The Supreme Court Misses an Opportunity in Securities Law Enforcement

In Lorenzo v. SEC, the U.S. Supreme Court continued the struggle to define the difference between primary liability and aiding and abetting liability in Rule 10b-5 and other securities fraud claims.  The difference matters because private plaintiffs do not have a claim against an aider and abettor.  After several decisions narrowing the category of primary liability, the Court tacked back toward the plaintiff’s side in Lorenzo, but the decision resolved little about the difference between primary and aiding-and-abetting liability and created new questions.

Lorenzo was the director of investment banking at a broker-dealer.  His boss prepared and approved a materially false message about a company’s convertible debenture offering and instructed Lorenzo to send the message to two possible investors, which he did.

The question was whether Lorenzo had primary liability under any of the subparts of Rule 10b-5 or section 17(a), and much depended on the application of the Court’s 2011 decision in Janus Capital Group, Inc. v. First Derivative Traders.  Janus held that a person had primary liability as the maker of a false statement when the person had ultimate authority and control over the content, timing, and method of communicating the statement.

In Lorenzo, the D.C. Circuit had concluded that the defendant did not have primary liability under Rule 10b-5(b) as a Janus maker of the false statements because his boss had ultimate authority over them.  It then found that Lorenzo was primarily liable under broader interpretations of other subparts of the Rule and section 17(a)(1).

The Supreme Court affirmed the D.C. Circuit.  Justice Breyer’s majority opinion characterized Lorenzo’s conduct as dissemination of the misstatements and concluded that dissemination of a false or misleading statement with intent to defraud can fall within subpart (a) or (c) of Rule 10b-5 and corresponding parts of section 17(a) even if the disseminator did not “make” the statement.

Unfortunately, the majority opinion was poorly and inconsistently reasoned and will perpetuate discord in the lower courts.  Its most significant defect was that it did little to accomplish the main goal of separating primary liability from aiding and abetting.  It failed to account for the statutory language requiring an aider and abettor to provide substantial assistance to a primary violator and did not discuss the difference between substantial assistance and the kind of conduct justifying primary liability.

The majority also explicitly did not overrule Janus, saying that primary liability extends to an individual who makes or disseminates false information and narrowly characterizing Lorenzo’s conduct of dissemination.  This keeps the lower courts in the dark on the application of Janus and the scope of primary liability in a wide variety of situations.  Plaintiffs and defendants continue to have too much room to litigate over which persons should have primary liability for securities fraud.

This post comes to us from Andrew Vollmer, a senior affiliated scholar with the Mercatus Center at George Mason University.  He taught securities regulation at the University of Virginia School of Law, was deputy general counsel of the Securities and Exchange Commission, and was a partner in the securities enforcement practice of Wilmer Cutler Pickering Hale and Dorr LLP. The post is based on an essay published in The Regulatory Review as part of a series on cases from the Supreme Court’s 2018 Term.  The full essay is available here.