On December 3, 2018, the Supreme Court heard argument on an appeal in a case where a divided panel of the D.C. Circuit held that a defendant who did not “make” a misstatement within the meaning of Janus Capital Group v. First Derivative Traders, 564 U.S. 135, 142 (2011), nonetheless could be liable for participating in a “scheme” to defraud under Section 10(b) of the Exchange Act, SEC Rule 10-b5 promulgated thereunder, and Section 17(a) of the Securities Act, by disseminating with fraudulent intent a misstatement made by someone else. See Lorenzo v. S.E.C., No. 17-1077.
In a 5-4 decision, Janus held that where a Section 10(b) claim is predicated on a misstatement, only the “maker” of that misstatement can be a primary violator of Section 10(b) and SEC Rule 10b-5. Janus, 564 U.S. at 142. Janus defined a “maker” as the person or entity with “ultimate authority” over the statement. Id. This squared, among other things, with the Supreme Court’s prior decision in Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., which held that there is no aiding and abetting liability under Section 10(b) – it is primary liability or nothing. 511 U.S. 164, 191 (1994). (Congress later amended the Exchange Act to permit aiding and abetting liability in actions brought by the Securities and Exchange Commission (“SEC”). Exchange Act § 20(e), 15 U.S.C. § 78t (2011).)
In Lorenzo, defendant Lorenzo was directed by his boss to send two emails to potential investors with statements that his boss had prepared. In the Matter of Gregg C. Lorenzo, Francis v. Lorenzo, & Charles Vista, LLC, S.E.C. Release No. 544, 2013 WL 6858820, at *5 (Dec. 31, 2013). The case proceeded before an SEC administrative law judge, and the Commission reviewed the ALJ’s decision. The SEC determined in the administrative proceeding that Lorenzo acted with scienter (i.e., fraudulent intent) when sending the emails. Id. at *7-*8. The Commission’s findings and penalties were reviewed by the D.C. Circuit.
On appeal, consistent with Janus, the D.C. Circuit panel agreed that Lorenzo could not be liable as the “maker” of the misstatements, because his boss was the one with “ultimate authority” over them. Lorenzo v. S.E.C., 872 F.3d 578, 587 (D.C. Cir. 2017). A majority of the court, however, held that the SEC was still within its rights to find Lorenzo liable for a violation, because Section 10(b) and SEC Rule 10b-5 permit liability for primary participation in a “scheme” to defraud. Id. at 588-89. In so doing, the D.C. Circuit relied on subsections (a) and (c) of SEC Rule 10b-5, which deal expressly with schemes to defraud, rather than subsection (b), which deals expressly with misstatements and was interpreted in Janus. Id. The majority also distinguished the case from Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, 552 U.S. 148, 166-67 (2008). There, the Supreme Court rejected the idea that “scheme” liability could be used to impose primary liability on secondary actors whose transactions with the corporate issuer might have facilitated a disclosure fraud. Unlike the fact pattern in Stoneridge, wrote the majority...
