On March 27, 2019, the United States Supreme Court decided Lorenzo v. SEC. Many eyes were on this case, because of its potential to have a significant impact on the scope of securities fraud liability. Ultimately, the Supreme Court found in favor of the Securities Exchange Commission and held that “dissemination of false or misleading statements with intent to defraud can fall within the scope of Rules 10b–5(a) and (c), as well as the relevant statutory provisions, even if the disseminator did not “make” the statements and consequently falls outside Rule 10b–5(b).” This decision clarified what the holding of Janus Capital Group, Inc. v. First Derivative Traders (2011) covers.
What is Lorenzo v. SEC
Lorenzo v. SEC involved a person named Francis Lorenzo. While Lorenzo had been serving as the director of investment banking at the SEC-registered brokerage firm Charles Vista, LLC, he knowingly sent two false and misleading emails (that had been asked for, supplied by, and approved by Lorenzo’s manager and boss) to prospective investors. The Securities Exchange Commission (SEC) later brought enforcement actions against the broker-dealer, its owner, and Lorenzo. The SEC ended up finding that Lorenzo had violated Rule 10b–5, §10(b) of the Exchange Act, and §17(a)(1) of the Securities Act by sending false and misleading statements to investors with intent to defraud. However, on appeal, the District of Columbia Circuit court then ruled that while the SEC could not find Lorenzo to have violated subsection (b) of Rule 10b-5 because Lorenzo was not a “maker” as defined by Janus, the SEC was indeed correct in finding Lorenzo liable under §10(b), §17(a)(1), and other subsections of Rule 10b-5—namely, subsections (a) and (c). And under Janus, the “maker” of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.
The Supreme Court ultimately granted cert and found that those who do not “make” statements (as Janus defined “make”), but who disseminate false or misleading statements to potential investors with the intent to defraud, can nevertheless be found to have violated the other parts of Rule 10b–5, subsections (a) and (c) of Rule 10b-5, as well as related provisions of the securities laws. The decision in Lorenzo makes clear that Janus only addressed the “making” of a statement and said nothing about the application of Rule 10b-5 to people disseminating false or misleading information. Therefore, Janus’s precluding of primary liability still applies for situations in which an individual neither makes nor disseminates false information.
For reference, subsection (a) of Rule 10b-5 makes it unlawful to “employ any device, scheme, or artifice to defraud.” Subsection (b) of the same rule makes it unlawful to “make any untrue statement of a material fact.” Finally, subsection (c) of Rule 10b-5 makes it unlawful to “engage in any act, practice, or course of business” that “operates . . . as a fraud or deceit.”
Lorenzo’s defense in this case centered on the argument that the only way for a person to be liable for false statements is through the provisions of the securities laws—such as Rule 10b–5(b)—that refer specifically to false statements. The Supreme Court majority, however, did not buy the defendant’s argument that each of these provisions should be read as governing different, mutually exclusive, spheres of conduct. According to the majority opinion, the courts and the SEC have long recognized considerable overlap among the subsections of Rule 10b-5 and related provisions of the securities laws. Ultimately, the Supreme Court ruled against Lorenzo.
The Supreme Court emphasized in Lorenzo that the securities laws’ fundamental policy is to protect the market from the spread of misinformation. Following the Lorenzo decision, the reach of the Janus limitation that only those who “make” a false statement are primarily liable under 10b-5(b) is restricted.
It will be interesting and crucial to keep an eye out for how the lower circuit courts now implement Lorenzo and the concept of “dissemination.” Previously, there had been a circuit split regarding whether material misstatements that are not actionable under Rule 10b-5(b) (because the defendant did not “make” them) can nonetheless form the basis for liability under Rule 10b-5(a) and (c). Some of the circuits (such as the Ninth Circuit and Second Circuit) had long held that alleged frauds solely involving material misstatements or omissions could not be pursued under provisions other than Rule 10b-5(b). Post-Lorenzo, those federal circuits will have to change their tune and adhere to the new legal rule.
Lorenzo expanded the umbrella of people who are able to potentially incur primary liability under the securities laws. In essence, any person who is responsible for communicating to investors—even if he or she is not individually responsible for the content of those communications—may incur primary liability for disseminating information they know to be false or misleading.