Lorenzo v. SEC – Court Rules with SEC in Rule 10b-5 “Copy and Paste Scheme Liability” Case 15:31, April 18, 2019

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Lorenzo v. SEC – Court Rules with SEC in Rule 10b-5 “Copy and Paste Scheme Liability” Case

In Lorenzo v. SEC,[1]the Supreme Court recently held an individual who knowingly disseminates false and misleading information to prospective investors with the intent to defraud may be held liable under subsections (a) and (c) of Rule 10b-5, which are often referred to as the “scheme liability” provisions of the Rule.  Such liability applies even though the disseminator would not qualify as the “maker” of the statements at issue and thus could not be held personally liable for the statements under subsection (b) of Rule 10b-5.[2]  This decision overturns longstanding case law holding frauds solely involving material misstatements were not subject to enforcement under Rule 10b-5.

            Since the U.S. Supreme Court’s holding in Janus Capital Group, Inc. v. First Derivative Traders,[3]  only “makers” of fraudulent statements have primary liability for false statements under subsection (b) of Rule 10b-5. Under Janus, “the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. Without control, a person or entity can merely suggest what to say, not “make” a statement in its own right. One who prepares or publishes a statement on behalf of another is not its “maker.”[4] 

In 2009, Lorenzo, an investment banker, sent two emails to prospective investors describing an upcoming offering.  Although Lorenzo copied and pasted the text of the emails from content produced by his boss and sent the emails at his boss’ direction, Lorenzo conceded he knew the emails contained misleading information. 

In 2013, the SEC charged Lorenzo with violation of Rule 10b-5 of the Exchange Act and Section 17(a)(1) of the Securities Act of 1933.  The SEC found him liable as “maker” of misleading statements under Rule 10b-5(b) as well as liable for employing a deceptive “device,” an “artifice to defraud,” and/or a deceptive “act” under Rule 10b-5(a) and (c).   On appeal, Lorenzo argued he could not be held liable under Rule 10b-5 in light of the Court’s holding in Janus.  The D.C. Circuit Court agreed Lorenzo could not be held liable as a “maker” under Rule 10b-5(b); though, the D.C. Circuit affirmed the SEC’s determination that Lorenzo was liable under SEC Rule 10b-5(a) and (c), and the similarly worded Section 10(b) and Section 17(a)(1).  The Court agreed to review Lorenzo’s case to determine whether material misstatements that are not actionable under Rule 10b5(b) given the defendant did not “make” the statements can nonetheless form the basis for liability under Rule 10b-5(a) and (c).

In a 6-2 decision (Justice Kavanaugh recused himself, having dissented in the D.C. Circuit opinion) the Court held Lorenzo was not the maker of the false statements as he did not have primary liability under Rule 10b-5(b). The Court found, however, Lorenzo did have primary liability under subsections (a) and (c) of Rule 10b-5, even though Lorenzo did not “make” the statements under rule 10b-5(b) as interpreted in Janus.  The Court concluded that “[b]y sending e-mails he understood to contain material untruths, Lorenzo ‘employ[ed]’ a ‘device,’ ‘scheme,’ and ‘artifice to defraud’ within the meaning of subsection (a) of the Rule, §10(b), and §17(a)(1). By the same conduct, he ‘engage[d] in a[n] act, practice, or course of business’ that ‘operate[d] . . . as a fraud or deceit’ under subsection (c) of the Rule.”[5]

The Court contrasted this case with an example where dissemination of fraudulent statements would not give rise to liability in noting “while one can readily imagine other actors tangentially involved in dissemination—say, a mailroom clerk—for whom liability would typically be inappropriate, the petitioner in this case sent false statements directly to investors, invited them to follow up with questions, and did so in his capacity as vice president of an investment banking company.”[6]  

The decision will have likely implications for persons who knowingly disseminate false statements made by others in connection with the purchase or sale of securities. The decision will allow the SEC to pursue broader theories of scheme liability in an effort to identify those whom the SEC believes are responsible for a violation. Plaintiffs may also seek to broaden their claims as well.  However, unlike SEC enforcement, other facts will need to be present as current law prevents suits against mere aiders and abettors in private litigation.[7]

The decision is available here.  For more information, please contact our Avon office at 0070 Benchmark Road, Unit 104, Avon, Colorado 81620, Paul Wisor at 970-925-1936 x119 and

[1] 587 U. S.       _, No. 17-1077 (U.S. Mar. 27, 2019)

[2] Rule 10b-5 provides in relevant part:

“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.” 17 C.F.R. § 240.10b-5 (emphasis added).

[3] 564 U.S. 135 (2011)

[4] Id. at 142.

[5] Lorenzo, at 2.

[6] Id. at 10.

[7] Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994).