Lorenzo v. SEC, No. 17-1077

Today, the Supreme Court held 6-2 that an individual who disseminates false or misleading statements to potential investors with fraudulent intent can be found liable for violating federal securities laws, even if that individual did not “make” the statements.

Background: SEC Rule 10b-5 makes it unlawful to (a) “employ any device, scheme, or artifice to defraud,” (b) “make any untrue statement of a material fact,” or (c) “engage in any act . . . which operates . . . as a fraud or deceit” in connection with the sale of securities. In Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011), the Court had held that only an individual with “ultimate authority” over a false statement is a “maker” who can be liable under subsection (b). In this case, an investment banker e-mailed prospective investors information he knew to be false about a client’s debenture offering, but because he did so at the direction of his boss, the D.C. Circuit held that the banker was not a “maker” under Janus. But the D.C. Circuit held that the banker could still be liable for securities fraud under subsections (a) and (c) of Rule 10b-5.

Issue: Whether an individual who disseminates—but does not “make”—false or misleading statements to potential investors with fraudulent intent can be held liable for violating federal securities laws.

Court’s Holding: In an opinion authored by Justice Breyer, the Court affirmed the D.C. Circuit’s decision. The Court concluded that subsections (a) and (c) of Rule 10b-5 are “sufficiently broad to include within their scope the dissemination of false or misleading information,” so those that do not “make” the statement can still be liable under one of those subsections. The Court rejected the banker’s argument that liability for false statements should be limited to subsection (b), explaining that there is “considerable overlap” among the three subsections and that they are not mutually exclusive. Otherwise, “plainly fraudulent” behavior, such as the banker’s, might escape liability.