Securities litigation frequently raises the question of what conduct constitutes a primary violation of the federal securities laws, specifically, Rule 10b-5 and the various other antifraud provisions.  Must one make a false statement in order to be primarily liable?[1]  The Supreme Court held in Janus Capital Group, Inc. v. First Derivative Traders that only those who “make any untrue statement of material fact” may violate Rule 10b5-(b).[2]  Other questions include whether one who merely disseminates a false statement, without actually writing or “making” the statement, can be primarily liable.  And what are the contours of “scheme” liability under Rules 10b-5(a) and (c)?  The Supreme Court recently clarified some of these difficult questions in Lorenzo v. SEC. [3]

Background: Janus and Primary Liability of “Makers” of Untrue Statements

As mentioned, the Supreme Court held in Janus that only those who “make any untrue statement of material fact” may violate Rule 10b5-(b).[4]  The Court wrote 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]  For example, the Court noted, a speechwriter does not control the content of the speech; that content is exclusively within the control of the person who delivers it.  Under this analysis, the speechwriter is not a “maker” of the speech and therefore could not be held primarily liable under Rule 10b5-(b), even if all other elements of the violation were satisfied.[6]  Left undecided in Janus was whether one who disseminates a statement, with scienter but without control over its content, may be liable under any part of Rule 10b-5.

Cut-and-Paste Liability: Knowing Dissemination of Untrue Statements

In Lorenzo, an investment banker sent two emails to prospective debenture investors.  Lorenzo “sent the emails at the direction of his boss, who supplied the content and ‘approved’ the messages.”[7]   The emails described the company involved in the offering as having “confirmed assets” of $10 million, when “Lorenzo knew that the company had recently disclosed that its total assets were worth less than $400,000.”[8]

The Supreme Court held that even though Lorenzo was not a “maker” of the statements in the emails and therefore could not be liable under Rule 10b-5(b), his dissemination of untrue statements rendered him liable under Rules 10b-5(a) for “employ[ing] any device, scheme, or artifice to defraud,” and (c) for “engag[ing] in any act, practice, or course of business which operates or would operate as a fraud or deceit . . .”[9]  Thus, one’s dissemination of false and misleading information can constitute a fraudulent “scheme” and “course of business” in violation of subparts (a) and (c) of Rule 10b-5, even if the person is not a maker of the untrue statement disseminated.

Lorenzo essentially argued that an untrue statement is a violation only of Rule 10b-5(b), not subparts (a) or (c).  Subsection (b) specifically prohibits “untrue statements of fact.” The other subsections do not mention statements but instead forbid fraudulent “schemes” and “course[s] of business.”  Thus, he contended, untrue statements cannot supply the basis for liability under subparts (a) or (c) of Rule 10b-5.  But the Court disagreed, noting that there is substantial overlap among the three subparts, and nothing disqualifies a false statement from also being part of a scheme under Rule 10b-5(a) or fraudulent course of business under Rule 10b-5(c).

Conclusion

Only a maker of an untrue statement can be liable under Rule 10b-5(b).  But one who merely disseminates a statement, assuming she does so with the requisite state of mind, may be liable for participating in a scheme or fraudulent course of business under Rules 10b-5(a) and (c).  While it may seem obvious as a matter of business ethics, these two cases teach that one should neither make nor disseminate untrue statements of material fact.  Either scenario can lead to liability under the antifraud provisions of the federal securities laws.

[1]              For purposes of this blog post, primary liability refers to liability on the part of someone who violates the antifraud provisions; secondary liability, in contrast, refers to the liability of secondary actors such as those who aid and abet a primary violation.

[2]              564 U.S. 135, 142 (2011).

[3]              2019 U.S. LEXIS 2295 (Mar. 27, 2019).

[4]              564 U.S. 135, 142 (2011).

[5]              Id.

[6]              Id. at 143.

[7]              Id. at *8.

[8]              Id.
[9]              Id. at 11.