I firmly believe and have often written that “when private capital is not protected by regulators, legislators, the courts, and the executive branch, then that capital will be more expensive to source in the future. More expensive and subsequently less available capital will inhibit an economic recovery.”

What part of that basic premise do those running Wall Street businesses and our supposed “protectors of the public interest” not understand? Do we need any more evidence than the precipitous decline in volumes across virtually every market segment to highlight that investors “get this” and that the incestuous parties on Wall Street and in Washington “don’t”?

While those with any appreciation of ‘sense on cents’ understand the need to protect long-term investor capital, we witness once again a mind boggling development that relegates the interests of real long term investors—that is you, me, and every Mom and Pop investor in our nation–to second class status.

I recommend you have multiple barf bags readily available prior to reviewing a decision recently handed down by the highest court in our land. Let’s navigate as Reuters highlights, Top Court Rules for Janus In Securities Case,

Janus Capital Group Inc (JNS.N) and a subsidiary cannot be held liable in a lawsuit by shareholders over allegedly false statements in prospectuses for several Janus mutual funds, the U.S. Supreme Court ruled on Monday.

By a 5-4 vote in a narrow decision, the justices overturned a ruling by a U.S. appeals court that a class-action securities fraud lawsuit could go forward.

In backing the Denver-based Janus, one of the largest mutual fund companies, the high court’s decision will mean few changes for the way big asset managers govern themselves — structures that could have faced a major overhaul if the ruling had gone the other way.

Janus, in appealing to the Supreme Court, argued that the funds were separate legal entities and that neither the parent company nor its subsidiary was responsible for the prospectuses and could not be held liable.

The high court agreed. It ruled the alleged false statements in the prospectuses were made by an investment fund, not Janus Capital, and that Janus and the subsidiary therefore cannot be held liable in a private securities fraud lawsuit.

Do you find yourself with a queasy feeling and beginning to foam at the mouth? Me too. Get the bag ready.

The lawsuit was brought on behalf of those who bought Janus stock from mid-2000 through early September 2003.

It alleged that the prospectuses of several Janus funds created the false or misleading impression that the company would adopt measures to curb market timing — when in fact secret arrangements with several hedge funds permitted such transactions, to the detriment of long-term investors.

Think Janus cared about the long term investors in its funds when it allowed this market timing activity? The fact is, though, this ruling solidifies the current legal structure of mutual fund entities which clearly are not protecting investor interests. Do you think Janus cares about long term investors currently by segregating its corporate management and investment fund structure. Do investors appreciate the differentiation in legal structure and the fact that Janus management effectively has a firewall here? Need another bag?

The lawsuit alleged that Janus stock was purchased at inflated prices, until public disclosure of the arrangements.

Janus paid $225 million in 2004 to settle claims by regulators that it had failed to disclose the trading arrangements to long-term investors.

Market timing — allowing favored investors to buy or sell shares based on outdated prices at the expense of other investors — took place at Janus and other fund firms in the last decade.

Mark Perry, the attorney who represented Janus, said he was delighted the Supreme Court agreed with the company’s position that only the party ultimately responsible for a statement can be sued for fraud in such private investor lawsuits.

“The court’s clarification of the scope of primary liability under the securities laws is important not just for the parties to this case, but for all participants in the securities markets, including bankers, lawyers, accountants, and investment advisers,” he said.

The Obama administration supported the plaintiffs before the Supreme Court while the Chamber of Commerce business group supported Janus.

The high court previously has issued a number of rulings that limited private shareholder securities fraud lawsuits. It divided in the Janus case along conservative and liberal lines.

Justice Clarence Thomas in the majority opinion said Janus Capital may have assisted the Janus Investment Fund with crafting what it said in the prospectuses, but Janus Capital itself did not actually make those statements.

Makes one think back to the infamous statement put forth by President Clinton, “it depends what the definition of “is” is. So in this case, Janus Capital is judged to be fully and separate from Janus Investment Fund. Is “Janus” Janus?

Would you want to do business with a crowd that does not take full and total responsibility for what goes into a prospectus for their funds? Shame on my fellow Holy Cross Crusader Clarence Thomas and his brethren on the court for not protecting investors.

Janus had argued that technically it is a service provider to the funds. A federal judge initially sided with Janus.

William Birdthistle, an associate professor at the Chicago-Kent College of Law who had written an amicus brief on behalf of First Derivative Traders, called the ruling a “pretty simplistic” one that will leave the basic structure of the mutual fund industry unchanged.

He said the ruling’s most dramatic impact could be to encourage other industries to adopt the split management structure of the mutual funds sector as a way to avoid liability.

“What this ruling says is that as long as there are separate legal entities, even if management totally dominates all aspects, there’s no liability,” Birdthistle said. “This is going to open the eyes of those not in the funds industry who are going to say: ‘Wow, those guys are bulletproof’,” he said.

Management can “avoid liability”, has “no liability”, and is considered “bulletproof”. All watchwords which mean as an investor you are getting bent over. I do not own any Janus funds but if I did I would sell them. I would then ask my brokers and/or financial planners for a position statement by other mutual fund families on their position on this case.

As one highly respected Wall Street executive whom I hold in high regard told me, “this ruling does not pass the smell test.” I concur. The stench of this ruling combined with the smell of the vomit beneath my desk is truly overpowering.

Legal scholars or those within the industry who care to provide a defense of this ruling, please do not be bashful.

Everybody else…navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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