Recently, in Lorenzo v. Securities and Exchange Commission, No. 17-1077, the Supreme Court held that an investment banker had committed securities fraud by copying and pasting false statements prepared by his supervisor into emails to prospective investors, even though he was not on the hook for making the statements himself.
The decision focuses on Rule 10b-5 of the Securities and Exchange Commission, which contains three subsections. Subsection (b) prohibits “mak[ing] any untrue statement of a material fact.” The other two, subsections (a) and (c), prohibit “employ[ing] any device, scheme, or artifice to defraud” and “engag[ing] in any act, practice, or course of business which operates . . . as a fraud or deceit.” With respect to subsection (b), based on the Court’s decision in Janus Capital v. First Derivative Traders, 564 U.S. 135 (2011), only the “maker” of a statement—one with ultimate authority over that statement—is liable for its falsity.
Here, the Court decided that Lorenzo, though safe from liability under subsection (b) because he was only the messenger of false statements made by his boss, was liable for fraud under subsections (a) and (c) because he transmitted those false statements to prospective investors. The Court was swayed by the plain language of 10b-5 and declined to adopt a narrower interpretation, which would fail to capture this “paradigmatic example of securities fraud” and would run counter to the “philosophy of full disclosure” promoted by securities laws.
Lorenzo sends a cautionary message to those participating in securities markets: the SEC can now shoot the messenger. And further, because the Court found primary liability—not secondary liability, which only the SEC can pursue—private plaintiffs may seek to rely on fraudulent scheme liability theories to pursue a broader range of defendants in securities fraud suits.
Still, defense counsel can distinguish their cases based on their clients’ knowledge of falsity (because Lorenzo’s scienter was undisputed) and level of involvement in the scheme (because liability will typically remain inappropriate for those only “tangentially involved in dissemination”).