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Circuit Split Reflects Disagreement About the Relationship Between Scheme Liability and SEC Rule 10b-5(b)
Historically, federal courts generally agreed that scheme liability under SEC Rule 10b-5(a) and (c) requires something more than a misstatement or omission — with misstatements and omissions typically being litigated under Rule 10b-5(b) instead. The U.S. Supreme Court in Lorenzo v. SEC, 139 S. Ct. 1094 (2019), however, held that an individual who disseminates a misstatement, without other fraudulent conduct, is potentially liable under the scheme liability provisions of Rule 10b-5. Subsequently, a circuit split has emerged over the scope of Lorenzo's holding, which reflects a fundamental disagreement about the relationship between scheme liability and Rule 10b-5(b).
The Second Circuit, like several other circuits, has long held that misstatements and omissions cannot form the "sole basis" for a scheme liability claim. Lentell v. Merrill Lynch & Co., 396 F.3d 161, 171 (2d Cir. 2005). In other words, the scheme must "also encompass conduct beyond those misrepresentations or omissions." WPP Luxembourg Gamma Three Sarl v. Spot Runner, 655 F.3d 1039, 1057 (9th Cir. 2011). Some courts adopted this rule to discourage private plaintiffs from attempting to evade some of the PSLRA's heightened pleading requirements by recasting their Rule 10b-5(b) allegations as scheme liability claims. Lentell, 396 F.3d at 177. Courts have also justified the rule as safeguarding the distinction between primary and secondary liability. The private right of action under Rule 10b-5 does not include aiding-and-abetting liability, Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 180 (1994), but permitting scheme liability claims based solely on misstatements or omissions, without other actionable conduct, may allow private plaintiffs to sue aiders and abettors, SEC v. Rio Tinto plc, 41 F.4th 57, 55 (2d Cir. 2022).
The distinction between scheme liability and Rule 10b-5(b) claims was tested by the Supreme Court's decision in Janus Capital Group v. First Derivative Traders, 564 U.S. 135 (2011). In Janus, the Supreme Court limited the scope of Rule 10b-5(b) liability to persons or entities who had "ultimate authority" over the misstatement or omission. Id. at 142. As a result, someone who published or prepared a misstatement or omission might not be liable under Rule 10b-5(b), if she lacked "ultimate authority." And because courts did not permit repackaging of a misstatement or omission as a scheme liability claim, that person might also not be liable under Rule 10b-5(a) and (c), unless there was some allegation of additional conduct beyond the misstatement or omission. Thus, it was possible that an individual who issued a misstatement or omission, with intent to defraud, might nonetheless avoid liability altogether.
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