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On 27 March 2019, in Lorenzo v. SEC, the US Supreme Court handed the Securities and Exchange Commission (the “SEC”) a victory. In this case, the Supreme Court held that Francis Lorenzo, an investment banker, could be liable under Rule 10b-5 for disseminating material misleading statements even though he had not made the statements.

Lorenzo refines the law that previous cases had established regarding the liability of “non-makers” of material misleading statements. Certainly, this case expands the applicability of the anti-fraud liability under Rule 10b-5.

The statutory foundation of the anti-fraud liability in the United States

Section 10(b) of the Securities Exchange Act of 1934 imposes liability on any person who employs a manipulative or deceptive device in connection with the purchase or sale of a security. Rule 10b-5 specifies the type of conduct that gives rise to liability. In particular, the conduct can consist of:

  • the employment of any device, scheme, or artifice to defraud (subparagraph (a));
  • the making of a material misstatement or the omission to state a material fact that makes the statement misleading (subparagraph (b)); or
  • any act or practice which operates as a fraud (subparagraph (c)).

Section 10(b) and Rule 10b-5, however, do not apply primary liability to aiders and abettors. An aider and abettor is a person who knowingly or recklessly provides substantial assistance to another person who violates the securities law. Thus, an aider and abettor can only be secondarily liable with respect to a primary violation of the securities law, such as Section 10(b) and Rule 10b-5.

The law before Lorenzo

Historically, the Supreme Court had denied a right of action under Rule 10b-5(b) for material misstatements against a party who had not made the statements. According to the Supreme Court, such right of action amounted to an impermissible claim for a primary violation against an aider and abettor. In particular, the Supreme Court denied such right in Central Bank of Denver v. First Interstate Bank of Denver, 511 US 164 (1994), Stoneridge Investment Partners v. Scientific-Atlanta, 552 US 148 (2008), and Janus Capital Group, Inc. v. First Derivative Traders, 564 US 135 (2011).

In these cases, the defendants were not the makers of the statements. In Central Bank, Central Bank was the indenture trustee. In Stoneridge, Scientific Atlanta and Motorola were clients of the issuer. In Janus, Janus Capital Management and Janus Capital Group were, respectively, the issuer’s investment adviser and the investment adviser’s controlling entity. Despite that all the defendants had knowingly or intentionally participated in the “making” of the material misstatements, none of them was found to have violated Rule 10b-5(b). The logic behind the holdings, as explained in Janus, was that the defendants did not have ultimate authority over the content of the statements and how and whether to communicate the statements.

The Supreme Court, however, only considered Rule 10b-5(b). Nothing was held on the application of Rule 10b-5(a) or (c) to a non-maker of material misstatements. This is where Lorenzo refines the law.

Lorenzo v. SEC

Francis Lorenzo, the defendant, was a director of an investment banking firm engaged in a $15 million bond offering. Lorenzo, under instructions of his supervisor, contacted via email potential investors stating that the issuer had intellectual property assets worth $10 million while in reality the assets were almost worthless. Significantly, Lorenzo and his supervisor knew that the assets were almost worthless.

The Supreme Court held Lorenzo liable under Rule 10b-5. Even though Lorenzo could not be liable under Rule 10b-5(b) for making material misstatements as his supervisor had “ultimate authority” (and so was a maker) over the misstatements, Rule 10b-5(b) is not exclusive of Rule 10b-5(a) or (c). Thus, Rule 10b-5(a) and (c) can apply to a claim filed for material misstatements against a non-maker. The Supreme Court stated that if Rule 10b-5(b) prevented the application of Rule 10b-5(a) and (c), then a non-maker could never be liable as primary violator of Rule 10b-5 even though such non-maker had intentionally, knowingly or recklessly disseminated material misstatements.

Overseas application of Lorenzo

The rule devised in Lorenzo may also apply overseas. In Robert Morrison v. National Australia Bank, 561 US 247 (2010), the Supreme Court held that Rule 10b-5 applies any time a security is purchased or sold in the United States or if a security purchased or sold is listed on a US stock exchange. Lorenzo’s holding, however, will not apply where the foreign securities transaction has no connection with the United States.


Lorenzo has provided the SEC and private parties with a sharper weapon. In the future, non-makers can be liable as primary violators under Rule 10b-5. This means that anyone, including investment bankers acting as underwriters or placement agents, could be held liable through their active and knowing participation in the distribution of a misstatement made by a different person. Whether Lorenzo will actually translate in an increase in litigations by the SEC and private parties against investment bankers (or any other non-maker), however, is difficult to predict as Lorenzo’s outcome was facilitated by Lorenzo’s admission of his knowing dissemination of a material misstatement.


Andrew Reilly heads the Firm's US capital markets practice in Australia. Over the past 20 years, he has represented Australian and New Zealand companies, underwriters and placement agents in more than 200 offers of debt and equity securities in the United States.


Alberto Pacchioni is a general associate in the Corporate Markets practice group in Sydney.