The U.S. Supreme Court recently handed down a win for the SEC and private securities litigants, significantly broadening the scope of primary liability under Rule 10b-(5). In Lorenzo v. SEC, the Court held that liability under Rules 10b-5(a) and (c)—which make it unlawful to employ a scheme to defraud or engage in any practice that operates as a fraud—is not limited only to those who make false or misleading statements as contemplated under sister-section Rule 10b-(5)(b), but may also extend to those who disseminate such statements made by others knowing they are false or misleading.
This case arose from an SEC enforcement action brought against Francis Lorenzo, Director of Investment Banking for a New York broker-dealer. The SEC alleged that, in connection with a $15 million debt offering, Lorenzo sent emails to prospective investors that significantly overstated the value of the investment. It was undisputed that the emails were sent at the direction of Lorenzo’s boss, who supplied all the content and “approved” the messages. It was also undisputed that Lorenzo knew that statements regarding the value of the investment were false or misleading.
The SEC concluded that, by knowingly sending false statements from his email account, Lorenzo directly violated SEC Rule 10b–5 and related provisions of the securities law, including Sections 10(b) of the Exchange Act of 1934 and Section 17(a)(1) of the Securities Act of 1933. Rule 10b-5 makes it unlawful to: (a) employ a device, scheme, or artifice to defraud, (b) make an untrue statement of a material fact, or (c) engage in an act, practice, or course of business which does or would operate as a fraud or deceit in connection with the purchase or sale of securities.
Lorenzo appealed, contending he had no liability under Rule 10b–5 because under the Supreme Court’s ruling in Janus Capital Group, Inc. v. First Derivative Traders, liability for false statements was limited only to the “makers” of those statements as contemplated by Rule 10b–5(b), defined only as those with “ultimate authority” over the statements’ content and communication. One who simply prepares or publishes a statement on behalf of another, as Lorenzo saw his role, fell outside of the scope of primary liability under Janus. The D.C. Circuit agreed that since Lorenzo’s boss directed him to send the emails, supplied their content, and approved them for distribution, Lorenzo did not “make” the statements, and thus could not be held primarily liable for a Rule 10b-5(b) violation. But, the D.C. Circuit sustained the SEC’s finding of primary liability under Rules 10b-5(a) and (c) for knowingly disseminating statements he knew to be false, even though he did not “make” the statements himself.
The Supreme Court’s Ruling
On appeal to the Supreme Court, Lorenzo advanced two main theories, both of which the Supreme Court flatly rejected. Continue Reading