The Supreme Court has now made clear that a person can be held liable for disseminating false or misleading statements with the intent to defraud, under SEC Rules 10b-5(a) and (c) even if the person did not “make” the false statement and even if the dissemination of the false or misleading statement was done at the direction of a superior.

In Lorenzo v. SEC, the SEC instituted proceedings in 2013 against Francis Lorenzo, who was the director of investment banking at Charles Vista, LLC. Waste2Energy Holdings, Inc. had hired Charles Vista to sell $15 million worth of debentures. Lorenzo sent two emails to investors regarding the offering, in which he stated that Waste2Energy had $10 million in “confirmed assets” while knowing that its total assets amounted to only $370,552. Lorenzo sent these emails “at the direction of his boss, who supplied the content and ‘approved’ the messages,” but signed the emails with his own name and invited recipients to call with questions.

The SEC charged Lorenzo with violating SEC Rule 10b-5, which makes it unlawful, in connection with the purchase or sale of any security, to: (a) “employ any device, scheme, or artifice to defraud,” (b) “make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading,” or (c) “engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.”

On appeal, the D.C. Circuit Court of Appeals found that Lorenzo could not be held liable under subsection (b) because he was not a “maker” of a misstatement, which the prior Supreme Court decision Janus Capital Group, Inc. v. First Derivative Traders defines as “the person or entity with the ultimate authority over the statement, including its content and whether and how to communicate it.” The D.C. Circuit, however, sustained the SEC’s finding that Lorenzo had violated Rule 10b-5 subsections (a) and (c), as well as §§ 10(b) of the Exchange Act and 17(a)(1) of the Securities Act.

In a 6-2 decision, the Court affirmed the D.C. Circuit, holding that a defendant who does not “make” a false or misleading statement within the meaning of Janus and thus cannot be liable under Rule 10b-5(b), may nevertheless be liable under other subsections of the Rule as well as related security law provisions, for disseminating misstatements to potential investors with the intent to defraud.

The Court rejected Lorenzo’s arguments that he could not be liable under subsections (a) and (c) because they did not reach his conduct, that “the only way to be liable for false statements is through those provisions that refer specifically to false statements,” and that liability was foreclosed under subsection (b) because he was not a “maker” under Janus. The Court held that the subsections are not mutually exclusive but rather regulate overlapping conduct. Noting that Lorenzo did not challenge the D.C. Circuit’s finding that he sent the emails with the required “intent to deceive, manipulate or defraud” the recipients, the Court found that Rule 10b-5 covered Lorenzo’s conduct, calling the use of “false representations to induce the purchase of securities . . . a paradigmatic example of securities fraud.”

The Court distinguished Janus, where it found that “subsection (b) did not (under the circumstances) cover an investment adviser who helped draft misstatements issued by a different entity that controlled the statements’ content.” It also defended its decision as maintaining an “administrable” line between primary and secondary conduct: “Those who disseminate false statements with intent to defraud are primarily liable under Rules 10b-5(a) and (c), § 10(b), and § 17(a)(1), even if they are secondarily liable under Rule 10b-5(b).”

The Lorenzo decision should serve as a warning to any person who communicates directly with investors in connection with the sale or purchase of a security, as the Court has now clarified that liability under Rule 10b-5 is not limited just to “makers” with ultimate authority. However, even under Lorenzo, the SEC still has the burden to show that a defendant knew the statement was false or misleading, and distributed the statement with the required intent to defraud.