On March 27, 2019, the U.S. Supreme Court issued its much-anticipated decision in Lorenzo v. SEC, No. 17-1077 ("Lorenzo"), holding that an individual who knowingly disseminates false written statements can be liable under the anti-fraud provisions of the securities laws even if someone else prepared the statements and directed that they be distributed. The Court firmly rejected the argument that disseminating false statements cannot give rise to primary liability under the "fraudulent scheme" prohibitions of the securities laws.

As discussed in our post of December 10, 2019, investment banker Francis Lorenzo sent two emails to prospective investors regarding a debt offering while knowing that the emails contained materially false information. The false statements were written by Lorenzo's boss, who directed that they be sent to potential investors. Lorenzo sent the emails over his own name, indicating that he was the firm's "Vice President - Investment Banking" and inviting interested investors to contact him. The SEC and the D.C. Circuit found that Lorenzo intended to deceive investors, a finding he did not dispute before the Supreme Court.

Rule 10b-5, promulgated under the Securities Exchange Act of 1934, makes it unlawful in the context of a securities transaction to make a materially false statement or engage in a fraudulent scheme. The SEC determined that Lorenzo had violated both the "false statement" and "fraudulent scheme" prohibitions (as well as related provisions at Section 10(b) of the Exchange Act and Section 17(a)(1) of the Securities Act). On appeal, the DC Circuit found that Lorenzo was not subject to false statement liability under Rule 10b-5(b) because he was not the "maker" of the statements pursuant to Janus Capital Group Inc. v. First Derivative Traders, 54 U.S. 135 (2011). But the DC Circuit upheld the SEC's determination that Lorenzo engaged in a fraudulent scheme in violation of subsections (a) and (c) of Rule 10b-5 (and the related statutory provisions). Lorenzo v. Securities and Exchange Commission, 872 F.3d 578, 580 (2017).

The primary issue before the Supreme Court was whether disseminating false statements prepared by someone else can constitute a fraudulent scheme. Lorenzo argued that the subsections of Rule 10b-5 apply to two distinct and mutually-exclusive types of conduct, i.e., that subsection (b) covers only statements, while subsections (a) and (c) cover only conduct other than statements. Based on this reasoning, Lorenzo claimed that his dissemination of false statements could not have been a fraudulent scheme in violation of subsections (a) and (c). Further, because he was not the "maker" of the false statements under Janus, Lorenzo argued that he was not liable under any provision relied on by the SEC.

Justice Kavanaugh was on the DC Circuit when it addressed the Lorenzo matter and he did not participate in this matter at the Supreme Court level. Thus, it was possible that the Court might divide evenly, four to four, and be unable to reach a decision. However, six justices joined in affirming Lorenzo's "fraudulent scheme" liability, strongly endorsing the SEC's position regarding the broad reach of Rule 10b-5.

The majority opinion, written by Justice Breyer, concluded that the "statement" and "scheme" subsections of Rule 10b-5 are not mutually exclusive and "dissemination of false or misleading statements with intent to defraud can fall with the scope of subsections (a) and (c) of Rule 10b-5." Lorenzo, slip op. at 5. The Court held that even if Lorenzo was not the maker of the false statements, disseminating them violated the scheme prohibitions in subsections (a) and (c). (The Court also affirmed the DC Circuit's determination that Lorenzo violated Section 10(b) of the Exchange Act and Section 17(a)(1) of the Securities Act.)

The Lorenzo decision is important on several levels. First, with this ruling the Supreme Court put to rest years of effort by the securities defense bar to fragment the Rule 10b-5 prohibitions into separate, mutually-exclusive compartments, each covering only a narrow range of misconduct. The majority opinion emphasized that "this Court and the Commission have long recognized considerable overlap among the subsections of the Rule," id. at 7, and that "each succeeding prohibition" of Rule 10b-5 was "meant to cover additional kinds of illegalities -- not to narrow the reach of prior sections," id. at 8 (quoting United States v. Naftalin, 441 U.S. 768, 774 (1979). Thus, Lorenzo establishes that an individual involved in the release of false statements cannot escape primary liability under Rule 10b-5 simply because he did not have ultimate authority over those statements.

Second, Lorenzo confirms that the SEC's unique authority to pursue "aiding and abetting" claims (a type of secondary liability) cannot be used as a shield against primary liability. Lorenzo argued that if he could only be secondarily liable for violating the Rule 10b-5(b) prohibition against false statements, it would be inconsistent to find him primarily liable for violating other provisions of Rule 10b-5. The Court quickly rejected that argument, noting that "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." Lorenzo, slip op. at 11. The Court also gave little weight to Lorenzo's plea that he was only a "peripheral" player in the fraudulent scheme and consequently should not be subject to primary liability under any provision. The majority emphasized that, to the contrary, "even a bit participant" may be as a primary violator under Rule 10b-5. Id. at 12.

Third, although Lorenzo involved an SEC enforcement action, the decision may be of equal importance to private plaintiffs. Because private parties cannot assert aiding and abetting claims, the Janus decision severely limited the field of potential company-affiliated defendants in private litigation based on false statements. By recognizing that dissemination of false statements can give rise to fraudulent scheme violations, the Court opened the door a bit wider to investor claims against, inter alia, corporate officers and employees involved in disseminating company press releases, SEC filings, or other statements known to contain materially false information.

Finally, Lorenzo represents a sharp departure from other recent Supreme Court decisions involving the SEC, in which the Court seemed to be concerned chiefly with limiting the scope of defendants' liability. During the last ten years the Court has restricted the SEC's enforcement options by, inter alia, (i) limiting false statement liability to the individual with ultimate responsibility for the statement (Janus, 2011), (ii) limiting the SEC's ability to impose monetary penalties for older violations (Gabelli, 2013), (iii) barring courts from requiring violators to disgorge illicit gains obtained from older violations (Kokesh, 2017), and (iv) upending the SEC's administrative law tribunals (Lucia, 2018). In contrast, in Lorenzo the majority was clearly troubled by the fact that accepting Lorenzo's arguments would put those who disseminate false statements (but did not prepare those statements) beyond the reach of fundamental anti-fraud provisions.

In this instance, six justices were unwilling to accept further erosion of Rule 10b-5's investor protections. Perhaps the most intriguing question generated by Lorenzo is whether, and to what extent, the majority's sensitivity to the investor-protection purposes behind Rule 10b-5 will carry over to future rulings. There is little reason to hope that the two dissenters in Lorenzo (Justices Thomas and Gorsuch) will show increased empathy for defrauded investors. But those interested in meaningful investor protection might take heart from the fact that Chief Justice Roberts and Justice Alito joined in the majority opinion in Lorenzo.

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