Mutual Finds Investment Litigation – Janus Subtrack (Fund Derivative Plaintiffs v. Janus Capital Management LLC)

The Situation

In 2004, Janus Capital Management settled with the Securities and Exchange Commission (SEC) regarding SEC's accusations that JCM permitted twelve traders to market-time seven of the Janus Funds ("arranged market-timing"). Shortly after the settlement, some Janus Funds' shareholders brought derivative claims against JCM and various other Janus entities (collectively, "Janus" or "Janus Defendants"). The Plaintiffs alleged that Janus breached their fiduciary duty to the Janus Funds by allowing various additional traders ("non-arranged market-timers") to market-time the Janus Funds (and, correspondingly, gaining "excessive investment advisor fees"). The Plaintiffs also alleged that Janus failed to disclose that it intentionally and/or recklessly allowed market-timing in its funds.

NERA's Role

NERA was asked by counsel for Janus Defendants to review and analyze the Plaintiffs' expert. NERA also analyzed all related mutual fund trading data, flows, and holdings. The results of NERA's analysis were presented in two expert reports (April and May 2008) and subsequent expert deposition of Former Senior Vice President Dr. Chudozie Okongwu in June 2008.
NERA's review of the Plaintiffs' expert's analysis uncovered numerous conceptual and calculation errors contained within the Plaintiffs' expert's reports. For example, the Plaintiffs' expert's analysis improperly classified many accounts as "non-arranged market-timers" when, in fact, most of those were non-retail or "omnibus" accounts. Other errors included improper classification of certain activity as "arranged market-timing", improper apportioning of a fund's administrative costs to a trade level, classification of certain non-Janus funds as Janus funds, inconsistent treatment of the funds' trading volume measures, and incorrect calculation of the fund returns and the dilution due to market timing.

The Result

In December 2008, the US District Court, the District of Maryland (the "District Court"), ruled that with regards to the "arranged market-timing", the Plaintiffs had been already fully compensated by the existing 2004 settlement with the SEC. In 2009, the District Court granted summary judgment for Janus Defendants finding no intentional misconduct or recklessness relating to the "non-arranged market-timing". In 2010, the District Court dismissed the derivative action. In particular, the Judge held that Plaintiffs may not recover either the "excessive redemptions damages" or the Janus Defendants' fees resulting from the trading of the “non-arranged market-timers". The decision was appealed by the Plaintiffs. In December 2011, the Fourth Circuit of the US Court of Appeals affirmed the District Court’s decision in favor of the Janus Defendants.