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Congressional ______
*.Research Service
Lies and Schemes: Supreme Court Expands
Securities Fraud Liability
April 24, 2019
The Supreme Court recently held in Lorenzo v. Securities and Exchange Commission that persons who
knowingly disseminate false statements to investors violate the scheme liability provisions of federal
securities law even if they do not have ultimate authority over the content of those statements. In reading
the scheme liability provisions to reach this conduct, the Court expanded the scope of primary securities
fraud liability and, by extension, the range of defendants that private plaintiffs can sue for fraud. The
Court's decision-which bucks a trend of recent opinions narrowing the anti-fraud provisions of the
securities laws-highlights a longstanding debate over the proper scope of private causes of action under
those provisions. This Sidebar discusses the Court's decision in Lorenzo and its implications for
Congress.
Primary and Secondary Securities Fraud Liability
The federal securities laws contain a variety of anti-fraud provisions. Section 10(b) of the Securities
Exchange Act of 1934 (the Exchange Act) makes it unlawful to use or employ, in connection with the
purchase or sale of any security . . . , any manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the [SEC] may prescribe. SEC Rule lOb-5, which
implements Section 10(b), in turn makes it unlawful to in connection with the purchase or sale of any
security:
1. employ any device, scheme, or artifice to defraud;
2. make any untrue statement of a material fact; or
3. engage in any act, practice, or course of business which operates or would operate as a
fraud or deceit upon any person.
Courts have generally referred to claims brought under the first and third subsections of Rule 1Ob-5 as
scheme liability claims to distinguish them from false statement claims brought under the Rule's
second subsection. Similarly, while Section 17(a) of the Securities Act of 1933 regulates the offer or
sale of securities (as opposed to their purchase or sale), it contains anti-fraud provisions
that courts have described as substantially identical to those in Rule 1Ob-5.
Congressional Research Service
https://crsreports.congress.gov
LSB10293
CRS Legal Sidebar
Prepared for Members and
Committees of Congress](ViewImageLocal?handle=hein.crs/govzli0001&div=1&collection=&method=preview&ext=.png&size=3)
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