In March 2019, the U.S. Supreme Court held that the SEC may discipline an individual for disseminating misstatements made by someone else. The case, Lorenzo v. S.E.C., 139 S. Ct. 1094 (2019), marked the first time in a decade that the court has wrestled with “scheme” liability—so called in reference to the word contained in subsection (a) of Rule 10b-5, but not found in §10(b). But the justices struggled to find a principled way of explaining what types of conduct (beyond the making of misstatements or omissions and manipulation) may be actionable under §10(b), Rule 10b-5, and other provisions of the federal securities laws.
In its first “scheme” liability decision, Stoneridge Inv. Partners v. Scientific-Atlanta, 552 U.S. 148 (2008), a majority of the court found no primary liability for a customer and supplier that entered into sham arrangements designed to allow a company to inflate revenues. This drew a heated protest from three dissenters who lamented “the Court’s continuing campaign to render the private cause of action under §10(b) toothless.” In their view, Congress enacted §10(b) “with the understanding that federal courts respected the principle that every wrong would have a remedy.” The majority and dissent did agree on one thing though—they both rejected the categorical assertion that only misstatements, omissions, and manipulation are actionable. The majority described the proposition as “erroneous” as “[c]onduct itself can be deceptive,” and the dissent agreed that “the statute covers nonverbal as well as verbal deceptive conduct.” This left open the question of exactly what other forms of conduct §10(b) might reach.
