Supreme Court Rules that Employees Who Disseminate False Statements Drafted by Their Superiors Can Be Primarily Liable Under § 10(b)

March 28, 2019

Striking a blow to employees who send communications at the behest of others, the Supreme Court held yesterday that those who “disseminate” false statements with the intent to defraud—even if they did not draft those statements—can be primarily liable for securities fraud under § 10(b)-5(a) and (c).  In doing so, the Court blurred the lines between fraudulent conduct versus fraudulent statements.  The Supreme Court’s decision in Lorenzo is important to all public companies, directors, and officers who could face securities fraud litigation, as there can be little doubt that this decision will spawn a new trend in litigation: the filing of lawsuits by private plaintiffs seeking to hold defendants liable for false statements that they “disseminated” but did not “make.” 

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Most employees have been asked by their direct superior to send an email. Lorenzo—the vice president of an investment banking company—is no different. His boss drafted an email inviting two prospective investors to invest in a company. But rather than sending this email himself, he instructed his employee, Lorenzo, to send the email. Lorenzo complied, copying-and-pasting the text into an email and noting that it was sent at his boss’ request. However, this email also stated that the company had US$10 million in confirmed assets, which Lorenzo knew was false, as the company actually had less than US$400,000 in assets. Lorenzo also included his own contact information and invited recipients to contact him with questions.

Section 10(b) includes three subparts, making it unlawful to: (a) “employ any device, scheme, or artifice to defraud;” (b) “make any untrue statement of material fact;” and (c) “engage in any act, practice, or course of business which operates or would operate as a fraud or deceit.” 17 CFR § 240.10b-5. Historically, most securities fraud cases brought under § 10(b) focus on liability for allegedly materially misleading statements or omissions, claims which fall under subsection (b). Although Lorenzo argued in the lower courts that he did not act with an intent to defraud, i.e., scienter—an essential element of every § 10(b) claim—he abandoned that argument when he reached the Supreme Court.

Both the majority and the dissent agreed that no liability could exist under subsection (b) because—pursuant to the Court’s earlier decision in Janus—Lorenzo did not have any control over the statement and thus did not actually “make” it. This left only one question: when it is undisputed that the defendant acted with an intent to defraud, does the dissemination of a false statement drafted by someone else create liability under subsections (a) and (c), even though liability cannot exist under subsection (b)? The majority of the Court answered that question in the affirmative. But the warnings expressed in the dissent should not be ignored.

According to the majority, it was “obvious” that the words in subsection (a) and (c) were “sufficiently broad to include within their scope the dissemination of false or misleading information with the intent to defraud.” For support, the majority cited dictionary definitions of “device, scheme, or artifice” and “act, practice, or course of business.” Throughout its analysis, the majority expressed great skepticism at the notion that an act made with intent to defraud could somehow escape liability under the securities laws.

The securities laws are nuanced, and—even if the Court ultimately reached the same conclusion—lower courts and litigators would have benefited from reasoning that was more closely tied to existing caselaw.

First, subsections (a) and (c) have generally been interpreted to prohibit fraudulent conduct, creating liability only if the defendant engaged in “some form of planning, designing, devising, or strategizing.” Here, however, the Supreme Court permits the general to subsume the specific, holding that false statements can be actionable under the broad language in subsection (a) and (c), even if those statements are not actionable under the specific language in subsection (b). As the dissent notes, the “old familiar rule” is that the “specific governs the general,” and where the specific language in subsection (b) provides no liability for an “untrue statement,” the more general terms in subsections (a) and (c) should not create it.

Indeed, the majority seems to acknowledge this problem, conceding that applying its interpretation of subsections (a) and (c) “may present difficult problems of scope in borderline cases,” and that “[p]urpose, precedent, and circumstance could lead to narrowing their reach in other contexts.” But this invitation for further refinement is surely cold comfort to defendants who will be tasked with defending the litigation that defines the contours of this newly announced claim.

Second, while Lorenzo may not be primarily liable under subsection (b), he likely faced the real probability of secondary liability—aiding and abetting—a cause of action the SEC was capable of prosecuting. The Supreme Court did not address that specific issue, instead discussing a hypothetical scenario in which the “maker” of the statement is not liable (because he lacked intent to defraud), and as a result, the disseminator of the statement cannot be secondarily liable as a matter of law, even if he knew the statement was false. But that was not the case here, because the “maker” of the statement—Lorezno’s boss—assuredly knew the statement was false, and indeed he was separately prosecuted by the SEC for securities fraud violations. What really seemed to trouble the Court here was the defendant’s uncontested intent to defraud. But in reaching a decision based on a hypothetical—rather than a careful review of the elements, statutory language, and caselaw—the Court failed to articulate meaningful guidance to lower courts.

Finally, the pronouncement that a defendant can be primarily liable under subsections (a) and (c), even if he is only secondarily liable under (b), has wide-sweeping consequences in private securities actions. Although the SEC can prosecute claims of secondary liability under subsection (b), private individuals cannot do so. But the Court’s ruling in Lorenzo creates an end-run around that prohibition, holding that those who disseminate false statements with intent to defraud are primarily liable under subsections (a) and (c), even if they are only secondarily liable under (b). Such a bold pronouncement—without a supporting analysis—will surely be exploited by entrepreneurial plaintiffs who seek to expand the scope of the securities laws. For example, one could imagine a scenario where a board member repeats or disseminates a misstatement from management. While the board member may not have any knowledge that management’s statement is false, a plaintiff may be able to survive a motion to dismiss by relying on the language in Lorenzo.


The Supreme Court’s decision in Lorenzo is not only important to public companies and their directors and officers, but also all individuals and entities who are involved in the creation and dissemination of potentially misleading misstatements. As predicted by the dissent, while a defendant is not liable under subsection (b) for a statement he did not “make,” a plaintiff need only relabel the defendant’s involvement in a false statement as an “act, device, scheme, or artifice” in order to create primary liability under subsections (a) and (c)—a simple task for any attorney who does not shy away from artful pleading. Although the Supreme Court acknowledged that its holding may present difficulties, it left lower courts with the tough task of defining and limiting the available causes of action under subsections (a) and (c), and defense counsel will be instrumental in helping courts determine the appropriate reach of this new decision.

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