which were credited to
the affected funds. The IDC further determined that JCM earned
$819,541 in fees on assets invested by market timers in the
relevant time period.
In reaction to the state and federal regulatory actions,
numerous
market

civil
timing.

coordinated

as

lawsuits
Most
part

District of Maryland.

were
of

of

a

filed

them,

based

including

multi-district

on

allegations

Plaintiffs=,
litigation

in

of

were
the

Plaintiffs are individual shareholders in

the Janus Funds who asserted derivative claims.

They allege

that Defendants violated Section 36(b) of the ICA by failing to
disclose the market timing agreements to the Janus Fund trustees
in the course of negotiating annual advisory contracts with the
Janus Funds.

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Relevant
found

that

Section

to

Date Filed: 12/02/2011

this

Plaintiffs:

36(b),

appeal,
(i)

including

the

could

Aflight

Page: 8 of 16

district
not

court

recover

damages@;

ultimately

damages

under

(ii)

lacked

and

standing to sue on behalf of mutual funds in which they owned no
shares.

Accordingly, it granted Defendants= motion for summary

judgment.

Plaintiffs appealed.

II.
We review a district court=s grant of summary judgment de
novo.

Nielson v. Gaertner, 96 F.3d 110, 112 (4th Cir. 1996).

III.
On appeal, Plaintiffs contend: (i) that the district court
erred in finding that Defendants could offset their liability
for damages under Section 36(b) by amounts paid pursuant to the
Order; (ii) that the district court erred in its determination
of

what

constituted

available

damages,

specifically

its

rejection of Plaintiff=s request for Aflight damages@; (iii) that
the

district

court

erred

in

its

finding

that

the

remedy

of

rescission was unavailable; and (iv) that the district court
erred in its finding that Plaintiffs lacked standing to sue on
behalf of certain mutual funds under Section 36(b).
these arguments in turn.

8

We address

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determine

Plaintiffs

A. Remedies
We

need

not

whether

can

prove

a

Section 36(b) violation, but only whether any remedy exists for
such

a

violation

given

Defendants=

settlement

with

the

SEC.

Because we find that no remedy exists, we affirm the district
court=s grant of summary judgment.
Section 36(b) imposes upon investment advisors a fiduciary
duty Awith respect to the receipt of compensation for services.@
15 U.S.C. ' 80a-35(b).

It provides a private cause of action by

which plaintiffs can sue for breach of that duty.

Id.

If the

suit is successful, Section 36(b) permits plaintiffs to recover
Aactual damages resulting from [the breach] . . . [not to] exceed
the amount of compensation or payments received . . . by the
investor.@

Id.

Thus,

as

statute is focused on fees.

we

have

previously

observed,

the

See Migdal v. Rowe Price-Fleming

Int=l, Inc., 248 F.3d 321, 328 (4th Cir. 2001) (AAs the statutory
text indicates, Section 36(b) is sharply focused on the question
of whether the fees themselves were excessive@).

See also Jones

v. Harris Assocs. L.P., 130 S. Ct. 1418, 1426 (2010).
Accordingly,

Defendants

may

be

liable

damages@ caused by their alleged breach.

for

the

Aactual

Here, actual damages

amount to the portion of the fees that the Janus Funds paid
while,

unbeknownst

market timing.

to

Plaintiffs,

the

funds

were

subject

to

The IDC determined that JCM earned $819,541 in
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fees on assets invested by market timers in the relevant time
period.

The parties do not dispute that figure.

We therefore

conclude

that,

36(b)

if

successful

at

trial,

Section

would

entitle Plaintiffs to recover up to $819,541 in actual damages.
1. Offsetting Damages
The question remains, however, whether the Order=s offset
provision ultimately precludes recovery.

We hold that it does.

The Order compels JCM to pay $50 million in disgorgement
and $50 million in civil penalties.

It further provides that

Defendants= liability in any private damages action may be offset
by the amount Defendants= paid in disgorgement.
Fund

has

distributed

roughly

FundsCi.e.,

the

Account@

ultimately

and

monies

placed
given

$19

Because the Fair

million

in

directly

the

Janus

AUndistributed

the

Funds

to

the

to

seven

affected

Janus FundsCDefendants are entitled to a $19 million offset if
the

$19

million

came

from

disgorgement

rather

than

civil

penalties.
Plaintiffs

argue

that

because

the

Order

gave

investors

priority over the Janus Funds in accessing money from the Fair
Fund, and the investors received $61 million prior to the $19
million being distributed to the seven affected Janus Funds, the
$50

million

was

necessarily

million was distributed.
Order mandating

exhausted

We disagree.

by

the

time

the

$19

There is nothing in the

full distribution of the disgorgement before
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distribution of the civil penalty.
case evincing such a rule.

Page: 11 of 16

And we are unaware of any

Finally,

nothing in the record

suggests that Plaintiffs= characterization of the disbursement is
accurate.

Indeed,

Plaintiffs=

argument

ignores

the

fungible

nature of moneys and, if adopted, would create an arbitrary line
that we prefer not to draw.
Moreover,

we

approximately
Janus

Funds

as

a

that

allowing

JCM

to

offset

the

$19 million that has already gone to the affected
in

no

To

settlement.
serves

note

ensure

$50

way

undermines

million

that

the

the

$50

deterrent,

goals

million
the

Order

of

the

civil
bans

SEC

penalty
JCM

from

claiming an offset for any of the civil penalty; that is, it
requires JCM to suffer a $50 million loss (the civil penalty) in
addition to any other civil liability it may have.
allows

JCM

to

claim

up

to

$50

million

in

offsets

The Order
from

the

disgorgement paid into the Fair Fund because, even if the full
$50 million disgorgement is offset, JCM still pays the full $50
million

civil

penalty

on

top

of

any

civil

liability.

Consequently, regardless of what moneys were distributed when,
if Defendants are restricted to $50 million in offsets, they
will still be required to pay $50 million in addition to any
civil liability and the Order=s civil penalty will still result
in a full $50 million deterrent.

Since Defendants have thus far

only offset around $21 million, they may claim up to around $29
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million more in offsets without undermining the deterrence goals
of the Order.
Thus, because the $19 million paid to the affected Janus
Funds

falls

offset it.

well

below

$29

million,

Defendants

may

properly

And because the $19 million offset to which the

defendants are entitled exceeds the $819,541 that

Plaintiffs

could potentially recover under Section 36(b), the Janus Funds
have

been

fully

compensated.

Plaintiffs

would

be

unable

to

recover additional damages from Defendants under Section 36(b),
and summary judgment is therefore appropriate.
2.

Flight Damages

Plaintiffs contend that they are entitled to flight damages
amounting

to

approximately

$28.7

million.

Flight

damages,

however, are not Adamages@ in the context of Section 36(b).

This

is because flight damages are transactional and administrative
expenses

that

federal

actions

shares.

accrued

when,

against

upon

learning

Defendants,

of

investors

the

state

redeemed

and

their

Section 36(b), however, is focused on actual damages

resulting from the breach of the fiduciary=s duty to the mutual
funds regarding his or her fees.

Phrased differently, Section

36(b) applies to the Areceipt of compensation for services,@ not
costs

accruing

from

disclosure

investigations to investors.
never Areceived@

of

the

market

15 U.S.C. ' 80a-35(b).

timing

Defendants

flight damages, let alone as compensation from
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Plaintiffs; rather, the mutual funds paid the flight damages to
other persons and entities. It is true that Defendants failed to
disclose the discretionary frequent trading arrangements to the
Trustees;

however,

the

only

fees

resulting

from

this

non-

disclosure were the advisory fees that Defendants earned on the
affected

funds,

not

investor flight.

the

administrative

costs

associated

with

Thus, Section 36(b) provides Plaintiffs with

neither a cause of action nor a remedy regarding flight damages.
3.

Rescission

Plaintiffs argue that they are entitled to rescission under
the ICA.

They assert that because Section 36(b) allows for

Aother 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.

We

find

this

argument

unpersuasive.
We cannot conclude that Sections 36(b) and 47(b) interact
as

Plaintiffs

provides

a

assert.

limited

As

private

we

have

cause

explained,
of

action

Section
focused

advisor=s fiduciary duty related to compensation.
that

the

provision

damages or

other

mentions

relief

Aother

shall

be

13

relief,@
granted

on

an

It is true

stating

against

36(b)

that

any

Ano

person

Appeal: 10-1207

other

Document: 72

than

the

Date Filed: 12/02/2011

recipient

of

such

Page: 14 of 16

compensation

15 U.S.C. ' 80a-35(b) (emphasis added).

or

payments.@ *

We do not read this,

however, to mean that Section 36(b) encompasses any relief that
plaintiffs might want or a court might be tempted to award.
Rather,

this

remedies

language

against

anyone

is

a

prohibition

other

than

the

against

awarding

recipient

of

the

compensation.
Section 47(b), in turn, provides that a contract Athat is
made,

or

whose

performance

involves,

a

violation

subchapter . . . is unenforceable by either party.@
80-46(b)(1).

of

this

15 U.S.C.

Crucially, however, there is no private cause of

action to enforce Section 47(b).

Thus, Plaintiffs are forced to

argue that the rescission remedy in Section 47(b)Ca

provision

which includes no express private cause of actionCcan be wedged
into the phrase Aother relief@ in Section 36(b), even though that
section

expressly

provides

a

limited

damages

remedy.

Tellingly, Plaintiffs cite no cases in which rescission has been
allowed

pursuant

to

Section

36(b).

We

therefore

find

that

Plaintiffs are not entitled to rescission under Section 36(b).

*

In full, the sentence reads:
ANo such action shall be
brought or maintained against any person other than the
recipient of such compensation or payments, and no damages or
other relief shall be granted against any person other than the
recipient of such compensation or payments.@

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B.

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Page: 15 of 16

Standing
The final issue before this Court is standing.
Each of Defendants=

mutual funds.

trusts includes a subset of individual

Thus, it is possible for investors to own stock

in some but not all of the funds associated with a particular
trust.

Such is the case here, where Plaintiffs sued on behalf

of all mutual funds in the relevant trusts even though they
owned shares in only a portion of those funds.
court

held

that

Plaintiffs

could

sue

only

mutual funds in which they owned shares.

on

The district
behalf

of

the

Thus, regarding those

funds in which they claimed no ownership, they had no standing,
and

pursuant

dismissal,

in

to

Federal

part,

was

Rule

of

Civil

warranted.

Procedure

Plaintiffs

12(b)(6),

appeal

this

ruling.
Standing is part and parcel of this Court=s jurisdiction.
To establish standing, Plaintiffs Amust have suffered an injury
in factCan invasion of a legally protected interest which is (a)
concrete and particularized and (b) actual or imminent.@
v. Defenders of Wildlife, 504 U.S. 555, 560 (1992).

Lujan
Section

36(b) authorizes suit by Aa security holder of [a] registered
investment

company

on

behalf

of

such

company,

investment advisor@ for breach of fiduciary duty.

against

[an]

Plaintiffs

argue that, because they invested in each of Defendants= three
trusts (by way of owning shares in some of each trust’s mutual
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Page: 16 of 16

funds), they have standing to bring claims on behalf of all
three trusts despite not owning shares in all of the mutual
funds.

Defendants counter that, because Plaintiffs did not own

shares in a number of the mutual funds, they cannot claim that
they

were

injured

by

alleged

harm

to

those

Defendants= failure to disclose market timing.

funds

caused

by

In light of the

foregoing discussion, however, we need not reach the merits of
the parties arguments and decline to do so.

As explained, even

if Plaintiffs have standing to sue on behalf of the funds in
which

they

did

not

own

shares,

Defendants=

right

to

offset

precludes Plaintiffs= recovery.

IV.
For the foregoing reasons, we conclude that the district
court did not err in granting summary judgment for Defendants.
The judgment of the district court is
AFFIRMED.

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