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(Article from Securities Law Alert, October 2017) 

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On September 29, 2017, the D.C. Circuit held that a broker who distributed false statements that were authored and approved by his boss could not be liable under Rule 10b-5(b) as a “maker” of those statements within the meaning of the Supreme Court’s decision in Janus Capital Group v. First Derivative Traders, 564 U.S. 135 (2011).[1] Lorenzo v. SEC, 2017 WL 4320272 (D.C. Cir. 2017) (Srinivasan, J.). However, the D.C. Circuit held that the broker could nevertheless be liable under Rules 10b-5(a) and (c) and Section 17(a)(1)[2] because those sections “do not speak in terms of an individual’s ‘making’ a false statement.”

Distributing a Statement Is Not Equivalent to “Making” a Statement for Janus Purposes

Rule 10b-5(b) renders it unlawful to “make any untrue statement of a material fact … in connection with the purchase or sale of any security.” In Janus, 564 U.S. 135, the Supreme Court held that “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.” The Court reasoned that “[w]ithout control, a person or entity can merely suggest what to say, not ‘make’ a statement in its own right.”

In the case before the D.C. Circuit, the broker claimed that “he [had] sent the email messages at the behest of his boss” who had “supplied the content of the false statements.” Lorenzo, 2017 WL 4320272. The broker contended that he had simply “copied and pasted [ ] the messages before distributing them.” The D.C. Circuit deemed it significant that the broker’s boss had “approved the messages for distribution.” The court found this demonstrated the boss’s “ultimate authority over the substance and distribution of the emails.”

For purposes of the Janus analysis, the court considered it immaterial that the broker had “put his own name and direct phone number at the end of the emails” and “sent the emails from his own account.” The court reasoned that this “sort of signature line … can often exist when one person sends an email that ‘publishes a statement on behalf of another,’ with the latter person retaining ‘ultimate authority over the statement.’” Id. (quoting Janus, 564 U.S. 135).

The D.C. Circuit therefore reversed dismissal of the SEC’s determination that the broker had violated Rule 10b-5(b).

Janus Does Not Limit the Scope of Liability Under Rules 10b-5(a) and (c) and Section 17(a)(1)

Although the D.C. Circuit found the broker did not violate Rule 10b-5(b), the court held that the broker could nevertheless face liability under Rules 10b-5(a) and (c) and Section 17(a)(1). The court explained that the phrase “‘[t]o make any … statement’ was the critical language construed in Janus.” While this language appears in Rule 10b-5(b), the court noted that Rules 10b-5(a) and (c) and Section 17(a)(1) “do not speak in terms of an individual’s ‘making’ a false statement.”

The D.C. Circuit noted that the broker, “acting with scienter,” had “produced email messages containing three false statements about a pending offering, sent the messages directly to potential investors, and encouraged them to contact him personally with any questions.” Even though the broker was not himself the “maker” of those statements, the court determined that the broker’s “own active role in producing and sending the emails constituted employing a deceptive ‘device,’ ‘act,’ or ‘artifice to defraud’ for purposes of liability under” Rules 10b-5(a) and (c) and Section 17(a)(1).

The Broker’s Conduct Did Not Amount Simply to Aiding and Abetting Securities Fraud

The D.C. Circuit rejected the broker’s contention that “if he could be found to have violated [these] provisions, the decision in Janus would effectively be rendered meaningless” because private parties could then bring suit for certain forms of aiding and abetting securities fraud.

The D.C. Circuit found the “conduct at issue in Janus materially differ[ed] from [the broker’s] actions in this case.” Lorenzo, 2017 WL 4320272. The court explained that “Janus involved an investment adviser that initially drafted false statements which an independent entity subsequently decided to disseminate to investors in its own name.” The court emphasized that “[t]he investment advisor’s role in originally devising the statements was unknown to the investors who ultimately received them.”

Here, on the other hand, the broker’s role “was not ‘undisclosed’ to investors,” and the “dissemination of the false statements to investors [did not] result only from the separate ‘decision of an independent entity.’” Id. (quoting Janus, 564 U.S. 135). The broker “transmitted misinformation directly to investors, and his involvement was transparent to them.” The D.C. Circuit held that “[t]he [Janus] Court’s concern that ‘aiders and abettors would be almost nonexistent’ if a private action under Rule 10b-5 reached ‘an undisclosed act preceding the decision of an independent entity to make a public statement’ need not obtain in the case of a person’s self-attributed communications sent directly to investors (and backed by scienter).”

Rules 10b-5(a) and (c) and Section 17(a)(1) Reach Securities Fraud Actions Involving False Statements

The D.C. Circuit also rejected the argument that “actions involving false statements must fit within Rule 10b-5(b) and cannot be brought separately under Rules 10b-5(a) or (c) (or Section 17(a)(1)).” The court explained that there was “no blanket reason  … to treat the various provisions as occupying mutually exclusive territory, such that false-statement cases must reside exclusively within the province of Rule 10b-5(b).” Rather, the court found that “the provisions’ coverage may overlap in certain respects.”

The D.C. Circuit held that “Rules 10b-5(a) and (c), as well as Sections 10(b) and 17(a)(1), may encompass certain conduct involving the dissemination of false statements even if the same conduct lies beyond the reach of Rule 10b-5(b).”

The D.C. Circuit found no “incongruity in deciding both that [the broker] was not a maker of the false statements under Rule 10b-5(b) and that he nonetheless employed a fraudulent device and engaged in a fraudulent act under Rules 10b-5(a) and (c) and Section 17(a)(1).” The court explained that its ruling “follow[ed] naturally from the terms of the provisions.” The broker “was not the ‘maker’ of the false statements because he lacked ultimate authority over them.” However, the broker nevertheless “‘engaged’ in a fraudulent ‘act’ and ‘employed’ a fraudulent ‘device’ when, with knowledge of the statements’ falsity and an intent to deceive, he sent the statements to potential investors carrying his stamp of approval as investment banking director.” The court recognized that there may be individuals “whose ministerial acts in connection with false statements would fail to qualify either as ‘making’ the statements or as ‘employing’ any fraudulent device,” but the broker here was “not such a person.”

Judge Kavanaugh, Dissenting, Opines That the Majority’s Decision Creates a Circuit Split

In a dissenting opinion, Judge Kavanaugh stated that “[t]he majority opinion creates a circuit split by holding that mere misstatements, standing alone, may constitute the basis for so-called scheme liability under the securities laws—that is, willful participation in a scheme to defraud—even if the defendant did not make the misstatements.”[3] He found that “[o]ther courts have instead concluded that scheme liability must be based on conduct that goes beyond a defendant’s role in preparing mere misstatements or omissions made by others.” In Judge Kavanaugh’s view, these courts based their decisions on “the important statutory distinction between primary liability and secondary (aiding and abetting) liability.”