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(Article from Securities Law Alert, May/June 2018) 

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On June 18, 2018, the Supreme Court granted certiorari to consider whether a misstatement claim that does not satisfy the standard set forth in Janus Capital Group v. First Derivative Traders, 564 U.S. 135 (2011) for Rule 10b-5(b) claims can serve as the basis for a fraudulent scheme claim under Rules 10b-5(a) and (c), as well as Sections 17(a)(1) and (3) of the Securities Act of 1933.[1] Lorenzo v. SEC, No. 17-1077.

Rule 10b-5(b) renders it unlawful “[t]o make” any material misstatement or omission “in connection with the purchase or sale of any security.”[2] The Janus Court limited the scope of liability under Rule 10b-5(b) by holding 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 made it clear that “[o]ne who prepares or publishes a statement on behalf of another is not its maker” and therefore cannot be subject to liability for that statement under Rule 10b-5(b).

In Lorenzo v. SEC, 872 F.3d 578 (D.C. Cir. 2017), the District of Columbia Circuit relied on Janus to hold that a broker who distributed false statements that were authored and approved by his boss could not be liable under Rule 10b-5(b). 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” and “approved the messages for distribution.” The D.C. Circuit found that the broker’s boss, rather than the broker, had “ultimate authority over the substance and distribution of the emails” within the meaning of Janus.

Although the D.C. Circuit found no basis for holding the broker liable under Rule 10b-5(b), the D.C. Circuit found the broker liable under Rules 10b-5(a) and (c) and Section 17(a)(1) of the Securities Act of 1933. 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 D.C. Circuit found 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).” The court held that “Rules 10b-5(a) and (c), as well as Sections 10(b) [of the Securities Exchange Act of 1934] and 17(a)(1) [of the Securities Act], may encompass certain conduct involving the dissemination of false statements even if the same conduct lies beyond the reach of Rule 10b-5(b).”

Like the D.C. Circuit, the Eleventh Circuit has determined that “even a person . . . who is not the ‘maker’ of an untrue statement of a material fact, nonetheless could be liable as a primary violator of Rule 10b-5(a) and (c).” SEC v. Big Apple Consulting USA, 783 F.3d 786 (11th Cir. 2015). However, the Second, Eighth and Ninth Circuits have held that misstatements and omissions alone cannot give rise to a claim for scheme liability under Rules 10b-5(a) and (c).[3]

Citing this circuit split, the broker-defendant in Lorenzo petitioned the Court for certiorari to address the question of “whether a misstatement claim that does not meet the elements set forth in Janus can be repackaged and pursued as a fraudulent scheme claim.” Petition for a Writ of Certiorari, Lorenzo v. SEC, 2018 WL 656234 (Jan. 26, 2018). The broker-defendant argued that the D.C. Circuit’s decision will enable private plaintiffs to “sidestep” the Janus standard by bringing misstatement claims as fraudulent scheme claims under Rules 10b-5(a) and (c). The broker-defendant contended that “allow[ing] a private plaintiff to use a fraudulent scheme theory to pursue primary liability against a defendant who did not make a misstatement would erase the distinction between primary and secondary liability.”

The SEC responded that “nothing in the text, structure, history or purpose of the relevant provisions suggests that the references to ‘statement[s]’ in Section 17(a)(2) and Rule 10b-5(b) mean that a fraud claim based on false claims can proceed only under those two provisions.” Brief for the Respondent in Opposition, Lorenzo v. SEC, 2018 WL 2063084 (May 2, 2018). The SEC argued that a person may be liable for “disseminating a false statement” under the scheme liability provisions of Rule 10b-5 and Section 17(a) regardless of whether that person can face liability for making that same statement.

The Court will hear the Lorenzo case in October Term 2018. A date for oral argument has not yet been set.