Menu

Expect Focus Life, Annuity, and Retirement Solutions, June 2019

Supreme Court Casts a Wide Net with Rule 10b-5

Life, Annuity, and Retirement Litigation   |   Life, Annuity, and Retirement Solutions   |   Financial Services Regulatory   |   Securities & Investment Companies   |   July 11, 2019
Download   
Share Page

The U.S. Supreme Court recently held that someone doesn’t need to have “made” a false or misleading statement to have primary liability under the securities fraud rules.

Although the outer limits of that liability are not yet defined, this decision should cause persons with ancillary roles in securities transactions to be even more attentive to the accuracy of disclosures. Affected people could include:

  • Broker-dealer firms whose representatives provide customers with disclosures about mutual funds and securities-based insurance products sold through the firm; and
  • In some circumstances, legal, accounting, or business personnel who prepare, but do not have ultimate authority over, those disclosures.

Historically, most securities fraud actions have been brought under SEC Rule 10b-5(b), which governs those who “make” false or misleading statements. And the Supreme Court held in 2011 that one does not “make” a statement without ultimate authority over the contents of the statement and whether and how to issue it. But in its March 2019 opinion in Lorenzo v. SEC, the Supreme Court interpreted subsections (a) and (c) of the Rule (and the relevant statutory sections), and made clear that primary liability under those sections is not limited to persons with ultimate authority over statements.

Francis Lorenzo was an employee at an SEC-registered brokerage firm. He was helping to sell debentures in a company, and he sent emails to prospective investors that he knew contained materially false statements about the value of the company’s assets. The content of the emails was written by Lorenzo’s boss and Lorenzo sent them at his boss’s direction, but the Supreme Court held that Lorenzo can be primarily liable under 10b-5(a) or (c).

As then-Judge Kavanaugh wrote in his dissent in the opinion below when he was on the D.C. Circuit, “the distinction between primary and secondary liability matters, particularly for private securities lawsuits.” The Supreme Court has held that private litigants cannot bring 10b-5 claims against people who merely aid and abet primary actors. The majority opinion in Lorenzo therefore allows for more private lawsuits than would have been possible under the dissent’s preferred holding. 

 


©2019 Carlton Fields, P.A. Carlton Fields practices law in California through Carlton Fields, LLP. Carlton Fields publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Carlton Fields. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our Contact Us form via the link below. The views set forth herein are the personal views of the author and do not necessarily reflect those of the firm. This site may contain hypertext links to information created and maintained by other entities. Carlton Fields does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites.

Subscribe to Publications

Disclaimer

The information on this website is presented as a service for our clients and Internet users and is not intended to be legal advice, nor should you consider it as such. Although we welcome your inquiries, please keep in mind that merely contacting us will not establish an attorney-client relationship between us. Consequently, you should not convey any confidential information to us until a formal attorney-client relationship has been established. Please remember that electronic correspondence on the internet is not secure and that you should not include sensitive or confidential information in messages. With that in mind, we look forward to hearing from you.