In a decision beneficial to the US Securities and Exchange Commission, the US Supreme Court has affirmed that those persons who disseminate statements containing material misrepresentations or omissions are primarily liable for such misstatements even if they did not directly make them. Private securities litigants will likely rely on Lorenzo v. SEC to assert claims against secondary actors—including bankers, lawyers, and accountants—who disseminate statements made by others that they allegedly know are materially misleading, and the Commission is now clear to charge such persons as primary violators without demonstrating that the person who actually made the statement also violated federal securities laws.
The US Supreme Court handed a significant victory to the US Securities and Exchange Commission (SEC or Commission) on March 27 by affirming a US Court of Appeals for the DC Circuit holding that an investment banker was primarily liable for sending clients emails drafted by his supervisor that contained false statements. In Lorenzo v. SEC, the Court, by a 6–2 margin, held that those who do not make statements but “disseminate false or misleading statements to potential investors with the intent to defraud” can be found to have committed primary violations of the antifraud provisions under those subsections that provide for “scheme” liability. The Court’s decision resolves several important questions that had existed since the Court narrowed the scope of primary liability to “makers” of statements in Janus Capital Group, Inc. v. First Derivative Traders.
Significantly, the Court endorsed the SEC’s approach to scheme liability against those who distribute materially misleading statements with scienter, regardless of whether they are actually the maker of the statements. By holding that a nonmaker can still violate Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, it is expected that private securities litigants will rely on Lorenzo to assert claims against secondary actors who, with scienter, disseminate alleged misstatements made by others. Lorenzo may also further embolden the Commission to allege primary violations against “gatekeepers” and others who did not make the alleged misstatements, but are nonetheless alleged to have been involved in their dissemination.
Under Section 17(a)(1) of the Securities Act, it is unlawful to “employ any device, scheme, or artifice to defraud.” Similarly, Section 10(b) of the Exchange Act makes it unlawful to “use or employ . . . any manipulative or deceptive device or contrivance” that contravenes the SEC’s rules and regulations. Lorenzo is the latest Supreme Court decision that seeks to distinguish primary from secondary liability under these sections of the federal securities laws.
In Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., the Supreme Court held that there is no private cause of action for aiding and abetting liability under Section 10(b). This decision was seen as offering significant protection to secondary actors, such as lawyers, investment bankers, and accountants.
Seventeen years later, Janus added further limits to secondary liability and narrowly construed the scope of Rule 10b-5(b) under the Exchange Act, which makes it unlawful to “make any untrue statement of a material fact.” Janus held that 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.” Thus, under Janus, one can be primarily liable for a violation of Rule 10b-5(b) only if he or she has the “ultimate authority” over a statement. Janus was therefore seen as foreclosing the possibility of being primarily liable under Section 10(b) and the other provisions of Rule 10b-5 for merely participating in the drafting of a materially false statement.
Whereas Central Bank foreclosed aiding and abetting liability in private actions under Rule 10b-5, and Janus confined Rule 10b-5(b) liability to “makers” of statements, the question remained whether primary liability could be established through so-called “scheme liability” under Rules 10b-5(a) and (c). Rule 10b-5(a)—like Section 17(a)(1)—makes it unlawful to “employ any device, scheme, or artifice to defraud.” Rule 10b-5(c) makes it unlawful to “engage in any act, practice, or course of business [that] operates . . . as a fraud or deceit.” A narrow construction of those provisions would have further limited the ability of the Commission and private litigants to assert claims of primary liability against persons who do not “make” actionable statements.
Facts and Procedural History of Lorenzo
At the request of his supervisor, Lorenzo, an investment banker, sent two emails that he did not draft to prospective investors. Lorenzo’s supervisor provided the content of the two emails, which Lorenzo merely copy and pasted into his own emails. Lorenzo then transmitted the emails and included his signature block with a note that he could be contacted with any questions, but also stated in each email that he had sent it at the request of his supervisor. Although Lorenzo did not draft the content of the emails, the Commission found he acted with intent to defraud because he knew some of the content was false or misleading when he sent them.
The Commission commenced administrative proceedings against Lorenzo and charged him with violating Section 17(a)(1) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. An administrative law judge concluded that Lorenzo had “willfully violated the antifraud provisions of the Securities and Exchange Acts,” which the Commission affirmed on appeal. In doing so, the Commission concluded that Lorenzo had violated Section 17(a)(1), Section 10(b), and Rules 10b-5(a), (b), and (c).
On appeal, the DC Circuit overturned the Commission’s finding that Lorenzo had violated Rule 10(b)-5(b), determining that Lorenzo’s supervisor, not Lorenzo himself, was the “maker” of the false statements under Janus. But the court affirmed the Commission’s conclusion that Lorenzo violated the “scheme liability” provisions of Rules 10b-5(a) and (c), and Section 17(a)(1). The DC Circuit agreed that, “regardless of whether he was the ‘maker’ of the false statements for purposes of Rule 10b-5(b),” Lorenzo produced email messages containing false statements and sent them directly to potential investors . . . with scienter,” and therefore “can be found to have infringed Section 10(b), Rules 10b-5(a) and (c), and Section 17(a)(1).”
Lorenzo appealed the DC Circuit’s opinion to the Supreme Court, presenting the question of whether someone who is not a “maker” of a misstatement under Janus can nevertheless be found to have violated the other subsections of Rule 10b-5 and related provisions of the securities laws when the only conduct involved circulating the misstatement of another, with scienter. The Supreme Court granted certiorari on June 18, 2018, and heard oral argument on December 3, 2018.
In its Lorenzo decision, the Supreme Court explained that “the words” used in Section 17(a)(1), Section 10(b), and Rules 10b-5(a) and (c) were “sufficiently broad to include within their scope the dissemination of false or misleading information with the intent to defraud.” Indeed, the Court saw “nothing borderline about this case, where the relevant conduct (as found by the Commission) consists of disseminating false or misleading information to prospective investors with the intent to defraud.” The Court went on to explain that as opposed to the “mailroom clerk” and other tangential actors for whom liability would be inappropriate, Lorenzo “sent false statements directly to investors, invited them to follow up with questions, and did so in his capacity as vice president of an investment banking company.”
The Court went on to explain why a finding of primary liability under these facts was consistent with its rulings in Janus, Central Bank, and other cases. The Court distinguished Janus because it involved an investment adviser who drafted misstatements that were then “issued by a different entity that controlled the statements’ content.” The Court further emphasized that Janus did not involve the application of Rule 10b-5(b) to the dissemination of false or misleading statements. The Court concluded that it expected Janus to “remain relevant” in situations where an “individual neither makes nor disseminates false information.”
Further, although Lorenzo argued that holding him primarily liable would vitiate, or at least weaken, the distinction between primary and secondary liability as established by Central Bank, the Court rejected this argument. Instead, it explained that its holding created an “administrable” line: “Those who disseminate false statements with intent to defraud are primarily liable under Rules 10b–5(a) and (c), §10(b), and §17(a)(1), even if they are secondarily liable under Rule 10b–5(b).” The Court compared this to its holding in Janus, which “neatly divide[d] primary violators and actors too far removed from the ultimate decision to communicate a statement.”
The Court also distinguished its prior holding in Stoneridge Investment Partners, LLC v. Scientific–Atlanta, Inc., where it rejected an attempt to bring claims against persons who allegedly committed undisclosed deceptions upon which a plaintiff could not have relied. As the Court explained, reliance is irrelevant in Commission actions, and even if it were relevant, Lorenzo’s conduct “involved the direct transmission of false statements to prospective investors intended to induce reliance.”
Lorenzo will likely boost the Commission’s ability to bring enforcement actions involving false and misleading statements. This is an area in which the distinction between primary liability and secondary liability is crucial. Under Section 20(e)—the Exchange Act’s “aiding and abetting” statute—an entity is secondarily liable only if there is a primary violator to whom the entity provided “substantial assistance.” Additionally, the secondary violator is “deemed to be in violation” only to the “same extent” as the primary violator.
To bring an action asserting aiding and abetting liability, therefore, the Commission must show that the primary actor violated the federal securities laws. As the Lorenzo Court noted, this creates a potential gap where, for example, the disseminator of a statement knows it is false but the maker of a statement does not. Under these circumstances, the innocent maker of the statement cannot be held primarily liable, which means that the more culpable disseminator could not have aided and abetted anything.
After Lorenzo, the Commission is now clear to charge such persons as primary violators without demonstrating the person who actually made the statement also violated the federal securities laws. By holding that someone who disseminates a materially misleading statement and acts with scienter can be held primarily liable under Rules 10b-5(a) and (c), the Lorenzo Court avoided a result that it deemed inconsistent with Congress’s intent in enacting the federal securities laws.
Before Lorenzo, the Janus and Central Bank decisions seemed to impose strict limits on claims brought by private plaintiffs. The Supreme Court’s new decision affirms that those who disseminate misstatements can commit a primary violation of Rule 10b-5, rather than just a secondary aiding and abetting violation, for which there is no private right of action. Accordingly, Lorenzo may curtail the effect of Janus and Central Bank, and could be interpreted to mean that a secondary actor (e.g., banker, lawyer, accountant) may, under similar facts, be held primarily liable under a scheme liability theory.
At minimum, private plaintiffs will likely argue that Lorenzo allows them to bring an action under Section 10(b) and Rule 10b-5 when someone transmits a materially false or misleading statement, even though he or she did not make that statement, and that person allegedly knew or recklessly disregarded the statement’s falsity. This could allow plaintiffs to attempt to add additional “nonmakers” as defendants to Section 10(b) lawsuits—including professionals such as bankers, lawyers, and accountants who forward or send registration statements or other offering documents containing material misrepresentations or omissions. Indeed, Justice Thomas’s dissent warned that if Lorenzo’s conduct qualifies as primary liability, “virtually any person who assists with the making of a fraudulent misstatement will be primarily liable and thereby subject not only to SEC enforcement, but private lawsuits.” It will therefore be left to lower courts to determine how far Lorenzo—which on its face appears to limit primary liability to “those who disseminate false statements with intent to defraud”—will stretch primary liability in private actions, if at all. Indeed, plaintiffs will still be required to plead with particularity that the “nonmaker” had such an intent.
While the precise ramifications of Lorenzo are yet to be determined, the Court’s opinion is a clear victory for the Commission and could lead to an increase in private securities cases against gatekeepers. Although the Lorenzo Court believes its decision provides an “administrable” line that separates primary from secondary liability, the Commission and private litigants are likely to test—and require lower courts to determine—how flexible that line is.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Marc J. Sonnenfeld
Ivan P. Harris
 Justice Brett Kavanaugh was recused from the case because he had participated in the DC Circuit Court decision.
 Lorenzo v. SEC, No. 17-1077, slip op. at 2 (U.S. Mar. 27, 2019).
 564 U.S. 135, 142, 131 S. Ct. 2296, 180 L. Ed. 2d 166 (2011).
 511 U.S. 164 (1994).
 Janus, 564 U.S. at 142.
 Lorenzo v. SEC, 872 F.3d 578, 588 (D.C. Cir. 2017).
 Id. at 588-89.
 Lorenzo, slip op. at 5-6.
 Id. at 7.
 Id. at 10.
 Id. at 11.
 552 U.S. 148 (2008).
 Lorenzo, slip. op at 12.
 In dissent, Justice Clarence Thomas disagreed that this gap might exist if not for the majority’s view of primary liability. According to the dissent, makers of false statements would not so easily avoid primary liability, and conduct such as that committed by Lorenzo is more “appropriately assessed under principles of secondary liability.” Id. at 8 (Thomas, J., dissenting).
 511 U.S. 164 (1994).
 Lorenzo, slip op. at 9 (Thomas, J., dissenting).