Last month, the Supreme Court granted a writ of certiorari in Lorenzo v. SEC,[1] a case where Francis Lorenzo, a registered representative of a broker-dealer, allegedly emailed false and misleading statements to investors that were originally drafted by his boss.  After administrative and Commission findings of liability, a divided panel of the D.C. Circuit determined that, while Lorenzo was not the “maker” of the statements, he did use them to deceive investors, and thereby violated the so-called scheme liability provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder.  As described in the petitioner’s motion seeking certiorari, the case presents the question whether, under the Court’s 2011 Janus Capital Group, Inc. v. First Derivative Traders decision,[2] the scheme liability provisions of Rule 10b-5(a) and (c) may be used to find liability in connection with false or misleading statements by persons who are not themselves the maker of those statements and, thus, not liable under the false-and-misleading statements provision of Rule 10b-5(b).[3]  The answer to this question could have implications for the Securities and Exchange Commission’s (“SEC” or “Commission”) Enforcement Division as well as potentially significant implications for private securities litigants who principally rely on Section 10(b) to bring private causes of action sounding in fraud. 

In particular, the Court’s decision may well bring more clarity to the case law that has developed after the Supreme Court held in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A that private plaintiffs may not maintain aiding-and-abetting suits brought under Section 10(b) and Rule 10b-5.[4]  Since that decision, a number of courts have taken the position that each clause of Rule 10b-5 is meant to capture different types of conduct, and therefore cases based primarily on misstatements or omissions that give rise to liability under Rule 10b-5(b) cannot also be charged under the scheme liability provisions of (a) and (c) of that same Rule.  Because Lorenzo allegedly involved the use of a misleading statement by a non-maker under Janus that nevertheless, according to the D.C. Circuit majority, amounted to a scheme, it provides the Court a vehicle, should it wish, to impose restrictions on scheme liability cases and thus limit claims available to private plaintiffs where the fact pattern involves the use of a material misrepresentation by a non-maker, but no additional deceptive conduct.

The Court’s ultimate approach on this appeal may turn on whether President Trump’s nominee to fill the Kennedy vacancy on the Court, Judge Brett Kavanaugh, is confirmed and, if so, whether he participates in the appeal.  Judge Kavanaugh penned a strong dissent from portions of the underlying D.C. Circuit decision.  If he is confirmed and recuses himself on the basis of having heard the case below, any attempt to limit the ability of the SEC or private plaintiffs to bring scheme liability claims could meet resistance from the Court’s four more liberal Justices, each of whom dissented from Janus, potentially resulting in a 4-4 split that would in effect affirm the D.C. Circuit’s decision below.  In any event, it is worth pausing to consider the issues this appeal presents because the grant of cert. itself suggests that the Court may be looking for a vehicle to more clearly demarcate the line between misstatements and scheme liability cases, and possibly even to rein in the scope of Rule 10b-5(b) cases more broadly, either here or in a future appeal.

Primary vs. Secondary Liability

The significance of this case rests on the difference between primary (misstatements and/or scheme) liability and secondary (aiding-and-abetting) liability for securities law violations under Rule 10b-5 and its three clauses.  Following Central Bank’s foreclosure of aiding-and-abetting liability, private litigation has focused on determining what constitutes either a false or misleading statement, actionable under Rule 10b-5(b), or otherwise deceptive conduct, which may or may not include a material misrepresentation, actionable under Rules 10b-5(a) and (c), which broadly prohibit deceptive devices, schemes or other similar acts.  This case highlights two questions relevant to that determination.  First, who is the “maker” of the statement and thus potentially liable under Section 10b-5(b)? And, second, is the mere use of a false or misleading statement by someone who is not himself the “maker” sufficiently deceptive on its own to constitute scheme liability under Rules 10b-5(a) and (c), or is such an attempt to turn mere use into a scheme an end-run around 10b-5(b)’s primary liability requirements?

Addressing the first question—who “makes” a statement under 10b-5(b)—the Supreme Court held in Janus 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.”[5]  On that question, the Court held that, “in the ordinary case, attribution within a statement or implicit from surrounding circumstances is strong evidence that a statement was made by—and only by—the party to whom it is attributed.”[6]  The second question—what conduct is deceptive under 10b-5(a) and (c)—has elicited somewhat mixed approaches from the federal bench.  A number of courts have taken the position that each clause of Rule 10b-5 is intended to capture different types of conduct.  Cases primarily based on misstatements or omissions that would give rise to liability under Rule 10b-5(b) therefore cannot also be charged as scheme liability under Rule 10b-5(a) or (c) absent additional deceptive conduct separate and apart from the use of the misstatement itself.[7]  The Commission has (unsurprisingly) taken the more expansive view that Rules 10b-5(a) and (c) can be used in appropriate circumstances to reach persons who disseminate a false or misleading statement made by another.[8]


The D.C. Circuit took a somewhat surprising route in deciding a case implicating both of these questions.  Lorenzo was the director of investment banking at a registered broker-dealer, Charles Vista, LLC.[9]  At the direction of his boss, Lorenzo sent an email to prospective investors lauding a number of purported “layers of protection” against default—including $10 million in assets—of a startup company looking to issue debentures.[10]  Lorenzo sent the email from his account and above his signature block, the email came from him as Charles Vista’s head of investment banking, and the email finished with an invitation to call him if investors had questions.[11]  The email also included a note that it was sent at the request of his boss,[12] and Lorenzo later testified that he copied and pasted the content from his boss.[13]  After a hearing, an SEC administrative law judge found that Lorenzo understood when he sent the email that none of these protections existed, that the company had virtually no assets to its name, and, as a result, that Lorenzo violated all three clauses of Rule 10b-5.[14]  The Commission upheld the ALJ’s decision.[15]

On appeal from the Commission decision, a 2-1 panel majority of the D.C. Circuit agreed that the statements in the email were false or misleading and that Lorenzo acted with the requisite scienter in sending it.[16]  However, the court also found that, under Janus, Lorenzo was not the maker of the false or misleading statements because he sent the email “at the behest of his boss” who “supplied the content” and “approved” the email.[17]  As a result, the court held that Lorenzo did not violate Rule 10b-5(b).[18]  Interestingly, the court did not address the issue of attribution, instead focusing on the notion that Lorenzo’s boss was the one with ultimate authority over when and how to communicate the email.

The court further held, however, that Lorenzo violated 10b-5(a) and (c) by sending the email.[19]  In other words, Lorenzo’s use of the statement to deceive was sufficient to invoke the scheme liability provisions of Rule 10b-5(a) and (c), even though Lorenzo was not himself the “maker” of the statement under Janus and even though the court identified no additional deceptive conduct apart from the use of the misstatement itself.  In reaching that conclusion, the court rejected Lorenzo’s argument that, at most, his conduct amounted to aiding-and-abetting and not primary liability.[20] Instead, the court found that, because Lorenzo interacted directly with investors in supplying the false emails, he was primarily liable.  The court also found that claims involving false statements did not need to sit exclusively within 10b-5(b): “Rules 10b-5(a) and (c), as well as Sections 10(b) 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).”[21]

In dissent, Judge Kavanaugh characterized the Commission’s tactics as decades of trying to “circumvent” Supreme Court decisions designed to distinguish primary and secondary liability.[22]  He criticized the shifting interpretations of the record at each level of the proceeding, and believed the administrative law judge’s factual findings did not support the required scienter.[23]  He also indicated that he would have ruled, in accordance with the Second, Eighth and Ninth Circuits, that “scheme liability must be based on conduct that goes beyond a defendant’s role in preparing mere misstatements or omissions made by others.”[24]

What’s Next?

Lorenzo has asked the Supreme Court to answer the question whether a misstatement claim “that does not meet the elements set forth in Janus can be repackaged and pursued as a fraudulent scheme claim.”[25]  A number of possible outcomes present themselves.

Prior to Judge Kavanaugh’s nomination to the Court, the most likely outcome in view of the Court’s recent securities law decisions is that a majority would subscribe to his dissent and use Lorenzo to clarify what type of conduct constitutes deception under scheme liability by finding that allegations of conduct involving use of a misleading statement alone can only give rise potentially to primary liability under Rule 10b-5(b) and not the scheme liability provisions of Rule 10b-5(a) and (c).  This approach, which would accord with the majority of federal courts to have considered the issue, seems the most likely given the Court’s past concerns—reflected in Central Bank, Janus, and Stoneridge Investment Partners v. Scientific-Atlanta[26]—with clearly demarcating the line between primary and secondary liability.  While such an approach would work to cabin private actions, it would have less of an impact on SEC enforcement actions in this area given the Commission’s ability to bring aiding-and-abetting charges against non-makers who use misstatements to deceive, as well as the Commission’s ability to use Section 17 of the Securities Act—to which most courts have said Janus does not apply[27]—to capture fraud in the offer or sale of securities “by means of any untrue statement of a material fact.”[28]

Should Judge Kavanaugh be confirmed and recuse himself, on the other hand, the Supreme Court may well reach a 4-4 stalemate on the scope of scheme liability, which would result in an affirmance of the D.C. Circuit’s majority decision.  This result would leave in place—at least for the moment—circuit court precedent that takes an expansive view of the scope of 10b-5 liability, allowing the SEC and private plaintiffs to bring primary liability claims involving misrepresentations as scheme liability claims, even without additional deceptive conduct, against someone who is not the statement’s “maker.”

One thing to keep an eye out for is whether the Court, either in this appeal or perhaps a future appeal, further restricts primary liability claims under Rule 10b-5(b) by endorsing the D.C. Circuit’s holding that only the person or entity with ultimate authority over a statement can be a “maker” for Janus purposes, without regard to explicit attribution within a statement.  This reading, while not necessary to answer the question presented in Lorenzo, could, if followed by the lower courts, dramatically curtail the reach of Rule 10b-5 in both private and SEC actions, particularly when combined with a reversal of the D.C. Circuit on the scope of scheme liability.  For example, this interpretation could affect whether investment banks can be held liable for statements in issuers’ offering documents.  While such documents state that they are the words of, and only of, the issuer, underwriters are often credited on the cover of such documents, which some courts have held can furnish the necessary attribution under Janus.[29]  However, under the D.C. Circuit’s reading, such attribution is likely insufficient to reflect the necessary ultimate authority required by Janus.[30]

In sum, the Court appears likely to endorse the more restrictive view of Rule 10b-5’s scheme liability provisions either in this case or, were a recusal to result in a 4-4 split, a future case on similar facts, to the detriment of private plaintiffs.  A majority conservative Court seems unlikely to endorse the Commission’s and the minority of courts’ views that a misstatement alone can be the basis for a scheme liability primary violation.  And, in the likely worst outcome for the SEC and private litigants, the Court ultimately could not only hem in scheme liability claims but also take the additional step of expressly endorsing the D.C. Circuit’s seeming cabining of Janus’ holding on maker liability.  This latter outcome could significantly complicate both SEC enforcement actions and private lawsuits against underwriters and others similarly situated.  Additional clues to the Court’s leanings should present themselves at oral argument in the fall.

[1] 872 F.3d 578 (D.C. Cir. 2017), cert. granted, 2018 WL 646998 (U.S. Jun. 18, 2018) (No. 17-1077).

[2] 564 U.S. 135 (2011).

[3] Petition for Writ of Certiorari, Lorezno, __U.S.­__ (No. 17-1077).

[4] 511 U.S. 164 (1994).

[5] Janus, 564 U.S. at 142.

[6] Id. at 142-43.

[7] See, e.g., Pub. Pension Fund Grp. v. KV Pharm. Co., 679 F.3d 972, 987 (8th Cir. 2012) (“[A] scheme liability claim must be based on conduct beyond misrepresentations or omissions actionable under Rule 10b-5(b)”); WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039, 1057 (9th Cir. 2011) (“[A] defendant may only be liable as part of a fraudulent scheme based upon misrepresentations and omissions under Rule 10b-5(a) or (c) when the scheme also encompasses conduct beyond those misrepresentations or omissions.”); Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 177 (2d Cir. 2005) (“We hold that where the sole basis for such claims is alleged misrepresentations or omissions, plaintiffs have not made out a market manipulation claim under Rule 10b–5(a) and (c), and remain subject to the heightened pleading requirements of the PSLRA.”).

[8] See, e.g., In the Matter of Francis V. Lorenzo, Exchange Act Rel. No. 74836, 2015 WL 1927763, at *11 (Apr. 29, 2015), vacated in part by Lorenzo v. SEC, 872 F.3d 578 (D.C. Cir. 2017).

[9] Lorenzo, 872 F.3d at 581.

[10] Id. at 581-82.

[11] Id.

[12] Id.

[13] Id. at 587.

[14] Id. at 582-3.

[15] In the Matter of Francis V. Lorenzo, Exchange Act Rel. No. 74836, 2015 WL 1927763 (Apr. 29, 2015), vacated in part by Lorenzo v. SEC, 872 F.3d 578 (D.C. Cir. 2017).

[16] Lorenzo, 872 F.3d at 580.

[17] Id. at 587-90.

[18] Id. at 588.

[19] Id. at 589-90.

[20] The SEC did not charge Lorenzo with aiding and abetting.  One possible reason for that decision is that the conduct at issue pre-dated the Dodd-Frank Wall Street Reform and Consumer Protection Act, which extended the Commission’s aiding-and-abetting authority to Securities Act Section 17(a) and lowered the scienter threshold from knowing to reckless conduct.  As a result, the Commission would not have been able to charge Lorenzo with aiding and abetting under Section 17(a) and would have needed to demonstrate that he acted knowingly, as opposed to merely recklessly, in aiding and abetting his boss’ 10b-5 violations.

[21] Lorenzo, 872 F.3d at 592.

[22] Id. at 601.  (Kavanaugh, J., dissenting).

[23] Id. at 599-600.  (Kavanaugh, J., dissenting).

[24] Id. at 600.  (Kavanaugh, J., dissenting) (internal citations omitted).

[25] Petition for Writ of Certiorari, Lorenzo, __U.S.­__ (No. 17-1077) at i.

[26] 552 U.S. 148 (2008) (holding that claims against a counterparty that did not interact with investors alleging that sham contracts allowed the issuer to make false and misleading statements constituted at most claims for secondary liability).

[27] See, e.g., In re The Reserve Fund Securities and Derivative Litigation, 09 MD 2011 (PGG), 09 Civ. 4346 (PGG), 2012 WL 12356743, at *9 (Oct. 8, 2012) (“Courts have generally not applied Janus to Section 17(a) causes of action, noting the Janus court’s focus on the word ‘make’ in Rule 10b-5—language that is not part of Section 17(a)”) (collecting cases).

[28] 15 U.S.C. § 77q(a)(2) (emphasis supplied); see, e.g., SEC v. Tambone, 550 F.3d 106, 127-28 (1st Cir. 2008), rehearing en banc granted, opinion withdrawn, 573 F.3d 54 (2009), reinstated in relevant part, 597 F.3d 436, 450 (2010).

[29] See, e.g., In re Puda Coal Sec. Litig., 30 F. Supp. 3d 261, 266-67 (S.D.N.Y. 2014) (collecting cases).

[30] Courts have also held that underwriters can exercise authority over the statements in an offering document pursuant to the terms of their underwriting agreements, which, in some cases, vest the underwriter with the authority to approve (as opposed to merely review or not object to) disclosures.  See id.  It is unclear whether what at most would be a blocking right of the underwriters would be considered sufficient to constitute ultimate authority under the D.C. Circuit’s reading of Janus.