United States Supreme Court Holds That Knowing Dissemination of False Statements Made by Others Can Constitute Primary “Scheme Liability” In Violation of Rule 10b-5(a) and (c)

In Lorenzo v. Securities & Exchange Comm., No. 17-1077, 2019 WL 1369839 (U.S. Mar. 27, 2019), the Supreme Court of the United States (Breyer, J.) held that an individual who did not “make” a false or misleading statement within the meaning of Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011) (blog article here), but instead disseminated it to potential investors with intent to defraud, can be held to have employed a scheme to defraud and/or engaged in an act, practice or course of business to defraud in violation of subsections (a) and (c) of Securities and Exchange Commission (“SEC”) Rule 10b-5, 17 C.F.R. § 240.10b-5. This decision broadens the scope of primary liability under Rule 10b-5 beyond those who make false and misleading statements to include those who knowingly “disseminate” (i.e., communicate to potential investors) such false or misleading statements. Although this decision involved an SEC enforcement action, it is likely to be invoked by plaintiffs in private securities litigation to expand the scope of named defendants beyond the issuer and individuals directly responsible for making public statements on the issuer’s behalf.

The relevant facts were not in dispute. The defendant represented himself as “Vice President-Investment Banking” for a registered broker-dealer in Staten Island, New York. In 2009, he sent emails to prospective investors at the direction of his boss, who supplied the content and approved the messages. Those emails contained false and misleading information about the client’s business. Defendant allegedly knew that.

The SEC brought an enforcement action. It determined that defendant violated Rule 10b-5 (among other provisions of the federal securities laws), issued a $15,000 fine and bar order. Defendant appealed. He argued, inter alia, that he could not be held liable under Rule 10b-5(b), which prohibits (in pertinent part) “mak[ing] any untrue statement of a material fact,” because he was not the “maker” of the statements in the emails at issue within the meaning of Janus Capital. The United States Court of Appeals for the District of Columbia Circuit agreed. See Securities & Exchange Comm. v. Lorenzo, 872 F.3d 578 (D.C. Cir. 2017). The Court of Appeals nevertheless held that defendant’s conduct violated Rule 10b-5(a) and (c) which prohibit (in pertinent part) “employ[ing] any device, scheme, or artifice to defraud” and “engag[ing] in any act, practice, or course of business which operates or would operate as a fraud or deceit.” The D.C. Circuit’s decision conflicted with decisions in other Circuits holding that alleged misconduct involving misstatements in violation of Rule 10b-5(b) cannot also give rise to “scheme...