On March 27, the U.S. Supreme Court held in Lorenzo v. U.S. Securities and Exchange Commission, that a person who disseminates false statements to investors with intent to defraud could be liable under subsections (a) and (c) of Rule 10b-5 and related securities laws, even if the disseminator does not “make” the statements for purposes of subsection (b) of the Rule, as defined by the Court’s precedent. 587 U.S. __ (2019). This decision may very well pave the way for private litigants to pursue claims against those who transmit (but did not actually “make”) misleading statements in connection with the purchase or sale of a security.

The Petitioner, Francis Lorenzo, is a former vice-president of investment banking for a small broker-dealer. In 2008, the bank was hired by Waste2Energy Holdings Inc. to sell $15 million in debentures to investors. The company claimed to have developed the technology to convert solid waste into energy. In public filings, Waste2Energy stated that it had $14 million in assets, including intangible assets (namely, its technology) worth $10 million. After an audit, Waste2Energy informed the public and Lorenzo that its intangible assets were actually worthless and that its assets amounted to less than $400,000. 

Shortly thereafter, Lorenzo sent two emails to prospective investors regarding the Waste2Energy debenture offering that described the investment as having three layers of protection, including $10 million in confirmed assets. The emails did not reveal that Waste2Energy had publicly stated that its assets were worth less than $400,000. Lorenzo testified that his boss provided him with the content of the emails and directed him to send them to two potential investors. However, Lorenzo signed the emails with his own name and title and invited the recipients to call with any questions.

In 2013, the SEC found that by sending emails he knew contained material untruths, Lorenzo violated subsections (a), (b) and (c) of Rule 10b-5, as well as §10(b) of the Exchange Act, and §17(a)(1) of the Securities Act. Lorenzo appealed the decision to the D.C. Circuit Court of Appeals, which held that Lorenzo did not “make” the false statements under subsection (b), as defined by the Supreme Court in Janus Capital Group, Inc. v. First Derivative Traders. 564 U.S. 135 (2011). In Janus, the Court said the “maker” of a false statement is one who has “ultimate authority over the statement, including its content and whether and how to communicate it.” Id. at 142. Because Lorenzo’s supervisor provided the content of the misleading emails and directed him to send them, the D.C. Circuit held that it was Lorenzo’s supervisor who made the statements for purposes of subsection (b), not Lorenzo. Nonetheless, the D.C. Circuit found that Lorenzo violated subsections (a) and (c) of Rule 10b-5, which make it unlawful to “employ any device, scheme, or artifice to defraud” or “engage in any act, practice, or course of business which operates or would operate as a fraud or deceit,” because Lorenzo knew the statements were false when he sent them to the prospective investors. Lorenzo v. SEC, 872 F.3d 578, 588-590 (D.C. Cir. 2017). 

The Supreme Court agreed. After an analysis of the plain meaning of the words in subsections (a) and (c), the Court held that Lorenzo’s misconduct fell well-within the Rule’s “expansive language.” 587 U.S. __, slip op. at 9 (2019). The dissent (written by Justice Clarence Thomas, joined by Justice Neil Gorsuch) argued that only subsection (b) regulates false statements, and that the other provisions of the Rule “are violated only when conduct other than misstatements is involved.” Id. at 7. Holding to the contrary, they argued, would render subsection (b) superfluous. 

The majority rejected this argument, reasoning that both the Court and the SEC “have long recognized considerable overlap among the subsections of the Rule and related provisions.” Id. Federal securities laws contain both general and specific proscriptions against fraudulent and deceptive practices, and the Court has found no grounds for “narrowing alternative provisions… adopted with the purpose of affording added safeguards.” Id. at 8. More importantly, the majority recognized that if they were to adopt the dissent’s reasoning, “those who disseminate false statements with the intent to cheat investors might escape liability under the Rule altogether.” Id. at 9.That was not an acceptable outcome to the Court, which reasoned that “using false representations to induce the purchase of securities would seem a paradigmatic example of securities fraud.” Id.

The Court also rejected the argument by Lorenzo that a decision holding him primarily liable for misstatements made by another would “erase or at least weaken what is otherwise a clear distinction between primary and secondary (i.e., aiding and abetting) liability.” 10. The Exchange Act contains an “aiding and abetting” provision, enforceable only by the SEC and not by private parties, that makes it unlawful to “knowingly or recklessly… provid[e] substantial assistance to another person” who violates the Rule. Id. (citing 15 U.S.C. §78t(e)). The Court was not persuaded, however, that its “decision creates a serious anomaly or otherwise weakens the distinction between primary and secondary liability,” since “it is hardly unusual for the same conduct to be a primary violation with respect to one offense and aiding and abetting with respect to another.” Id. at 11. The Court also worried that if it adopted Lorenzo’s position, the SEC would not be able to bring aiding and abetting charges against individuals that knowingly disseminate false statements made by others, if the “maker” of the statements does not violate subsection (b) of the Rule, such as in cases where he or she lacked the necessary intent. The Court reasoned, “[t]hat is not what Congress intended.” Id. at 13. 

In sum, dissemination of false or misleading statements with intent to defraud can fall within the scope of subsections (a) and (c) of Rule 10b-5, even if the disseminator did not “make” the statements pursuant to subsection (b) of the Rule. This expansion of liability for false or misleading statements may encourage more aggressive enforcement on the part of the SEC. It may also open the door for private litigants to pursue claims against those who disseminated, but did not make false statements, now that it is clear that disseminators can be primarily liable for violations of Rule 10b-5, rather than for aiding and abetting, which is only actionable by the SEC.

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