Supreme Court Finds Banker Liable for Forwarding False Statements
The U.S. Supreme Court found that an investment banker may be held legally responsible for disseminating statements that he knew to be false, even though he was not the "maker" of the false statements.
The SEC charged an investment banker and his superior for violating Section 10(b) of the Exchange Act, Rule 10b-5 thereunder, and Securities Act Section 17, in the case of the superior, by making, and in the case of the charged investment banker, by disseminating, inaccurate statements to investors with "the intent to defraud."
In 2017, the U.S. Court of Appeals for the District of Columbia Circuit generally affirmed the SEC's finding of liability under certain provisions of Rule 10b-5, but determined that the investment banker did not violate Rule 10b-5(b) (making, or omitting to make, any untrue statement of a material fact) because he was not the one who composed the misleading statements. The D.C. Circuit held that even though the banker had not violated paragraph (b) of Rule 10b-5, he was still liable under paragraphs (a) and (c), which bar, respectively, employing a device to defraud and engaging in an act that operates as a fraud.
The Supreme Court did not examine whether the banker could be liable under paragraph (b) of Rule 10b-5. The Court found that the banker could be held liable under paragraphs (a) and (c).
Commentary
This case had the potential to be a significant blow to the SEC (and private plaintiffs) if it had come out the other way. Instead, the 6-2 decision (Justice Kavanaugh dissented in the D.C. Circuit Court opinion and did not participate in the case) is an affirmation of the SEC's approach to scheme liability. By confirming that a person may be held liable for securities fraud under Rule 10b-5 for disseminating false statements even if the person did not "make" the false statements, the decision goes a long way to limiting the practical implications of the Supreme Court's opinion in Janus Capital Group, Inc. v. First Derivative Traders, which held that only the "maker" of a false statement could be held liable for fraud under Rule 10b-5(b). While the facts as presented to the Supreme Court here were pretty stark - the banker sent emails to investors that he knew contained materially false information with the intent to defraud them - the decision may embolden the SEC to be more aggressive in pursuing fraud claims where an individual's involvement and intent are less clear.