Gloria Steinberg v. Janus Capital Management, LLC

UNPUBLISHED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.

-- 1 of 16 --

2
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Affirmed by unpublished per curiam opinion.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Unpublished opinions are not binding precedent in this circuit.

-- 2 of 16 --

3
PER CURIAM:
This case concerns mutual funds, their administration, and
improper practices by the companies hired to manage them.
Plaintiff-Appellants (APlaintiffs@) are individuals 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 which JCM is a subsidiary), and Janus Distributors LLC
(which distributes shares of the funds that JCM advises), as
well as three trusts, 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 47(b).
Plaintiffs appealed the grant of summary judgment. 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.

-- 3 of 16 --

4
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. Each
mutual fund share represents an investor=s proportionate
ownership of the fund=s portfolio assets and 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. Each
trust includes a series of mutual funds. The mutual funds are
managed by investment advisors who enter into annual advisory
contracts with the funds. JCM is an investment adviser to the
Janus Funds. 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 Exchange Commission (ASEC@) also
launched an investigation. Market timing refers to a strategy
of frequent trading at off-peak times, and is designed to
exploit inefficiencies in the way that mutual funds are priced

-- 4 of 16 --

5
under federal law. 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 will increase as soon as the
Japanese market opens. 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

-- 5 of 16 --

6
entered into discretionary market 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. The Order provides that the
$50 million in disgorgement can 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

-- 6 of 16 --

7
funds that suffered such losses. The IDC determined that
aggregate losses borne by the seven affected Janus Funds
amounted to $21 million, and, thus, that amount went to
individual accounts. The remainder was made available to
compensate investors for other harms, if any. Subsequent to
that compensation, all leftover funds 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 civil lawsuits were filed based on allegations of
market timing. Most of them, including Plaintiffs=, were
coordinated as part of a multi-district litigation in the
District of Maryland. 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.

-- 7 of 16 --

8
Relevant to this appeal, the district court ultimately
found that Plaintiffs: (i) could not recover damages under
Section 36(b), including Aflight damages@; and (ii) lacked
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). We address
these arguments in turn.

-- 8 of 16 --

9
A. Remedies
We need not determine whether Plaintiffs 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 we have previously observed, the
statute is focused on fees. 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 for the Aactual
damages@ caused by their alleged breach. Here, actual damages
amount to the portion of the fees that the Janus Funds paid
while, unbeknownst to Plaintiffs, the funds were subject to
market timing. The IDC determined that JCM earned $819,541 in

-- 9 of 16 --

10
fees on assets invested by market timers in the relevant time
period. The parties do not dispute that figure. We therefore
conclude that, if successful at trial, Section 36(b) 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. Because the Fair
Fund has distributed roughly $19 million to the Janus
FundsCi.e., the monies placed in the AUndistributed Funds
Account@ and ultimately given directly to the 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 exhausted by the time the $19
million was distributed. We disagree. There is nothing in the
Order mandating full distribution of the disgorgement before

-- 10 of 16 --

11
distribution of the civil penalty. And we are unaware of any
case evincing such a rule. 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 note that allowing JCM to offset the
approximately $19 million that has already gone to the affected
Janus Funds in no way undermines the goals of the SEC
settlement. To ensure that the $50 million civil penalty
serves as a $50 million deterrent, the Order bans 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. The Order
allows JCM to claim up to $50 million in offsets 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

-- 11 of 16 --

12
million more in offsets without undermining the deterrence goals
of the Order.
Thus, because the $19 million paid to the affected Janus
Funds falls well below $29 million, Defendants may properly
offset it. 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 accrued when, upon learning of the state and
federal actions against Defendants, investors redeemed their
shares. 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 of the market timing
investigations to investors. 15 U.S.C. ' 80a-35(b). Defendants
never Areceived@ flight damages, let alone as compensation from

-- 12 of 16 --

13
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 the administrative costs associated with
investor flight. 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 assert. As we have explained, Section 36(b)
provides a limited private cause of action focused on an
advisor=s fiduciary duty related to compensation. It is true
that the provision mentions Aother relief,@ stating that Ano
damages or other relief shall be granted against any person

-- 13 of 16 --

14
other than the recipient of such compensation or payments.@*
Section 47(b), in turn, provides that a contract Athat is
made, or whose performance involves, a violation of this
subchapter . . . is unenforceable by either party.@ 15 U.S.C.
80-46(b)(1). 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).
15 U.S.C. ' 80a-35(b) (emphasis added). 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 language is a prohibition against awarding
remedies against anyone other than the recipient of the
compensation.
* 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.@

-- 14 of 16 --

15
B. Standing
The final issue before this Court is standing.
Each of Defendants= trusts includes a subset of individual
mutual funds. 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. The district
court held that Plaintiffs could sue only on behalf of the
mutual funds in which they owned shares. Thus, regarding those
funds in which they claimed no ownership, they had no standing,
and pursuant to Federal Rule of Civil Procedure 12(b)(6),
dismissal, in part, was warranted. Plaintiffs 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.@ Lujan
v. Defenders of Wildlife, 504 U.S. 555, 560 (1992). Section
36(b) authorizes suit by Aa security holder of [a] registered
investment company on behalf of such company, against [an]
investment advisor@ for breach of fiduciary duty. Plaintiffs
argue that, because they invested in each of Defendants= three
trusts (by way of owning shares in some of each trust’s mutual

-- 15 of 16 --

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 funds caused by
Defendants= failure to disclose market timing. 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.

-- 16 of 16 --