On March 27, 2019, the U.S. Supreme Court ruled in Lorenzo v. SEC, No. 17-1077 (U.S. Mar. 27, 2019) that a party who is not a “maker” under Securities and Exchange Commission Rule 10b-5(b) can nevertheless be found to have violated Rule 10b-5(a) and (c) and other securities laws including §17(a)(1) of the Securities Act of 1933. Rule 10b-5 makes it unlawful:
“(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact…, nor
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit…”
In 2011, prior to Lorenzo, the U.S. Supreme Court held that, with respect to Rule 10b-5(b), 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.” ( Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 142 (2011)). In Lorenzo, the director of investment banking at a broker-dealer firm sent two emails to potential investors that contained false information about a debenture offering. The emails stated that the issuer had $10 million in confirmed assets when, in fact, the assets were worth less than $400,000. Despite knowing that the statements were false, the director sent the emails at the direction of his boss, who supplied the content and approved the messages.
Under the Janus rationale, the director would not have been found to be the “maker” under Rule 10b-5(b) of the untrue statement. However, in Lorenzo, the Court held that those who do not make statements, but who disseminate false or misleading with scienter (intent to deceive or defraud) can be found primarily liable under Rule 10b-5(a) and (c) and secondarily liable under Rule 10b-5(b).
Takeaways
The Lorenzo decision greatly expands the range of individuals, under certain circumstances, who can be found liable under Rule 10b-5 and this group will likely see increased activity from the SEC and private litigants. The ruling in Janus is thus qualified and clarified, as the Circuit courts have heretofore been split on its interpretation.
The Court’s ruling indicates that not only primary actors but secondary persons such as broker-dealers, bankers and even attorneys may be subject to Rule 10b-5 liability if there is a knowing or reckless disregard of the truth of a statement – and intent to defraud is linked to that act. Perhaps even class action lawsuits could reach these secondary players.
Broker-dealer firms, in light of the new potential for Rule 10b-5 claims to be asserted, should remain diligent on the due diligence and reasonable investigation it conducts for securities on its product shelf, to at least ensure that materials disseminated as part of its selling efforts are accurate and contain no material misrepresentations.
If you have further questions, please contact Stephen Wilkes or Livia Aber directly.