Last month, the U.S. Supreme Court granted certiorari to hear a case where an investment banker copied and pasted misstatements from his boss into emails that, at his boss’s request, he sent to prospective debenture purchasers.  In Lorenzo v. Securities and Exchange Commission, 872 F.3d 578 (D.C. Cir. 2017), a divided United States Court of Appeals for the District of Columbia held that the investment banker was not the “maker” of the misstatements, but nevertheless affirmed the SEC’s determination that he committed securities fraud under a fraudulent scheme theory.  The Supreme Court will thus be faced with the dichotomy of whether an individual can be held liable for fraudulent scheme liability when transmitting a statement that he did not “make” (i.e., the statement was attributed to another person).


In Lorenzo, Francis Lorenzo was director of investment banking at a small registered broker dealer.  Although he knew that Waste2Energy Holdings, Inc. (“W2E”) had issued a Form 8-K reporting an impairment that essentially reduced the value of its intangible assets (previously valued at $10 million) to zero, he omitted the devaluation when soliciting two potential investors by email to invest in debentures for W2E.  Lorenzo sent those emails at the request of his boss, stated in the emails that the messages were being sent at the request of his boss, and copied and pasted the content in the emails to the potential investors from an email that he received from his boss.  However, Lorenzo signed the emails with his name and title and indicated that investors could call him with questions.

Fraudulent Statements and Fraudulent Schemes

As background, the antifraud provisions of federal securities laws prohibit two well-defined categories of misconduct in connection with the offer and sale of securities:  fraudulent statements and fraudulent schemes.

Regarding fraudulent statements, Rule 10b-5(b), promulgated under Section 10(b) of the 1934 Securities Exchange Act (“Exchange Act”), prohibits making any “untrue statement of a material fact.”  The SEC also can avail itself of Section 17(a)(2) of the Securities Act of 1933 (“Securities Act”), which establishes liability for untrue statements or omissions of a material fact.

In Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011), the Supreme Court held that only the “maker” of a fraudulent statement may be held liable under Rule 10b-5.  According to Janus,

“[f]or purposes of Rule 10b-5, 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.  Without control, a person or entity can merely suggest what to say, not ‘make’ a statement in its own right.  One who prepares or publishes a statement on behalf of another is not its maker.”

Janus, 564 U.S. at 142.

With respect to fraudulent schemes, Rule 10b-5(a) prohibits the employment of “any device, scheme, or artifice to defraud.”  Relatedly, Rule 10b-5(c) prohibits anyone from engaging in “any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.”  Claims that are brought under Rules 10b-5(a) and (c) are referred to as “scheme liability” claims.  The SEC can also avail itself of this theory under Section 17(a)(1) of the Securities Act, which prohibits the employment of any “device, scheme, or artifice to defraud.”

The Lorenzo Action

In Lorenzo, the SEC initiated administrative proceedings and upheld an administrative law judge’s determination that Lorenzo was liable for making fraudulent statements under Section 10(b) and Rule 10b-5(b), as well as fraudulent scheme liability under Rules 10b-5(a) and (c) and Section 17(a)(1).

Lorenzo appealed the SEC’s decision to the United States Court of Appeals for the District of Columbia.  The D.C. Circuit rejected the SEC’s finding of Rule 10b-5(b) liability on grounds that Lorenzo was not the “maker” of the false statements in the emails he sent to the potential investors.  However, the D.C. Circuit—in a 2-1 decision—sustained the SEC’s finding that Lorenzo violated the fraudulent scheme provisions under Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c).

Writing for the majority, Judge Srinivasan wrote that,

“[a]t least in the circumstances of this case, in which Lorenzo produced email messages containing false statements and sent them directly to potential investors expressly in his capacity as head of the Investment Banking Division—and did so with scienter—he can be found to have infringed Section 10(b), Rules 10b-5(a) and (c), and Section 17(a)(1), regardless of whether he was the ‘maker’ of the false statements for purposes of Rule 10b-5(b).”

Lorenzo, 872 F.3d at 588-589.

The majority reasoned that (1) unlike Rule 10b-5(b), Rules 10b‑5(a) and (c), along with Sections 10(b) and 17(a)(1), do not speak in terms of an individual’s “making” a false statement; (2) Lorenzo’s actions do not implicate concerns of overextending the reach of Rule 10b-5 as expressed in Janus and in other Supreme Court decisions that eliminated aiding and abetting liability in private securities fraud actions because here Lorenzo transmitted the misinformation directly to investors and Lorenzo’s involvement was transparent; and (3) Rule 10b-5(b) on the one hand, and Rules 10b-5(a) and (c) on the other, are not mutually exclusive and false statements may overlap in liability under such rules.

Judge Kavanaugh, who has been nominated by President Trump to fill the vacancy on the Supreme Court created by Justice Kennedy’s retirement, lodged a highly critical dissent.  He first criticized the administrative law proceeding and the SEC’s decision to uphold its liability findings as containing irregularities violating Lorenzo’s due process rights, and he stated the majority opinion’s deference to the SEC was unwarranted in these circumstances.  Judge Kavanaugh also cited several federal appellate decisions for the notion that “scheme liability must be based on conduct that goes beyond a defendant’s role in preparing mere misstatements or omissions made by others.”  Id. at 600.

Judge Kavanaugh further emphasized that the SEC’s pursuit of Lorenzo was part of a long-standing effort to blur the distinction between primary and secondary liability matters (which is significant for private securities lawsuits, where aiding and abetting—i.e., secondary liability—is barred).  As Judge Kavanaugh stated,

The distinction between primary and secondary liability matters, particularly for private securities lawsuits.  For decades, however, the SEC has tried to erase that distinction so as to expand the scope of primary liability under the securities laws.  For decades, the Supreme Court has pushed back hard against the SEC’s attempts to unilaterally rewrite the law. Still undeterred in the wake of that body of Supreme Court precedent, the SEC has continued to push the envelope and has tried to circumvent those Supreme Court decisions.  This case is merely the latest example.

I agree with the other courts that have rejected the SEC’s persistent efforts to end‑run the Supreme Court.  I therefore respectfully disagree with the majority opinion that Lorenzo’s role in forwarding the alleged misstatements made by Lorenzo’s boss can be the basis for scheme liability against Lorenzo.

Id. at 600-601 (internal citations omitted).


Although Lorenzo involved an SEC enforcement action and on the surface may appear to address a highly technical question, the Supreme Court’s decision may have a large impact on private securities actions.  Holding an individual liable for securities fraud for transmitting a statement he did not “make” may, in some circles, be seen as merely aiding and abetting a Rule 10b-5(b) fraudulent misstatement violation, constituting secondary liability.  However, if such conduct falls into “scheme” liability under Rules 10b-5(a) and (c), the individual would now be a primary actor and liability may be established in a private securities action.

The securities litigation bar will await the Supreme Court’s decision, which will be handed down in 2019.  If Judge Kavanaugh is confirmed by the Senate and joins the Supreme Court, he would be expected to recuse himself when the Supreme Court hears the Lorenzo case.  Accordingly, there is a possibility we could see a 4-4 split among the remaining Justices, resulting in the Supreme Court affirming the D.C. Circuit’s decision without opinion.