On March 27, 2019, the United States Supreme Court issued its decision in Lorenzo v. Securities and Exchange Commission, holding that the dissemination of false or misleading statements with intent to defraud can fall within the scope of subsections (a) and (c) of Rule 10b-5 of the Securities and Exchange Act of 1934. The decision significantly broadens the group of persons who could face primary liability for violating federal securities laws.

Francis Lorenzo was a registered broker-dealer who sent emails to prospective investors stating that a client had $10 million in “confirmed assets” while knowing that the company’s total assets were worth less than $400,000.00. Following an administrative proceeding, the SEC found that Lorenzo had violated Section 10b-5 of the Securities and Exchange Act of 1934 and Section 17(a)(1) of the Securities Act of 1933. On appeal, the D.C. Circuit held that Lorenzo did not violate subsection (b), which finds individuals liable who “make any untrue statement of a material fact . . . in connection with the purchase or sale of any security.” The D.C. Circuit’s opinion was based on the Supreme Court’s June 2011 opinion in Janus Capital Group v. First Derivative Traders. In Janus, the Supreme Court held that a statement “maker” is “the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” Thus, because Lorenzo was not the “maker” of the content, he did not violate that subsection of the statute. Nevertheless, the D.C. Circuit did find that Lorenzo’s conduct of knowingly disseminating false information to prospective investors left him still liable under subsections (a) and (c) of Rule 10b-5.

On appeal at the Supreme Court, Lorenzo argued that he could not be liable under subsections (a) and (c) of Rule 10b-5 for his making false statements to prospective clients because only subsection (b) “refers specifically to false statements.” The majority opinion, authored by Justice Stephen Breyer, found the language of subsections (a) and (c) “sufficiently broad to include within their scope the dissemination of false or misleading information with the intent to defraud” regardless of whether that person “made” the false statements in question. According to the opinion, Lorenzo’s conduct could be defined as both having employed a “device” or “scheme” under subsection (a) and as an “act, practice, or course of business” that functioned as a “fraud or deceit” under subsection (c). Thus, the opinion stands for the proposition that an individual cannot escape primary liability by claiming that the false statements at issue were “made” by another person.

In dissent, Justice Thomas argued that the Lorenzo decision made Janus a “dead letter,” and fails to maintain a clear line between primary and secondary liability in fraudulent-misstatement cases.