In a 6 to 2 opinion Wednesday,^[1] the U.S. Supreme Court declined to extend its holding in Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135 (2011) beyond Exchange Act Rule 10b-5(b), and held that a person who disseminates a false or misleading statement can be held liable under the anti-fraud provisions of the federal securities laws even if the person was not the “maker” of the statement. Lorenzo v. SEC, 587 U.S. __ (2019).

Under Rule 10b-5(b), it is unlawful to “make any untrue statement of a material fact … in connection with the purchase or sale of a security.” At issue in Lorenzo was whether a person who disseminates a false or misleading statement, but who was not the statement’s “maker,” could nonetheless be charged with securities fraud for violating the so-called “scheme” liability provisions found in subsections (a) and (c) of Rule 10b-5, and related statutory anti-fraud provisions.^[2] Subsections (a) and (c) prohibit the use of any “device, scheme or artifice to defraud,” and any “act, practice, or course of business” that “operates as a fraud or deceit.”

Since the Janus opinion in 2011, there can be no misstatement liability under subsection (b) of Rule 10b-5 unless the person sought to be charged “makes” the false or misleading statement. Only a person “with ultimate authority over the statement, including its content and whether and how to communicate it,” qualifies as a statement “maker.” To have such authority over a statement, the maker must exercise sufficient control over its content and distribution. “One who prepares or publishes a statement on behalf of another” does not have the requisite control over the statement and “is not its maker.”

In Lorenzo, the Court considered whether someone who publishes a false statement on behalf of another could be held liable for fraud under subsections (a) and (c) of Rule 10b-5 even though, under Janus, there could be no liability under subsection (b). In other words, the Court had to decide whether the Janus test applied not only to misstatement liability, but to scheme liability as well, when the latter is based on the dissemination of false or misleading statements.

Petitioner Lorenzo, a director at an investment bank, took his appeal from a D.C. Circuit Court of Appeals decision upholding findings of scheme liability against him for his role in sending emails to investors on behalf of his boss. His boss provided the content of the emails, which described an investment in a company with “confirmed assets” of $10 million. When Lorenzo sent the email, he was aware that the company had recently disclosed that its total assets were, in fact, worth less than $400,000.

The panel of judges that decided the appeal for the D.C. Circuit Court of Appeals held that, while Lorenzo did not “make” the statements at issue for purposes of subsection (b) of Rule 10b-5, he could nonetheless be held liable for fraud under subsections (a) and (c), because his own active role in producing and sending the emails constituted employing a deceptive “device,” “act,” or “artifice to defraud.” On appeal to the Supreme Court, Lorenzo argued that holding him liable under subsections (a) and (c) for conduct that could not qualify as securities fraud under subsection (b), would render subsection (b) superfluous, and Janus a “dead letter.”

The Supreme Court disagreed. It reasoned that the SEC and the Court have long recognized that the anti-fraud provisions of the federal securities laws govern overlapping spheres of conduct, and that it is apparent from the language used in Rule 10b-5 that the misconduct each subsection proscribes is not mutually exclusive. Nor, added the Court, was there anything in its prior opinion suggesting that the holding in Janus applied not only to making false statements but also to disseminating false information.

Janus, therefore, did not compel a different result, and the Court declined to extend Janus to scheme liability based on false or misleading statements. The Court concluded that it would be inadvisable to construe Rule 10-b(5) as regulating conduct involving false or misleading statements exclusively through subsection (b), as “the plainly fraudulent behavior confronted here might otherwise fall outside the Scope of the Rule.” A problematic result, in the Court’s view, given that “using false representations to induce the purchase of securities would seem a paradigmatic example of securities fraud.”

The Court also rejected Lorenzo’s argument that the scheme liability findings against him blurred the distinction between primary liability under Rule 10b-5 and secondary liability for “aiding and abetting” violations of the securities laws.^[3] Lorenzo urged that the type of conduct with which he was charged could amount only to secondary liability – for aiding and abetting a violation by his boss – not primary liability.

The Court was not persuaded. It expressed concern over relying too heavily on secondary liability to enforce the securities laws. The Court noted that liability for aiding and abetting a violation is only available as an enforcement measure when another actor commits a primary violation. Such a primary violator may not always be available. For example, in a fraud involving the dissemination of false statements, the actor responsible for “making” the statements may not have had the intent to deceive when the statements were made. Such intent, or scienter, is an essential element under Rule 10b-5. In such circumstances, if the would-be “secondary” actor then knowingly disseminated the statements to perpetuate an egregious fraud, then that person could not be held liable as an aider or abettor, and all participants would escape liability altogether.

This was an unacceptable risk in the Court’s view, and it chose instead to endorse the SEC’s current approach. The Court confirmed the SEC’s ability to charge participants in securities fraud with primary violations for scheme liability based on the dissemination of false or misleading statements. It declared: “Those who disseminate false statements with the intent to defraud are primarily liable under Rule 10b-5(a) and (c) [and related anti-fraud statutes], even if they are secondarily liable under Rule 10b-5(b).”

Lorenzo signals the Court’s confidence in the SEC’s current anti-fraud charging practices, and its belief that those practices are necessary for an effective enforcement regime. The decision likely comes as a relief to the SEC, which stood to lose some of the latitude with which it wields primary liability as an enforcement measure against schemes involving false or misleading statements.

Compared to claims for secondary liability, primary liability under Rule 10b-5 is a simpler and more efficient tool for the agency to wield. Proof of secondary liability for aiding and abetting is more difficult to obtain, as it requires a showing that the actor not only knowingly or recklessly participated in something deceitful, but also that the actor did so with a view towards helping someone else commit fraud. Under Lorenzo, participants in the securities industry can continue to expect scrutiny under the full force of Rule 10b-5 for statements and information shared with investors.

^[1] Justice Kavanaugh, who issued the dissent in the D.C. Circuit of Appeals opinion from which the appeal was taken, took no part in the decision.

^[2] Section 10(b) of the Securities Exchange Act of 1934 [15 U.S.C. § 78j(b)] and Section 17(a)(1) of the Securities Act of 1933 [15 U.S.C. § 77q(a)(1)].

^[3] 15 U.S.C. § 78t(e) makes it unlawful to “knowingly or recklessly … provid[e] substantial assistance to another person” who violates Rule 10b-5.