/>iI wrote an article over 12 years ago titled Who Cares What SCOTUS Says On Securities Fraud? I was reminded of that article when reading the Second Circuit's recent decision in SEC v. Rio Tinto PLC, et al. In Rio Tinto, the Second Circuit held that "misstatements and omissions alone do not suffice for scheme liability under Rule 10b-5(a) and (c)." In reaching this conclusion, the Second Circuit rejected the SEC's argument that the Supreme Court's decision in Lorenzo v. SEC, 139 S. Ct. 1094 (2019) had overruled an earlier Second Circuit decision that had reached the same conclusion. The Second Circuit so held primarily because a contrary ruling would result in “the scheme subsections [of Rule 10b-5] would swallow the misstatement subsections” and would “likely ‘revive in substance the implied cause of action against all aiders and abettors’” thereby eliminating the distinction between primary and secondary liability under Rule 10b-5. Importantly, the defendant and the dissent in Lorenzo made the same arguments, but the Supreme Court majority did not find them persuasive.
This is not to say that I think that the Second Circuit’s holding in Rio Tinto is wrong. I do not. I believe that the decision properly recognized that courts should not interpret Rule 10b-5 in a way that renders Rule 10b-5(b) superfluous especially as that provision serves as the primary basis on which most private securities class actions have been brought for over 30 years. I simply note that a different panel of the Second Circuit and/or a different district court judge might have reached the opposite conclusion based on a slightly different reading of Lorenzo. And to come full circle, this takes me back to my earlier article. While that earlier article only addressed private civil securities fraud lawsuits, I noted that there is an inherent tension in the securities laws that, no matter how the Supreme Court rules on an issue, “leaves the power on questions of securities fraud in the various courts that preside over and rule on the cases filed in their courts.” I believe that the Second Circuit’s Rio Tinto decision reaffirms that conclusion.
On this interlocutory appeal, the SEC contends that Lorenzo thereby abrogates Lentell. We disagree. While Lorenzo acknowledges that there is leakage between and among the three subsections of each provision, the divisions between the subsections remain distinct.
