On March 27, 2019, the U.S. Supreme Court, in Lorenzo v. SEC, No. 17-1077 (2019), held that dissemination of false or misleading statements with intent to defraud violates Rules 10b–5(a) and (c) under the Securities Exchange Act of 1934.  The Court reached that decision even though the defendant did not “make” the statements and so did not have primary liability for violation of Rule 10b-5(b) under the standard in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011).  Because private litigants cannot bring secondary claims (aiding and abetting), after the Janus decision, plaintiffs in securities class actions started emphasizing “fraudulent scheme” claims under sections (a) and (c) of Rule 10b-5, ultimately resulting in a split in the circuit courts as to whether primary liability in such circumstances was appropriate under the rule.

Rule 10b-5 makes it unlawful, in connection with the sale of any security, to

(a) employ any device, scheme, or artifice to defraud,

(b) make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the 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.

Background of Lorenzo Case

Francis Lorenzo was an investment banking director at a brokerage firm.  At the request of the brokerage firm’s CEO, Lorenzo sent emails to prospective investors that contained materially misleading information about the value and financial condition of a company conducting an offering.   The information was provided to Lorenzo by his boss and Lorenzo simply copied and pasted it into his emails to investors, but note that Lorenzo knew the information he copied contained material misstatements. The SEC brought an enforcement action against Lorenzo and an SEC Administrative Law Judge found that Lorenzo’s conduct violated all three provisions of Rule 10b-5. A divided panel of the D.C. Circuit reversed the SEC in part, ruling that Lorenzo’s conduct was insufficient to find that Lorenzo was the “maker” of the statements under Janus and Rule 10b-5(b).  However, the D.C. Circuit affirmed the SEC’s decision to impose liability on Lorenzo under Rules 10b-5(a) and (c) noting that even though Lorenzo was not the “maker” of the misstatements, he “conveyed materially false information to prospective investors about a pending securities offering,” defrauding the investors.  At the Supreme Court, Lorenzo’s counsel argued against liability because misstatements by Lorenzo’s boss were the sole act of fraud, Lorenzo did not make the statements, and the mere act of sending an email was not itself deceptive or an act of fraud.  The SEC argued that Janus was decided exclusively within the context of fraudulent misstatement allegations under Rule 10b-5(b) and that the Janus “maker” standard was not relevant to an interpretation of Rules 10b-5(a) or (c).

The Supreme Court rejected Lorenzo’s interpretation of Rule 10b-5, holding that Rules 10b-5(a), (b) and (c) operate together to broadly prohibit fraudulent conduct, and Lorenzo’s conduct in this case could certainly fall within Rules 10b-5(a) and (c). The court stated that by sending e-mails he understood to contain material un-truths, Lorenzo “employ[ed]” a “device,” “scheme,” and “artifice to de-fraud” within the meaning of Rule 10b-5(a) and by the same conduct, he “engage[d] in a[n] act, practice, or course of business” that “operate[d] . . . as a fraud or deceit” under subsection (c).  Based on the D.C. Circuit’s opinion, it was undisputed that Lorenzo sent the e-mails with “intent to deceive, manipulate, or defraud” the recipients.


The Lorenzo decision appears to expand the ability to assert claims against persons who did not actually “make” a misstatement or omission under Janus, but note that the requisite intent (scienter) to defraud must still be proven.  The Supreme Court majority saw “nothing borderline” in the conduct in the Lorenzo case, but conceded that liability for other persons “tangentially” involved in a dissemination, such as a mailroom clerk, would be inappropriate. Exactly where the line should be drawn between a director of investment banking and a mailroom clerk is unknown, but those persons who participate in distributions of information about securities offerings will need to pay closer attention to the quality of such information, even if they did not “make” it.

Good disclosure is always the best defense.  Thorough diligence of an issuer’s disclosure to ensure it is accurate and complete and then only conveying information to investors that is consistent with that disclosure should preclude liability in almost every instance.