Source: https://www.lexology.com/library/detail.aspx?g=cdc89454-7795-4f97-bf98-5ded30e13f28
Timestamp: 2019-04-24 08:51:08+00:00

Document:
The Supreme Court held today that persons who do not “make” material misstatements or omissions, but who disseminate them to potential investors with fraudulent intent, can be held to have violated other provisions of the securities laws that do not depend on actually “making” the misstatements or omissions. The Court’s decision in Lorenzo v. SEC (No. 17-1077) reads the anti-fraud provisions broadly and bolsters the ability of investors and governmental authorities to pursue persons who employ fraudulent schemes or practices even if those persons themselves do not “make” any material misrepresentations or omissions.
The Lorenzo case involves the interplay between the three subsections of SEC Rule 10b-5 and the Supreme Court’s 2011 decision in Janus Capital Group, Inc. v. First Derivative Traders.
Rule 10b-5, promulgated under § 10(b) of the Securities Exchange Act of 1934, forbids any person, directly or indirectly, (a) “[t]o employ any device, scheme, or artifice to defraud,” (b) “[t]o make any untrue statement of a material fact,” or any material omission, in connection with the purchase or sale of a security, or (c) “[t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit” (emphasis added). These three subsections – so-called “scheme liability” in subsections (a) and (c), and “misstatement liability” in subsection (b) – roughly track subsections (1) through (3) of § 17(a) of the Securities Act of 1933.
An SEC administrative law judge concluded that Lorenzo had willfully violated the Exchange Act’s anti-fraud provisions by his material misrepresentations and omissions concerning the start-up’s financial condition. The Commission sustained the ALJ’s ruling that Lorenzo had violated § 17(a) and all three subsections of Rule 10b-5. Lorenzo appealed, and, in a 2-1 decision – with then-Judge Brett Kavanaugh dissenting – the Court of Appeals for the District of Columbia Circuit vacated the SEC’s sanctions and remanded the case.
The majority first agreed with Lorenzo’s objection that the finding of “misstatement liability” under Rule 10b-5(b) could not stand because Lorenzo had not actually “made” the alleged misstatements. Lorenzo had sent the emails at the request of his boss, who had “supplied the content of the false statements, which Lorenzo copied and pasted into the messages before distributing them.” The boss, not Lorenzo, thus had retained “ultimate authority” over the false statements, so Lorenzo could not be held liable as their “maker” under Rule 10b-5(b) and Janus.
The majority saw no reason to treat the three subsections of Rule 10b-5 and § 17(a) “as occupying mutually exclusive territory, such that false-statement cases must reside exclusively within the province of Rule 10b-5(b).” Nor was the majority concerned that allowing some overlap between “misstatement liability” and “scheme liability” would undermine the Janus decision or erode the distinction between primary liability and aiding-and-abetting liability, which is not permitted in private actions (although the Government can bring aiding-and-abetting claims). However, the court vacated the sanctions against Lorenzo and remanded for further consideration because the SEC had chosen the level of sanctions based in part on its erroneous conclusion that Lorenzo had “made” the allegedly false statements.
Lorenzo sought review in the Supreme Court, contending that a misstatement claim that does not satisfy Janus cannot be “repackaged and pursued as a fraudulent scheme claim.” He did not challenge the ruling on scienter. In a 6-2 decision, with Justice Kavanaugh not participating, the Supreme Court affirmed the D.C. Circuit.
The Lorenzo decision appears to expand the arsenal available to investors and governmental authorities seeking to assert claims against persons who did not actually “make” a misstatement or omission under Janus, but who nevertheless participated in its dissemination with the requisite scienter. The decision might be less consequential to the Government, which perhaps could bring aiding/abetting claims against persons in Lorenzo’s position even if the Supreme Court had come out the other way. But private investors would not have had that option.
The Court saw “nothing borderline about this case, where the relevant conduct (as found by the Commission) consists of disseminating false or misleading information to prospective investors with the intent to defraud” – and where the dissemination was done by the vice president of an investment-banking company who “invited [the investors] to follow up with questions.” But the Court noted that “one can readily imagine other actors tangentially involved in dissemination – say, a mailroom clerk – for whom liability would typically be inappropriate.” Future cases will likely explore where the line should be drawn.
The decision should put to rest any lingering question about whether Janus applies to Rule 10b-5(b) claims asserted by the SEC and the Department of Justice, not just by private plaintiffs. If a person did not “make” a statement as defined by Janus, he or she cannot be sued or prosecuted for misstatement liability under Rule 10b-5(b).

References: v. 
 v. 
 § 10
 § 17
 § 17
 § 17