Argument preview: Court once again to examine anti-fraud rules of securities law
Although the Securities Act of 1933 and the Securities Exchange Act of 1934 provide a wide-ranging foundation for the entire federal regime of securities regulation, the great bulk of the Supreme Court’s encounters with those statutes has focused on the problem of misstatements made in connection with the sale of securities. Among other things, Exchange Act Section 10, Securities Act Section 17, and the Securities and Exchange Commission’s Rule 10b-5 subject those statements to sanction either by the SEC or by private parties.
Next Monday’s argument in Lorenzo v. SEC involves a proceeding sanctioning petitioner Francis Lorenzo under a different set of closely related provisions, which impose liability for using fraudulent schemes in connection with the sale of securities. Although Lorenzo distributed false statements (by sending emails that included the false statements), he cannot be charged directly with making those statements because his supervisor drafted them. The Supreme Court’s 2011 decision in Janus Capital v. First Derivative Traders held that only the “maker” of the statement is liable for its falsity, and all agree that Lorenzo’s connection with these statements is not sufficiently direct to satisfy the standard in Janus. The lower courts did hold, however, that the SEC properly can impose “scheme” liability on Lorenzo for his role in distributing the statements.
As securities cases go, the issues here are quite straightforward. Lorenzo argues that allowing “scheme” liability in this case is a direct end-run around the decision in Janus. Because the scheme in question consists of little more than the promulgation of false statements, allowing scheme liability reduces Janus to nothing more than a case of incorrect pleading. Lorenzo also emphasizes the tension between the imposition of liability here and the Supreme Court’s 1994 decision in Central Bank of Denver v. First Interstate Bank of Denver, in which the court rejected the idea of “aiding-and-abetting” liability under Section 10 and Rule 10b-5. Imposing liability on Lorenzo for participating in his supervisor’s “scheme” to make false statements, Lorenzo argues, looks a lot like charging him with aiding and abetting his supervisor’s false statements.
For his part, the U.S. solicitor general correctly points out that nothing in Janus (or Central Bank, for that matter) purports to evaluate the provisions regarding scheme liability under which the SEC proceeded against Lorenzo. All agree that Lorenzo sent the messages and all agree that the messages included false statements (though there is a heated debate over the extent to which Lorenzo can be charged with knowledge of their falsity). Because the scheme would have had no point without transmission of the messages to the customers of Lorenzo’s firm, Lorenzo’s actions fall squarely within the provisions imposing liability on those who engage in schemes to defraud in connection with the sale of securities.
To me, this case turns entirely on what you think of Janus and Central Bank. Lorenzo certainly is correct that an affirmance of liability in this case will vitiate most of the real-world import of Janus. But the solicitor general is just as correct in saying that Justice Clarence Thomas’ opinion for the Janus court rested directly on the language of Section 10 and Rule 10b-5 prohibiting the “mak[ing]” of false statements, language that is not relevant to the “scheme” liability at issue here. Oral argument should show us how troubled the justices are by a decision that would so sharply limit a ruling as recent as Janus.
On that point, it bears noting that the case will come before a bench of eight: Justice Brett Kavanaugh is recused (He dissented with some vigor from the decision below.). All four of the dissenters in Janus (Justices Stephen Breyer, Ruth Bader Ginsburg, Elena Kagan and Sonia Sotomayor) remain on the bench. So what we’ll really be watching for in the argument is any sign that the Janus dissenters are inclined to extend Janus to this situation. Without a vote from at least one of them, the Supreme Court will affirm the decision of the court of appeals.