Source: https://www.alston.com/en/insights/publications/2018/11/supreme-court-to-revisit
Timestamp: 2019-04-20 20:43:55+00:00

Document:
Our Securities Litigation Group discusses the Lorenzo v. SEC appeal pending before the U.S. Supreme Court, which will be argued on December 3, 2018, and describes the impact the appeal could have on securities fraud claims brought by investors under Rule10b-5.
The Supreme Court’s ruling on this question impacts not only claims brought by the SEC, but also, potentially, claims for private liability under Rule 10b-5. The “maker” requirement in Janus applies with equal force to private claims brought by shareholders against a company or its officers and directors.
Pursuant to its authority under Section 10(b) of the Exchange Act, the SEC promulgated Rule 10b-5 which makes it unlawful for any person, directly or indirectly, to use any “manipulative or deceptive device” or to make a material untrue statement or omission in connection with the purchase or sale of a security.7 Essentially, the rule prohibits two types of conduct. First, Rule 10b-5(b) prohibits any person from “mak[ing] any untrue statement of a material fact or … omit[ting] to state a material fact necessary … to make the statements made, in light of the circumstances under which they were made, not misleading….”8 This is often referred to as the misstatement provision of Rule 10b-5. Second, Rule 10b-5(a) and (c) make it unlawful “[t]o 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 upon any person….”9 These two subparts are often referred to as the scheme liability provisions of the rule.
Recent changes in the Court’s composition and how the Court previously ruled in Stoneridge may provide some indication of how Lorenzo will be decided. In many ways, this case is analogous to Stoneridge. In Stoneridge, the plaintiffs tried to expand the scope of private liability for alleged misstatements by arguing that, even though a claim could not be brought under the provision of the rule that specifically addresses misstatements or omissions, those claims can nevertheless exist under the scheme liability provisions of Rule 10b-5. In Stoneridge, like in Lorenzo, claims under subpart (b) could not exist because a mandatory requirement for subpart (b) liability could not be satisfied as a matter of law with respect to the defendant at issue. In Stoneridge, it was the reliance requirement (which does not apply to the SEC) while in Lorenzo the separate “maker” requirement is what doomed subpart (b) liability.
The Court in Stoneridge refused to allow an end-run around the requirements of subpart (b) by allowing claims deficient under that subpart to proceed because the parties had purportedly engaged in a “scheme” to make a misstatement. The result should be the same in Lorenzo. Stoneridge was decided before Janus and, thus, the vendors in Stoneridge did not argue that they would not qualify as “makers” of the statements at issue, but they very well could have. The vendors had made no public statements themselves and had no authority or ultimate control over the timing, distribution, or contents of the statements on which the claims in Stoneridge were made. The Court’s conclusion in Stoneridge should foreclose the liability proposed in Lorenzo because in both instances a necessary requirement for liability based on an alleged false and misleading statement is lacking.
 Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135, 144 (2011).
 Lorenzo v. Sec. & Exch. Comm’n, 872 F.3d 578 (D.C. Cir. 2017), cert. granted sub nom. Lorenzo v. S.E.C., 138 S. Ct. 2650 (2018).
 Pub. Pension Fund Grp. v. KV Pharma. Co., 679 F.3d 972, 987 (8th Cir. 2012); WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039, 1057-58 (9th Cir. 2011); Lentell v. Merrill Lynch & Co., 396 F.3d 161, 177 (2d Cir. 2005).
 SEC v. Big Apple Consulting USA, Inc., 783 F.3d 786, 795-96 (11th Cir. 2015); SEC v. Familant, 910 F. Supp. 2d 83, 93-95 (D.D.C. 2012).
 17 C.F.R. § 240.10b-5(a) and (c).
 Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, 552 U.S. 148 (2008). Alston & Bird was counsel of record in the Stoneridge case.
 Lorenzo v. SEC, 872 F.3d 578, 581 (D.C. Cir. 2017), cert. granted (U.S. Jun. 18, 2018) (No. 17-1077).
 Brief of Petitioner at 16, Lorenzo v. SEC, No. 17-1077, 2018 WL 4035397 (U.S. August 20, 2018).
 Brief of Respondent at 15, Lorenzo v. SEC, No. 17-1077, 2018 WL 4859376 (U.S. October 5, 2018).
 See 15 U.S.C. § 78t(e). Private litigants cannot bring claims for aiding and abetting liability. Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994).
 When the Supreme Court is split, it issues a per curiam (“by the court”) opinion that does not contain the names of the Justices issuing the opinion. Per curiam opinions are typically short opinions that uphold the ruling of the lower court but do not contain the same precedential value as a decision that is signed by a majority or plurality of Justices.

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