Supreme Court Will Revisit ‘Scheme Liability’ in Lorenzo v. SEC

Shareholder Advocate Fall 2018

October 18, 2018

By Laura H. Posner and Eric S. Berelovich

In June 2018, the Supreme Court agreed to hear Lorenzo v. SEC, a case in which the Securities and Exchange Commission (“SEC”) found Francis Lorenzo liable for emailing false and misleading statements to investors that were originally drafted by his boss. The SEC asserted claims under the scheme liability provisions of Rule 10b-5(a) and (c), as well as the false-and-misleading statements provision of Rule 10b-5(b). A divided panel of the U.S. Circuit Court of Appeals for the District of Columbia held that, under the Supreme Court’s precedent in Janus Capital Group, Inc. v. First Derivative Traders, Lorenzo did not “make” a false and misleading statement as required for liability under Rule 10b-5(b), because he did not have “ultimate authority” over the statements. The D.C. Circuit held, however, that Lorenzo was liable under the scheme liability provisions. Before his confirmation to the Supreme Court, Judge—now Justice—Kavanaugh wrote a dissenting opinion arguing Lorenzo is not liable under any provision of the federal securities laws. Lorenzo appealed the D.C. Circuit’s decision, arguing that an individual cannot be liable for false and misleading statements under the scheme liability provisions where the same individual did not “make” the statements under Rule10b-5(b). Lorenzo’s appeal raises complicated issues regarding, among other things, the line between Rule 10b-5(b) and the scheme liability provisions, the line between primary and secondary liability in SEC enforcement actions, and the scope of the scheme liability provisions.

In an amicus curiae (i.e., friend of the court) brief filed in the Supreme Court, Cohen Milstein recently argued that the Court need not decide these thorny issues. It can uphold the D.C. Circuit’s ruling simply by applying Janus to find that Lorenzo was a “maker” of the statements at issue, and thus find he is liable under Rule10b-5(b).

Janus held that “[o]ne ‘makes’ a statement by stating it.” Janus, 564 U.S. at 142. “For 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.” Id. Similar to Lorenzo’s argument here, after Janus, corporate officers who signed documents containing untrue statements attempted to avoid liability by arguing that their company or board of directors had “ultimate authority” over the statements. See, e.g., In re Smith Barney Transfer Agent Litig., 884 F. Supp. 2d 152, 163-64 (S.D.N.Y 2012). But this strategy was roundly rejected. See id.Thus, in our amicus curiae brief, we argue that the fact that Lorenzo signed the emails is decisive. Just like a corporate officer who puts her signature on a corporate statement written by others, Lorenzo adopted the emails as his own by signing them.

Read Supreme Court Will Revisit ‘Scheme Liability’ in Lorenzo v. SEC.