United States: Supreme Court Expands Scope Of Liability For Securities Fraud

On March 27, 2019, the U.S. Supreme Court issued a 6-2 decision in Lorenzo v. SEC holding that an individual who is not a "maker" of a misstatement under Janus v. First Derivative Traders, 564 U.S. 135 (2011) can nonetheless be held primarily liable under Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder for knowingly "disseminating" a misstatement made by another person. As we previewed in our Alert following oral argument in Lorenzo, the Court's decision potentially expands the ability of private plaintiffs to bring Section 10(b) claims against those who knowingly or recklessly transmit false and misleading statements that were made by someone else, and could meaningfully erode the limits on primary liability under Section 10(b) established by the Court in Janus and Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994).


SEC Rule 10(b) implements Section 10(b) of the Securities Exchange Act of 1934, and contains three subsections prohibiting fraudulent conduct in connection with the purchase or sale of securities. Rule 10b-5(a) makes it unlawful to "employ any device, scheme, or artifice to defraud"; Rule 10b-5(b) makes it unlawful to "make any untrue statement of a material fact"; and Rule 10b-5(c) prohibits engaging in "any act, practice, or course of business" that "operates . . . as a fraud or deceit." Claims asserted under Rule 10b-5(b) are often referred to as addressing "misstatement liability," while claims asserted under Rules 10b-5(a) and (c) are referenced as addressing "scheme liability."

In Janus, the Court considered the scope of Rule 10b-5(b), and ruled in a 5-4 decision that "misstatement liability" under Rule 10b-5(b) only extends to the "maker of a statement," which the Court held is "the person or entity with ultimate authority over the statement."1

In Lorenzo, the SEC charged Francis Lorenzo, the director of investment banking at a brokerage firm, with violating Rule 10b-5 by sending two false and misleading emails to potential investors.2 However, Lorenzo argued (and the Court accepted as true for purposes of the appeal) that he had merely copied and pasted the false and misleading statements from an email that his supervisor sent him. Nevertheless, an ALJ concluded that Lorenzo acted with fraudulent intent and that his conduct violated Rules 10b-5(a), (b) and (c) of the Exchange Act.3 In a split decision, the D.C. Circuit affirmed the ALJ's ruling on a "scheme liability" theory, finding that even though Lorenzo did not "make" the misstatements under Janus and thus could not be held liable under Rule 10b-5(b), he still violated Rules 10b-5(a) and (c) for his intentionally fraudulent "use" of the misstatements.4

On March 27, 2019, the Supreme Court affirmed in a 6-2 decision, ruling that "dissemination of false or misleading statements with intent to defraud" constitutes a violation of subsections (a) and (c) of Rule 10b-5, "even if the disseminator did not 'make' the statements."5 The Court reasoned that subsections (a) and (c) "capture a wide range of conduct," and that it was "obvious" that the language is "sufficiently broad" to "prohibit the dissemination of false and misleading information," which would include Lorenzo's emails. As such, the Court concluded that both subsections can cover actors who disseminate misstatements that, under Janus, are "made" by someone else. 

In so ruling, the Court rejected Lorenzo's argument that each of the subsections of Rule 10b-5 "should be read as governing different, mutually exclusive spheres of conduct," and that one can only be liable for a misstatement under provisions that "refer specifically to false statements." Rather, the Court reasoned that there is "considerable overlap among the subsections," and that Rule 10b-5 is best read as "includ[ing] both a general proscription against fraudulent . . . practices and, out of an abundance of caution, a specific proscription against nondisclosure." Because Lorenzo, who did not challenge the appeals court's finding of intent, knew that his emails contained material misstatements and sent them with the "intent to deceive, manipulate, or defraud" investors, the Court concluded that there was "nothing borderline about this case."6


While the Court's decision appeared to view Lorenzo's conduct as an example of the core, intentionally fraudulent conduct that Congress and the Commission sought to prohibit in the securities laws and regulations, the decision offered little guidance on the scope and limitations of liability for "disseminating" false and misleading statements. On one end, the Court acknowledged that Rule 10b-5 liability would "typically be inappropriate" for actors "tangentially involved in disseminating" a false statement, such as "a mailroom clerk." On the other, Lorenzo, who did not challenge the appeals court's finding of fraudulent intent, and who "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," was a "paradigmatic example" of an individual who should be held liable for securities fraud. According to the majority, going forward, "purpose, precedent, and circumstance" will clarify the scope of liability between those two extreme scenarios.7

Lorenzo also raises the question of what remains of the Court's holding in Janus that liability for a misstatement under Rule 10b-5(b) extends only to the "maker" of a statement, i.e., "the person or entity with ultimate authority over the statement."8  In response to the dissent's claim that the Lorenzo decision renders Janus a "dead letter," the majority insisted that Janus will still preclude liability where a defendant "neither makes nor disseminates false information"—for instance, where the defendant merely helps draft misstatements "issued by a different entity that controlled the statements' content."9

Finally, Lorenzo potentially blurs the line between primary liability and secondary (i.e. aiding and abetting) liability under Section 10(b). While Section 20(e) of the Exchange Act authorizes the Commission to assert claims for aiding and abetting against those who "knowingly or recklessly provid[e] substantial assistance to another person" in violation of Rule 10b-5, the Supreme Court's prior decision in Central Bank held that private actions under Rule 10b-5 cannot be premised on conceptions of secondary liability.10 It remains to be seen what, if any, distinction exists between intentional dissemination of a false and misleading statement made by someone else, which the Lorenzo decision held can be subject to primary liability under Section 10(b), and knowingly providing "substantial assistance" to the maker of a false and misleading statement, which only triggers secondary liability under Section 20(e). To the extent the two overlap, the Lorenzo decision could significantly expand the scope of potential Section 10(b) defendants in private litigation to include those who are better characterized as aiders and abettors.

While this decision expands upon the holding in Janus, we do not believe it is surprising that the Supreme Court believes that the SEC is able to bring a case against an individual that knowingly disseminates a fraudulent statement in connection with a securities transaction. In Janus, the Court found that an investment adviser that did not control the final content of statements in prospectuses distributed by a third party-client was not the "maker" of the statements, and therefore was not liable under 10b-5(b). In our view, these two cases represent the guardrails, and the battleground over the next few years will be defining just how far Lorenzo expands Rule 10b-5 liability. What amount of control over a fraudulent statement is enough, and what level of involvement in distribution is required—these are the questions that the courts will need to address. The SEC will undoubtedly continue to believe that anyone who comes close on either front should be subject to close scrutiny, but courts in civil class actions have generally shown more willingness to draw the lines that will be relevant going forward.


1 564 U.S. at 142.

2 See Case No. 17-1077, 2019 WL 1369839 (U.S. Mar. 27, 2019). 

3 Francis V. Lorenzo, SEC Release No. 9762, 111 SEC Docket 1761, 2015 WL 1927763 (Apr. 29, 2015).

4 Lorenzo v. SEC, 872 F.3d 578, 586 (D.C. Cir. 2017).

5 Lorenzo, 2019 WL 1369839, at *4.

6 Id. at *4–6.

7 Id.

8 564 U.S. at 142.

9 2019 WL 1369839, at *6.

10 See 511 U.S. 164, 177 (1994).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions