Law.com Subscribers SAVE 30%

Call 855-808-4530 or email [email protected] to receive your discount on a new subscription.

Circuit Split Reflects Disagreement About the Relationship Between Scheme Liability and SEC Rule 10b-5(b)

By Stefan Atkinson and Yi Yuan
March 01, 2023

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.

This premium content is locked for Entertainment Law & Finance subscribers only

  • Stay current on the latest information, rulings, regulations, and trends
  • Includes practical, must-have information on copyrights, royalties, AI, and more
  • Tap into expert guidance from top entertainment lawyers and experts

For enterprise-wide or corporate acess, please contact Customer Service at [email protected] or 877-256-2473

Read These Next
'Huguenot LLC v. Megalith Capital Group Fund I, L.P.': A Tutorial On Contract Liability for Real Estate Purchasers Image

In June 2024, the First Department decided Huguenot LLC v. Megalith Capital Group Fund I, L.P., which resolved a question of liability for a group of condominium apartment buyers and in so doing, touched on a wide range of issues about how contracts can obligate purchasers of real property.

Strategy vs. Tactics: Two Sides of a Difficult Coin Image

With each successive large-scale cyber attack, it is slowly becoming clear that ransomware attacks are targeting the critical infrastructure of the most powerful country on the planet. Understanding the strategy, and tactics of our opponents, as well as the strategy and the tactics we implement as a response are vital to victory.

CoStar Wins Injunction for Breach-of-Contract Damages In CRE Database Access Lawsuit Image

Latham & Watkins helped the largest U.S. commercial real estate research company prevail in a breach-of-contract dispute in District of Columbia federal court.

Fresh Filings Image

Notable recent court filings in entertainment law.

The Power of Your Inner Circle: Turning Friends and Social Contacts Into Business Allies Image

Practical strategies to explore doing business with friends and social contacts in a way that respects relationships and maximizes opportunities.