The U.S. Supreme Court Case That Could Significantly Expand Civil Liability under the Federal Securities Laws

Can the Securities and Exchange Commission (SEC) penalize an investment banker on the ground that, even though he did not “make” false statements under Janus Capital Group v. First Derivative Traders, his distribution of false statements constituted a “device, scheme, or artifice to defraud” or an “act, practice, or course of business which operates . . . as a fraud or deceit” under subsections (a) and (c) of Rule 10b-5? On December 3, 2018, the Supreme Court heard oral argument on that question in Lorenzo v. SEC. The stakes in Lorenzo are high. The SEC argues that prohibiting it from penalizing distributors of false statements will create a significant hole in its enforcement authority. Lorenzo responds that penalizing mere distributors under Rules 10b-5(a) and 10b-5(c) will render Janus a nullity, erode the Supreme Court’s limitations on liability for aiding and abetting, and lead to a deluge of private securities litigation. The Supreme Court’s anticipated decision will have a significant impact on liability for distributors of false statements.