On March 27, 2019, the U.S. Supreme Court issued a 6-2 decision in Lorenzo v. SEC, holding that a person who did not “make” a false statement may nonetheless be held primarily liable under Section 10(b) of the Securities Exchange Act of 1934 (and Rule 10b-5 promulgated thereunder) for knowingly passing-on misstatement(s) made by someone else. While issued from an SEC enforcement action, the Lorenzo opinion has the potential to change the landscape of private securities litigation. Indeed, it may even permit private litigants to assert claims for “primary” violations of Rule 10b-5 that would have otherwise been viewed as impermissible attempts to impose “secondary” liability—a practice prohibited by the U.S. Supreme Court in Central Bank of Denver, N. A. v. First Interstate Bank of Denver.

The three sub-parts of SEC Rule 10b-5 prohibit a party from employing fraudulent schemes, statements, or practices in connection with the purchase or sale of a security. More specifically, Rule 10b-5: (a) prohibits the use of “any device, scheme, or artifice to defraud”; (b) prohibits a party from “making” an untrue statement of material fact; and (c) prohibits the use of “any act, practice, or course of business” that “operates . . . as a fraud or deceit.” See 17 C.F.R. § 240.10b-5.

The U.S. Supreme Court established the scope of primary lability under Rule 10b-5(b) in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011). There, the Court limited liability for a misrepresentation to its “Maker”—the “person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” While this holding provided invaluable guidance to litigants seeking to apply Rule 10b-5(b), it left lingering questions regarding the proper application of Rules 10b-5(a) and (c). For example, could a party be held primarily liable for passing-on a misleading email that was written by his supervisor?

In Lorenzo v. SEC, 587 US ____ (2019), the U.S. Supreme Court answered this question with a resounding “yes.” There, Mr. Lorenzo—a vice president at an investment banking firm— did not “make” misleading statements as contemplated by the Court in Janus. Instead, he knowingly circulated emails that contained misleading information written by his supervisor. Thus, Mr. Lorenzo could not be held primarily liable for violations of Rule 10b-5(b).

In the 6-2 opinion authored by Justice Breyer, however, the U.S. Supreme Court held that Mr. Lorenzo could be held primarily liable for employing a scheme or practice intended to defraud potential investors. In so holding, the Court noted that the use of broad terms in Rules 10b-5(a) and (c) was indicative the drafters’ intent that the Rules “capture a wide range of conduct.” Thus, “[t]hose who disseminate false statements with intent to defraud are primarily liable under Rules 10b–5(a) and (c)[,] even if they are [only] secondarily liable under Rule10b–5(b).”

While issued from an SEC enforcement action, the ramifications of the Lorenzo opinion may be greater-felt in private securities litigation. Indeed, the Supreme Court’s edict that Rules 10b–5(a) and (c) be broadly applied—even against non- “makers”—may provide opportunistic litigants an avenue to assert claims against ancillary actors that would have otherwise been relegated to a “secondary” role under Janus. The importance of this distinction is magnified in civil litigation by the U.S. Supreme Court’s opinion in Central Bank of Denver, N. A., 511 U.S. 164 (1994)—which noted that there is no private right of action for secondary liability under Rule 10b-5.