United States: Supreme Court Hears Argument On "Scheme Liability" Under Section 10(b) And Rule 10b-5

On December 3, 2018, the Supreme Court heard argument on an appeal in a case where a divided panel of the D.C. Circuit held that a defendant who did not "make" a misstatement within the meaning of Janus Capital Group v. First Derivative Traders, 564 U.S. 135, 142 (2011), nonetheless could be liable for participating in a "scheme" to defraud under Section 10(b) of the Exchange Act, SEC Rule 10-b5 promulgated thereunder, and Section 17(a) of the Securities Act, by disseminating with fraudulent intent a misstatement made by someone else. See Lorenzo v. S.E.C., No. 17-1077.

In a 5-4 decision, Janus held that where a Section 10(b) claim is predicated on a misstatement, only the "maker" of that misstatement can be a primary violator of Section 10(b) and SEC Rule 10b-5. Janus, 564 U.S. at 142. Janus defined a "maker" as the person or entity with "ultimate authority" over the statement. Id. This squared, among other things, with the Supreme Court's prior decision in Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., which held that there is no aiding and abetting liability under Section 10(b) – it is primary liability or nothing. 511 U.S. 164, 191 (1994). (Congress later amended the Exchange Act to permit aiding and abetting liability in actions brought by the Securities and Exchange Commission ("SEC"). Exchange Act § 20(e), 15 U.S.C. § 78t (2011).)

In Lorenzo, defendant Lorenzo was directed by his boss to send two emails to potential investors with statements that his boss had prepared. In the Matter of Gregg C. Lorenzo, Francis v. Lorenzo, & Charles Vista, LLC, S.E.C. Release No. 544, 2013 WL 6858820, at *5 (Dec. 31, 2013). The case proceeded before an SEC administrative law judge, and the Commission reviewed the ALJ's decision. The SEC determined in the administrative proceeding that Lorenzo acted with scienter (i.e., fraudulent intent) when sending the emails. Id. at *7-*8. The Commission's findings and penalties were reviewed by the D.C. Circuit.

On appeal, consistent with Janus, the D.C. Circuit panel agreed that Lorenzo could not be liable as the "maker" of the misstatements, because his boss was the one with "ultimate authority" over them. Lorenzo v. S.E.C., 872 F.3d 578, 587 (D.C. Cir. 2017). A majority of the court, however, held that the SEC was still within its rights to find Lorenzo liable for a violation, because Section 10(b) and SEC Rule 10b-5 permit liability for primary participation in a "scheme" to defraud. Id. at 588-89. In so doing, the D.C. Circuit relied on subsections (a) and (c) of SEC Rule 10b-5, which deal expressly with schemes to defraud, rather than subsection (b), which deals expressly with misstatements and was interpreted in Janus. Id. The majority also distinguished the case from Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, 552 U.S. 148, 166-67 (2008). There, the Supreme Court rejected the idea that "scheme" liability could be used to impose primary liability on secondary actors whose transactions with the corporate issuer might have facilitated a disclosure fraud. Unlike the fact pattern in Stoneridge, wrote the majority, Lorenzo directly communicated with investors rather than acting behind the scenes. Lorenzo, 872 F.3d at 591.

Justice Brett Kavanaugh, then a D.C. Circuit judge, authored a fairly scathing dissent, noting – among other things – that relying on scheme liability and subsections (a) and (c) in a case ultimately premised on a misstatement was contrary to decisions of other circuits. Id. at 600-01 (citing Public Pension Fund Group v. KV Pharmaceutical Co., 679 F.3d 972, 987 (8th Cir. 2012); WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039, 1057 (9th Cir. 2011); Lentell v. Merrill Lynch & Co., 396 F.3d 161, 177 (2d Cir. 2005); S.E.C. v. Kelly, 817 F. Supp. 2d 340, 343-44 (S.D.N.Y. 2011)). On appeal to the Supreme Court, Justice Kavanaugh's involvement below required his recusal, meaning that only eight justices heard argument and that there may be a 4-4 split, which would result in the D.C. Circuit's decision continuing to stand, but not as a national precedent.

Now for the argument: Justices Breyer, Ginsburg, Kagan and Sotomayor – all of whom, notably, were in the dissent in Janus – appeared skeptical of Lorenzo's arguments on appeal. Justice Kagan labeled Janus a "very textual decision," while Justice Sotomayor noted that "Janus was based explicitly on the 'making' language of 10b-5(b)." Questions from Justices Alito and Roberts – both in the Janus majority – were less revealing, perhaps leaving open the prospect that a majority decision in the SEC's favor could be reached on some basis. Indeed, Justice Alito suggested that "verbal conduct" might constitute a fraudulent act under the language of subsection (c), and questioned whether the defendant's argument regarding secondary liability was relevant, because it appeared that the defendant was "a principal under [Rule 10b-5] (c)" who "did the act that is described in (c)." Questions from Justice Gorsuch appeared more accepting of Lorenzo's argument that if Lorenzo was not the "maker" of the statement under Janus, because he lacked ultimate authority, that should be the end of it. Two Justices who reached opposing conclusions in Janus – Chief Justice Roberts and Justice Ginsburg – did question whether reading 10b-5(a) and (c) as allowing liability here would render Janus a "dead letter" and "essentially inconsequential" by "repackage[ing] what would have been a 10b charge under 17 or 10b-5(a) and (c)." And, indeed, this would seem to be the core problem with the D.C. Circuit's decision, especially if applied beyond its fairly idiosyncratic facts.

As a practical matter, how the Court decides the case seems more important than whether it affirms or not. Holding an employee, who acted with scienter (as the SEC found administratively) liable under Section 10(b) for sending out a material misstatement at the instruction of his employer – although arguably incompatible with Janus – probably would do no structural violence to the overall "primary violator versus secondary actor" framework resulting from the trilogy of Janus, Central Bank and Stoneridge. Similarly, a rejection of the SEC's position probably would not change the landscape much either (and probably even less). If, however, the Court embraces the broad conclusion that anyone who "schemes" with the "maker" of a misstatement is just as liable as the maker, notwithstanding Janus, then Janus would indeed be diminished. It seems doubtful that a majority would embrace so broad a ruling.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions