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An Investment Adviser Cannot Be Sued in Private Action Under Rule10B-5 for Inaccurate Statements in a Mutual Fund Prospectus

June 14, 2011

The Securities Litigation and Enforcement and Investment Management Practices

In a highly anticipated 5-4 decision, the Supreme Court resolved a split in the circuits and held that an investment adviser to a mutual fund could not be sued under Rule 10b-5 in a private action for incorrect or misleading statements in a mutual fund prospectus, even though the adviser may have prepared those statements. In so holding, the Court addressed the meaning of a fundamental element needed to plead a private securities fraud claim under Section 10(b) of the Securities Exchange Act of 1934: what constitutes making a statement sufficient to hold a party liable for any alleged misstatements or omissions. In holding that the maker of a statement can only be someone who has ultimate authority over and actually makes the statement, the Court found that only the fund (which is a separate legal entity), and not the investment adviser, can be deemed to make a statement in a fund prospectus. The Courts opinion likely will have far-reaching implications for investment companies, advisors, investment banks, attorneys, accountants, and other service providers who are involved in the preparation of documents, such as prospectuses, that are publicly disseminated to investors.

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