Amicus Curiae Brief — Francis V. Lorenzo, Petitioner v. Securities and Exchange Commission

Supreme Court briefAug 27, 2018

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No. 17-1077

IN THE

Supreme Court of the United States

___________

FRANCIS V. LORENZO,

Petitioner,

SECURITIES AND EXCHANGE COMMISSION,

Respondent.

___________

On Writ of Certiorari to the

United States Court of Appeals

for the District of Columbia Circuit

___________

BRIEF OF AMICI CURIAE SECURITIES

INDUSTRY AND FINANCIAL MARKETS

ASSOCIATION AND CHAMBER OF

COMMERCE OF THE UNITED STATES OF

AMERICA SUPPORTING PETITIONER

___________

DANIEL A. MCLAUGHLIN

SIDLEY AUSTIN LLP

787 Seventh Avenue

New York, NY 10019

(212) 839-5300

CARTER G. PHILLIPS

KWAKU A. AKOWUAH*

KURT A. JOHNSON

SIDLEY AUSTIN LLP

1501 K Street, N.W.

Washington, D.C. 20005

(202) 736-8000

kakowuah@sidley.com

Counsel for Amici Curiae

August 27, 2018

*Counsel of Record

[Additional counsel listed on inside cover]

STEVEN P. LEHOTSKY

U.S. CHAMBER LITIGATION CENTER

1615 H Street, N.W.

Washington, D.C. 20062

(202) 463-5337

Counsel for Amicus

Curiae Chamber of

Commerce of the United

States of America

IRA D. HAMMERMAN

KEVIN CARROLL

SECURITIES INDUSTRY &

FINANCIAL MARKETS ASSOCIATION

1101 New York Avenue,

N.W.

Washington, D.C. 20005

(202) 962-7382

Counsel for Amicus

Curiae Securities Industry & Financial Markets

Association

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES .................................

INTEREST OF AMICI CURIAE ..........................

SUMMARY OF THE ARGUMENT .....................

ARGUMENT .........................................................

I. THE D.C. CIRCUIT ERRED BY FAILING

TO INTERPRET RULE 10b-5 IN LIGHT

OF ESTABLISHED LIMITATIONS ON

SECTION 10(b) LIABILITY ........................

A. Section 10(b) Governs The Scope Of Liability Under Rule 10b-5 And Proscribes

Only Certain Well-Defined Conduct ......

B. The D.C. Circuit’s Approach Would Undermine Section 10(b)’s Limitations On

Rule 10b-5 Liability ................................

C. The D.C. Circuit’s Interpretation Fails

To Take Account Of Other Securities

Law Provisions That Expressly Address

Misuses Of Statements ...........................

D. The D.C. Circuit’s Interpretation Will

Harm The Securities Markets ................

II. THE D.C. CIRCUIT FAILED TO SEPARATELY DETERMINE WHETHER LORENZO COMMITTED A PUNISHABLE

VIOLATION OF SECTION 17(a)(1) ...........

CONCLUSION ....................................................

(i)

CASES

TABLE OF AUTHORITIES

Page

Aaron v. SEC, 446 U.S. 680 (1980) ........... 3, 8, 28

Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164

(1994) ......................................... 4, 11, 12, 14, 22

Chiarella v. United States, 445 U.S. 222

(1980) ........................................ 3, 10, 11, 16, 26

Dirks v. SEC, 463 U.S. 646 (1983) ............... 4, 11

Ernst & Ernst v. Hochfelder, 425 U.S. 185

(1976) .................................................. 3, 7, 8, 27

FCC v. Fox Television Stations, Inc., 567

U.S. 239 (2012) ..........................................

Janus Capital Grp., Inc. v. First Derivative

Traders, 564 U.S. 135 (2011) ................. passim

Landry v. All Am. Assurance Co., 688 F.2d

381 (5th Cir. 1982) ....................................

Merrill Lynch, Pierce, Fenner & Smith Inc.

v. Dabit, 547 U.S. 71 (2006) ......................

Morrison v. Nat’l Austl. Bank Ltd., 561 U.S.

247 (2010) ..................................................

Musick, Peeler & Garrett v. Emp’rs Ins. of

Wausau, 508 U.S. 286 (1993).................... 20, 21

Nat’l Ass’n of Home Builders v. Defs. of

Wildlife, 551 U.S. 644 (2007) ....................

Pinter v. Dahl, 486 U.S. 622 (1988) ............. 21, 22

Salman v. United States, 137 S. Ct. 420

(2016) .........................................................

Santa Fe Indus., Inc. v. Green, 430 U.S. 462

(1977) ............................................. 3, 4, 9, 10, 16

SEC v. Monarch Funding Corp., 192 F.3d

295 (2d Cir. 1999) ......................................

SEC v. Quan, 817 F.3d 583

(8th Cir. 2016) ..........................................

SEC v. Zandford, 535 U.S. 813 (2002) ........

iii

TABLE OF AUTHORITIES—continued

Page

Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, Inc., 552 U.S. 148 (2008) ....... 4, 12, 17, 24

Tellabs, Inc. v. Makor Issues & Rights, Ltd.,

551 U.S. 308 (2007) ...................................

United States v. Chiarella, 588 F.2d 1358

(2d Cir. 1978) .............................................

United States v. Naftalin, 441 U.S. 768

(1979) .........................................................

United States v. O’Hagan, 521 U.S. 642

(1997) .........................................................

STATUTES AND REGULATION

Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111203, 124 Stat. 1376 (2010) ........................

15 U.S.C. § 77k(a) .........................................

§ 77l(a)(1)–(2) ...............................

§ 77o(a) .........................................

§ 77q(a) .........................................

§ 77q(b) .........................................

§ 78i .............................................. 20, 21

§ 78j(b) ....................................... 4, 9, 27

§ 78r(a) .........................................

§ 78t(a) .........................................

§ 78t(e) ......................................... 17, 21

17 C.F.R. § 240.10b-5 ................................... 18, 19

AGENCY DECISION

Flannery, Exchange Act Release No. 3981

(Dec. 15, 2014), rev’d on other grounds,

Flannery v. SEC, 810 F.3d 1 (1st Cir.

2015) .......................................................... 5, 15

TABLE OF AUTHORITIES—continued

LEGISLATIVE HISTORY

S. 1551, 111th Cong. (2009) .........................

Discussion Draft of Restoring American Financial Stability Act of 2009 (Nov. 10,

2009) ..........................................................

H.R. Rep. No. 107-414 (2002) ......................

156 Cong. Rec. S3569 (daily ed. May 12,

2010) ..........................................................

Page

SCHOLARLY AUTHORITY

Andrew N. Vollmer, SEC Revanchism and

the Expansion of Primary Liability Under

Section 17(a) and Rule 10b-5, 10 VA. L. &

Bus. Rev. 273 (2016) .................................

OTHER AUTHORITIES

Press Release, Cornerstone Research, Securities Class Action Filings Reach Record

High for Second Straight Year (Jan. 30,

2018), https://www.cornerstone.com/

Publications/Press-Releases/SecuritiesClass-Action-Filings-Reach-RecordHigh ...........................................................

Ctr. for Capital Mkts. et al., Expanding the

On-Ramp: Recommendations to Help

More Companies Go and Stay Public

(2018), https://www.centerforcapital

markets.com/wp-content/uploads/2018/

04/IPO-Report_EXPANDING-THE-ONRAMP.pdf ..................................................

GAO-11-664, Securities Fraud Liability of

Secondary Actors (July 21, 2011) .............

TABLE OF AUTHORITIES—continued

Inst. for Legal Reform, Economic Consequences: The Real Costs of U.S. Securities

Class Action Litigation (Feb. 28, 2014),

https://www.instituteforlegalreform.com/

research/economic-consequences-the-real

-costs-of-us-securities-class-action-litigation .............................................................

2 Wayne R. LaFave, Substantive Criminal

Law (3d ed. 2017) ......................................

1 Louis Loss, Joel Seligman & Troy Paredes,

Securities Regulation (5th ed. 2013) ........

Ronald D. Orol, Dodd Unveils Bank Reform

Bill Without GOP Support, MarketWatch,

Nov. 10, 2009 .............................................

Secs. Indus. & Fin. Mkts. Ass’n,

http://www.sifma.org (last viewed Aug.

27, 2018) ....................................................

Press Release, Rep. Maxine Waters, Waters

Wins Big for Consumers, Homeowners,

Minorities and Shareholders in Wall

Street Reform and Consumer Protection

Legislation (June 30, 2010) ......................

Page

INTEREST OF AMICI CURIAE1

The Securities Industry and Financial Markets Association (“SIFMA”) is the leading trade association for

broker-dealers, investment banks and asset managers

operating in the U.S. and global capital markets. On

behalf of the industry’s nearly 1 million employees,

SIFMA advocates on legislation, regulation and business policy, affecting retail and institutional investors,

equity and fixed income markets and related products

and services. SIFMA serves as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market

operations and resiliency. It also provides a forum for

industry policy and professional development. SIFMA,

with offices in New York and Washington, D.C., is the

U.S. regional member of the Global Financial Markets

Association (GFMA). For more information, visit

http://www.sifma.org.

The Chamber of Commerce of the United States of

America (“Chamber”) is the world’s largest business

federation. It represents 300,000 direct members and

indirectly represents the interests of more than 3 million companies and professional organizations of every

size, in every industry sector, and from every region of

the country. An important function of the Chamber is

to represent the interests of its members in matters

before Congress, the Executive Branch, and the courts.

To that end, the Chamber regularly files amicus curiae

1 Pursuant to Rule 37.6, SIFMA and the Chamber confirm that

no counsel for a party authored this brief in whole or in part and

that no person other than SIFMA or the Chamber, their members, or their counsel made a monetary contribution intended to

fund the preparation or submission of this brief. Pursuant to Rule

37.3(a), the parties have consented to the filing of this brief, each

in a separate writing filed concurrently with this brief.

briefs in cases such as this one that raise issues of concern to the nation’s business community.

SIFMA and Chamber members and their directors,

officers, and employees are often subjected to civil

suits or Commission enforcement actions brought under Section 10(b) of the Exchange Act of 1934 and Rule

10b-5. Civil litigation brought in pursuit of damages,

in particular, imposes enormous burdens, including

disruption of business, litigation costs, and settlement

expenses. Enforcement actions brought by the government add the prospect of sanctions that can end an individual’s career or criminal penalties that can include

incarceration. SIFMA and the Chamber, and the businesses and individuals whose interests they represent,

thus have a keen interest in obtaining clear guidance

regarding when Section 10(b) and Rule 10b-5 liability

may attach.

SUMMARY OF THE ARGUMENT

In Janus Capital Group, Inc. v. First Derivative

Traders, this Court held that one person cannot be

“held liable . . . under Rule 10b-5 for false statements”

made by another. 564 U.S. 135, 141 (2011). Now, just

seven years later, the D.C. Circuit has held that petitioner Francis Lorenzo can be held liable for false

statements made by another (Lorenzo’s boss), reasoning that this contrary result is warranted because its

decision rests on subsections (a) and (c) of Rule 10b-5,

whereas Janus supposedly addressed only subsection

(b) of that Rule.

This Court should reverse and make clear that there

is no liability in these circumstances under Rule 10b-5

regardless of the subsection involved. “For purposes of

Rule 10b-5,” as a whole, “the maker of a statement is

the person or entity with ultimate authority over the

statement, including its content and whether and how

to communicate it.” Id. at 142. That is the only answer

consistent with the controlling statute—Section

10(b)—and with the Court’s decisions construing that

statute, including Janus.

I.A. The D.C. Circuit’s key error was its myopic reliance on the language of the regulation, Rule 10b-5(a)

and (c), to the exclusion of any meaningful analysis of

whether Lorenzo’s conduct violated the statute, Section

10(b). This Court’s precedents instead command a

statute-focused approach.

A “complaint states a cause of action under any part

of Rule 10b-5 only if the conduct alleged can be fairly

viewed as ‘manipulative or deceptive’ within the meaning of the statute.” Santa Fe Indus., Inc. v. Green, 430

U.S. 462, 473–74 (1977) (emphasis added). However

broad the language of Rule 10b-5, “its scope cannot exceed the power granted the Commission by Congress

under § 10(b).” Ernst & Ernst v. Hochfelder, 425 U.S.

185, 214 (1976). That insight reverberates throughout

the Court’s Section 10(b) cases, several of which have

refused to find liability in circumstances covered by

the text of Rule 10b-5, but not Section 10(b). See Ernst,

425 U.S. at 212–14; Aaron v. SEC, 446 U.S. 680, 691

(1980); Chiarella v. United States, 445 U.S. 222, 225–

26 (1980).2

2 The Court’s approach reflects in part the fact that Rule 10b-5

was released with only an afternoon’s worth of thought and a single sentence of explanation. Indeed, the Commission essentially

created the Rule by copying the language of a different statute

(Section 17(a) of the 1933 Act) and pasting it into its regulation

as an interpretation of Section 10(b). See Ernst, 425 U.S. at 212

n.32.; 1 Louis Loss, Joel Seligman & Troy Paredes, Securities

Regulation 9.B.3 (5th ed. 2013).

In light of Section 10(b)’s primacy, the Court’s decisions have been careful to define the categories of conduct that violate Section 10(b)’s proscription of the

“use or employ[ment] of “any manipulative or deceptive device” in connection with the purchase or sale of

securities. See 15 U.S.C. § 78j(b). In Central Bank of

Denver, N.A. v. First Interstate Bank of Denver, N.A.,

the Court summarized those decisions, stating pointedly that the statute “prohibits only the making of a

material misstatement (or omission) or the commission of a manipulative act.” 511 U.S. 164, 175, 177–78

(1994) (emphases added). More recently, the Court’s

decision in Stoneridge Investment Partners, LLC v.

Scientific-Atlanta, 552 U.S. 148, 158 (2008), reiterated

that Section 10(b) violations consist of “only misstatements, omissions by one who has a duty to disclose,

and manipulative trading practices (where ‘manipulative’ is a term of art)” (citation omitted).

Seeking to create stable and predictable zones of liability, the Court has also carefully cabined the scope of

each category of Section 10(b) violations. In Santa Fe,

the Court confined “manipulation” to certain trading

practices “that are intended to mislead investors by artificially affecting market activity.” 430 U.S. at 476.

With respect to the duty to disclose, the Court repeatedly has held that a non-speaking defendant (such as

an inside trader) may violate Section 10(b) only by violating a duty of disclosure grounded in a relationship

of trust and confidence. See, e.g., Dirks v. SEC, 463

U.S. 646, 653–55, 657–59 (1983). Then, in Janus, the

Court addressed the last category of Section 10(b) violations, clarifying that, in defining the prohibition on

“the making of a material misstatement,” Cent. Bank,

511 U.S. at 177, it would “not expand liability beyond

the person or entity that ultimately has authority over

a false statement.” Janus, 564 U.S. at 144.

B. Reading the liability rule in Janus as applying to

Section 10(b) is the only sensible way of reconciling

this Court’s longstanding precedents, in an area where

clear, predictable rules and considerations of stare decisis are especially pronounced. The contrary rule

sought by the Commission and embraced by the D.C.

Circuit would dramatically blur long-settled lines between speaker and non-speaker liability under Section

10(b), and would “erase the line between primary violators and aiders and abettors established by Central

Bank.” Janus, 564 U.S. at 143, 147 & n.11.

It would also rob Rule 10b-5(b) of all meaning. In the

Commission’s view (which the D.C. Circuit adopted),

“primary liability under Rule 10b-5(a) and (c) also encompasses the ‘making’ of a fraudulent misstatement

to investors”—just like primary liability under Rule

10b-5(b). See Matter of John P. Flannery & James D.

Hopkins, Release No. 3981, at *12 (Dec. 15, 2014),

rev’d on other grounds, Flannery v. SEC, 810 F.3d 1

(1st Cir. 2015). This interpretation would reduce Rule

10b-5(b) to surplusage, even while also abrogating, in

practical effect, the limitation on liability set out in Janus. That is no way to read a regulatory text, or an

opinion of this Court for that matter.

C. The construction of Section 10(b) and Rule 10b-5

proposed by amici, in contrast, would respect the

Court’s Section 10(b) precedents and the structure of

Rule 10b-5. It would also give due regard to the 1933

and 1934 Acts. These statutes contain numerous provisions that expressly impose liability—albeit in carefully circumscribed ways—for the same kind of secondary uses of misstatements that the D.C. Circuit held

are implicitly prohibited by Rule 10b-5(a) and (c).

These provisions reach those who “cause” or “control”

the making of misstatements; “willfully participate[]”

in certain misstatements; sell securities “by means of”

documents containing misstatements; or (of particular

relevance here) “publish, give publicity to, or circulate”; or “disseminat[e]” certain misleading documents.

D. Finally, grounding Janus firmly in Section 10(b)

would bring clarity and stability to the securities laws

and therefore to the securities markets. Uncertain

rules not only are unfair to public enforcement respondents like Lorenzo, they create fodder for abusive

private suits. These suits make the country’s public

capital markets less attractive to entrepreneurs,

which shifts investment towards private equity. A decision from this Court that reaffirms the clear and

workable liability rule recognized in Janus would accordingly accrue to the benefit of the investing public.

II. In addition to reversing the Section 10(b) portion

of the decision below, the Court should vacate and remand to the D.C. Circuit the Section 17(a)(1)

charge. The D.C. Circuit treated Section 17(a)(1) as

condemning the same behavior that Rule 10b-5(a) and

thus Rule 10b-5, does not reach Lorenzo’s conduct, and

it is not clear what the D.C. Circuit would have held

regarding Section 17(a)(1) had it separately analyzed

that provision. Moreover, the courts of appeals have

not significantly addressed Section 17(a)(1)’s proper

scope, and because the Commission charged Lorenzo

with employing an unlawful “device” or “artifice,” but

not an unlawful “scheme,” this case does not present

the Court with an opportunity to consider the full

reach of Section 17(a)(1)—let alone the relationship of

that provision to other provisions of Section 17. Amici

respectfully submit, therefore, that the Court can and

should decide this case without opining on whether Lorenzo violated Section 17(a)(1).

ARGUMENT

I. THE D.C. CIRCUIT ERRED BY FAILING TO

INTERPRET RULE 10b-5 IN LIGHT OF ESTABLISHED LIMITATIONS ON SECTION

10(b) LIABILITY.

The D.C. Circuit erred when it ignored this Court’s

many decisions delimiting Section 10(b) and Rule 10b5 as a whole. Janus followed from those decisions. The

Court should confirm that the rule of Janus—including its approach to attribution, adoption, and dissemination—applies to any claim brought under Section

10(b) and Rule 10b-5 that is founded solely on an alleged misstatement. This rule would preserve the important distinction between primary and secondary violators and between potential liability for speaking

and non-speaking defendants, give proper effect to

other provisions of the securities laws, and protect the

nation’s public capital markets against the threat of

unwarranted private and public enforcement actions.

A. Section 10(b) Governs The Scope Of Liability Under Rule 10b-5 And Proscribes

Only Certain Well-Defined Conduct.

1. The Court long ago held that Rule 10b-5 does not

reach any conduct outside the four corners of the

Rule’s authorizing statute, Section 10(b) of the 1934

Act. In Ernst, the Commission claimed authority to

prosecute negligent behavior under Rule 10b-5, arguing that the broad language of Rule 10b-5(b) and (c)

“standing alone could encompass . . . negligent behavior.” 425 U.S. at 212. The Court agreed that the Rule’s

language alone “could be read as proscribing . . . any

course of conduct, that has the effect of defrauding investors, whether the wrongdoing was intentional or

not.” Id.

The Court, however, rejected the Commission’s invitation to read the regulation in isolation. It held that,

“despite the broad view of [Rule 10b-5] advanced by

the Commission,” the Rule’s “scope cannot exceed the

power granted the Commission by Congress under

[Section] 10(b).” Id. at 214. This holding followed from

basic tenets of administrative law: the “rulemaking

power granted to an administrative agency . . . is not

the power to make law.” Id. at 213. An agency only has

“the power to adopt regulations to carry into effect the

will of Congress as expressed by the statute.” Id. at 214

(quoting Dixon v. United States, 381 U.S. 68, 74

(1965)).

After holding that Section 10(b) demarcated the potential reach of Rule 10b-5, the Court determined that

the Commission’s reading of Rule 10b-5 exceeded

those bounds. Drawing from Section 10(b)’s reference

to “manipulation and deception, and of implementing

devices and contrivances,” id. at 214, the Court held

that Rule 10b-5 could not be construed to reach negligent conduct—even if the language of the Rule itself

went that far. Id.

Despite the Court’s reliance in Ernst on the statutory text, the Commission tried to limit Ernst to the

judicially implied private right of action. In Aaron v.

SEC, the Commission argued that the rule adopted in

Ernst applied only to private Rule 10b-5 suits, not to

injunctive actions brought by the Commission. 446

U.S. at 689. The Court rejected this attempt to artificially limit Ernst’s reading of the statute, and squarely

held that regardless whether an action is brought by a

private plaintiff or the Commission, “the language of

§ 10(b)” controls the scope of liability under Rule 10b5. Id. at 694–95.

2. Having established the primacy of Section 10(b),

the Court has since delineated the conduct the statute

prohibits. Section 10(b) only prohibits the “use” or “employ[ment]” of “any manipulative or deceptive device

or contrivance in contravention of such rules and regulations as the Commission may prescribe.” 15 U.S.C.

§ 78j(b). The Court has homed in on the statute’s “deceptive” or “manipulative” qualifiers, holding that a

“complaint states a cause of action under any part of

Rule 10b-5 only if the conduct alleged can be fairly

viewed as ‘manipulative or deceptive’ within the meaning of the statute.” Santa Fe, 430 U.S. at 473–74 (emphasis added).

In Santa Fe, a parent company had relied on a Delaware corporate law provision permitting the company

to buy out minority shareholders in exchange for cash.

Id. at 465–68. The plaintiffs attempted to assert liability based on the broad language of Rule 10b-5(a) and

(c), alleging that the defendants had engaged in a “device, scheme, or artifice to defraud,” through a “gross

undervaluation” of the plaintiffs’ shares, in breach of

their fiduciary duty to the plaintiffs. Id. at 467–68.

The Court disagreed. The Court first noted that the

defendants had not engaged in any “deceptive” act under Section 10(b) since the plaintiffs did not allege a

“material misrepresentation or material failure to disclose.” Id. at 474. That the defendants allegedly had

breached their fiduciary duty was not enough—absent

a misstatement by the defendants, the defendants’

conduct, however inappropriate or distasteful, did not

constitute the “deception” that Section 10(b) prohibits.

Id. at 474–75. As to manipulation, the Court held it

“readily apparent” that the defendants’ actions were

“not ‘manipulative’ within the meaning of the statute.”

Id. at 476. As the Court explained, “‘[m]anipulation’ is

‘virtually a term of art when used in connection with

securities markets.’” Id. (quoting Ernst, 425 U.S. at

199). “The term refers generally to practices, such as

wash sales, matched orders, or rigged prices, that are

intended to mislead investors by artificially affecting

market activity.” Id.

A few years later, the Court returned to the scope of

“deceptive,” as that term is used in Section 10(b). In

Chiarella v. United States, the defendant was charged

with a criminal violation of Section 10(b), on the theory

that he had unfairly traded on material non-public information. 445 U.S. at 224–25. The jury instruction

tracked the broad language of Rule 10b-5 subsections

(a) and (c): the jury could convict the defendant if it

found that he “employed a device, scheme, or artifice

to defraud” or “engaged in an act, practice, or course of

business which operated or would operate as a fraud

or deceit upon any person.” Id. at 236.3

This Court reversed. It held that the defendant did

not do anything “deceptive” within the meaning of Section 10(b) because “there can be no fraud absent a duty

to speak,” and on the facts before the Court, the defendant had no such specific duty. Id. at 235. In so ruling, the Court also rejected the Second Circuit’s suggestion that anyone possessing superior market information has a “general duty” running to “all participants in market transactions,” Chiarella, 445 U.S. at

233, to disclose that information (or refrain from trading on it) regardless of any pre-existing relationship.

See United States v. Chiarella, 588 F.2d 1358, 1364–

3 The government’s indictment also invoked the misstatement

language of Rule 10b-5(b). However, that portion of its indictment

was dismissed since Chiarella had not made any affirmative

statement. Chiarella, 445 U.S. at 225 n.5.

66 (2d Cir. 1978). The Court found no basis in the statute to support such a sweeping duty and cautioned

that, “[a]s we have emphasized before, the 1934 Act

cannot be read ‘more broadly than its language and the

statutory scheme reasonably permit.’ . . . Section 10(b)

is aptly described as a catchall provision, but what it

catches must be fraud.” Chiarella, 445 U.S. at 234–35

(quoting Touche Ross & Co. v. Redington, 442 U.S. 560,

578 (1979); SEC v. Sloan, 436 U.S. 103, 116 (1978)).4

The Court affirmed and restated all of these holdings

in its 1994 Central Bank decision: “As in earlier cases

considering conduct prohibited by § 10(b), we again

conclude that the statute prohibits only the making of

a material misstatement (or omission),” which can include a non-disclosure coupled with a duty to speak,

“or the commission of a manipulative act.” 511 U.S. at

177–78 (emphases added). The Court then restated the

same framework in its 2008 Stoneridge decision, confirming that Section 10(b) violations consist of “only

4 The Court relied both on its prior common law and Section

10(b) precedents and on the Commission’s own Cady, Roberts decision to conclude that “such liability is premised upon a duty to

disclose arising from a relationship of trust and confidence between parties to a transaction.” Chiarella, 445 U.S. 226–30 (citing

Matter of Cady, Roberts & Co., 40 S.E.C. 907, 911–13 (Nov. 8,

1961)). The Court, moreover, has since repeatedly adhered to Chiarella’s duty framework to define deceptive conduct under Section

10(b). See, e.g., United States v. O’Hagan, 521 U.S. 642, 654–55

(1997) (“Because the deception . . . involves feigning fidelity to the

source of information, if the fiduciary discloses to the source that

he plans to trade on the nonpublic information, there is no ‘deceptive device’ and thus no § 10(b) violation”); SEC v. Zandford, 535

U.S. 813, 821–23, 825 n.4 (2002) (broker’s Rule 10b-5(a) and (c)

liability for misappropriating assets derived from failure to make

disclosure required by fiduciary duty arising from discretion over

client investments); see also Salman v. United States, 137 S. Ct.

420, 423 (2016); Dirks, 463 U.S. at 653–55, 657–59.

misstatements, omissions by one who has a duty to disclose, and manipulative trading practices (where ‘manipulative’ is a term of art).” 552 U.S. at 158 (citation

omitted).

To be sure, there can be liability under Section 10(b)

without an “oral or written statement” because “[c]onduct itself can be deceptive.” Id. But this only underscores rather than amends the rule laid out in this

Court’s precedents. “Deception” consists of misstatements (including misstatements conveyed through

conduct rather than words), or the failure to disclose

in light of a clearly established duty to do so. “Manipulation” consists of a defined set of conduct, as explained in Santa Fe. Those are the only bases for liability covered by Section 10(b), and thus the only bases

that any provision of Rule 10b-5 can properly reach.

3. In light of this long tradition, the Court’s Janus

decision is properly understood as a case that refined

the meaning of “deceptive” under Section 10(b) by addressing what it means to commit a “deceptive” act

through “the making of a material misstatement or

omission.” Cent. Bank, 511 U.S. at 177.

In Janus, the Court began by stating the question

presented in holistic terms, asking whether “a mutual

fund investment adviser, can be held liable in a private

action under Securities and Exchange Commission

(SEC) Rule 10b-5 for false statements included in its

client mutual funds’ prospectuses.” 564 U.S. at 137

(emphasis added); see also id. at 141 (case concerned

liability “under Rule 10b-5 for false statements”). The

Court also emphasized that the Commission “promulgated Rule 10b-5 pursuant to authority granted under

§ 10(b) of the Securities Exchange Act of 1934.” Id. at

141.

Of course, the Court also placed significant weight

on the specific language of Rule 10b-5(b), id. at 142.

But it would be a mistake to read Janus (as the Commission and D.C. Circuit have), as a decision addressed solely to misstatements liability under Rule

10b-5(b), and not to misstatements liability under Section 10(b) and Rule 10b-5 as a whole.

In fact, the Court was careful to note that the “rule”

it announced “follow[ed] from” its decisions interpreting Section 10(b) and Rule 10b-5 such as Central Bank,

id. at 143, and described that “rule” as applying “for

purposes of Rule 10b-5”—not just subsection (b) of

Rule 10b-5. Id. at 142, 148 & n.12. Moreover, the Court

pointed out that this was “not the first time” it had

“disagreed with the SEC’s broad view of § 10(b) or Rule

10b–5” and cited Central Bank, Dirks, and Ernst,

among other leading Section 10(b) precedents. Id. at

145 n.8. Finally, the Court twice noted that a broader

reading would effectively expand primary liability to

encompass aiders and abettors, contrary to Central

Bank and Stoneridge. Id. at 143, 145. The Court’s

“rule” should thus be taken at face value as an interpretation of both Section 10(b) and Rule 10b-5. “[T]he

maker of a statement is the entity [or person] with authority over the content of the statement and whether

and how to communicate it.” Id. at 144. No one other

than a “maker” may be subjected to primary liability

under Section 10(b) and Rule 10b-5 on the theory that

the statement was materially false or misleading.

That conclusion is buttressed by Janus’s explicit

holding that merely acting as a conduit in disseminating the statements of others is “not a basis for liability.” Id. at 147–48 & nn.11–12 (rejecting argument

that distributing a prospectus by hosting it on a company website gives rise to liability). The Court further

explained that Rule 10b-5 does not impose liability for

making a statement “indirectly” unless the statement

was “attributed, explicitly or implicitly, to” the defendant: “[m]ore may be required . . . but attribution is necessary.” Id. at 147 n.11.

At the petition stage, the Commission obliquely referenced this aspect of Janus by arguing that the defendant in that case, unlike Lorenzo, “played no active

role in disseminating the misstatements.” BIO 14–15

(emphasis added). See also Pet. App. 21, 24–25. But

the Janus standard does not turn on the role that a

person or entity may play with respect to dissemination. To the contrary, Janus made clear that “[m]erely

hosting a document on a Web site does not indicate

that the hosting entity adopts the document as its own

statement or exercises control over its content.” 564

U.S. at 148 n.12 (emphasis added).

That one does not become civilly or criminally liable

under Section 10(b) merely by playing some role in the

dissemination of a statement is critical to amici and to

the businesses and individuals whose interests they

represent. Securities industry professionals, in particular, distribute the statements of others to their clients by many different channels and involving varying

degrees of directness, including public and private

websites, individual and mass emails, and the mailing

or physical distribution of prospectuses. Janus clarified that they do not accept exposure to Section 10(b)

or Rule 10b-5 liability each time they do so.

The Janus standard thus offers clear guidance, consistent with this Court’s precedents, for when such activities require securities industry professionals to

take responsibility for the contents of documents that

they disseminate. That is a crucial consideration in an

“‘an area that demands certainty and predictability,’ ”

Cent. Bank, 511 U.S. at 188 (quoting Pinter v. Dahl,

486 U.S. 622, 652 (1988)), and in which this Court has

previously rejected tests that are “complex in formulation and unpredictable in application.” Morrison v.

Nat’l Austl. Bank Ltd., 561 U.S. 247, 256 (2010). Neither the Commission nor the D.C. Circuit considered

whether the tests they adopted would promote the certainty and predictability across cases that this Court

has properly recognized as vital to the proper operation of the securities markets. Amici urge this Court to

preserve and reaffirm the clear and consistent Janus

rule.5

B. The D.C. Circuit’s Approach Would Undermine Section 10(b)’s Limitations On

Rule 10b-5 Liability.

1. The D.C. Circuit and the Commission gave far too

little consideration to this Court’s prior Section 10(b)

decisions and to Janus’s place within that line of decisions. Indeed, in a 2014 opinion, the Commission went

so far as to suggest that the Court had not defined “the

meaning of ‘deceptive’” devices or contrivances under

Section 10(b). Flannery, Release No. 3981, at *12 &

n.52. To the contrary, this Court’s decisions set forth

5 The D.C. Circuit appeared to mix and match standards with

its observation that Lorenzo had “effectively vouched for the

emails’ contents,” which it described as “self-attributed communications sent directly to investors.” Pet. App. 25. But it is apparently undisputed at this stage, as reflected in the question presented in both the Petition and the Commission’s Opposition, that

the D.C. Circuit correctly held that Lorenzo did not violate Rule

10b-5(b) under Janus. Pet. App. 15–19. Vouching or self-attribution were not the bases on which the Commission had found Rule

10b-5(a) or (c) liability. Pet. App. 77. Nor is the D.C. Circuit’s offhand formulation consistent with the approach to attribution or

adoption taken in Janus, which should be the proper analytical

framework.

above have amply defined and delimited the “deceptive” conduct that Section 10(b) prohibits, and that

Rule 10b-5 properly can reach.

Santa Fe and Chiarella—the Court’s decisions interpreting Section 10(b)’s proscription of “deceptive” devices—make clear that Section 10(b) only reaches misstatements consisting of a “material misrepresentation or material failure to disclose” (in light of a duty

to do so). Santa Fe, 430 U.S. at 474; Chiarella, 445 U.S.

at 236. Janus clarified these earlier decisions, holding

that misstatement liability attaches only to those responsible for its content.

It was thus error for the D.C. Circuit to say that involvement with a misstatement violates Rule 10b-5(a)

and (c), based solely on the observation (accurate, so

far as it goes) that those subsections are stated in

broad terms. As discussed above, the primary question

under this Court’s Section 10(b) cases is whether the

charged conduct violates the statute. Once the D.C.

Circuit determined that Lorenzo did not “make” the

false statements that formed the basis for the Commission’s charges, that should have been the end of the

inquiry, absent an allegation that Lorenzo violated

Section 10(b) in another way recognized by the Court’s

case law (i.e., by remaining silent where he had a duty

to speak, or by engaging in “manipulation,” within the

meaning of that term of art). Because no other such

basis for liability under Section 10(b) was found, the

conclusion that Lorenzo did not “make” the charged

misstatements means that he did not violate Section

10(b) or Rule 10b-5.

2. The D.C. Circuit also went wrong in attempting to

downplay the conflict between its conclusion and a key

animating rationale of the Court’s decisions in Janus

and Central Bank—to hold the Rule 10b-5 private

right of action within properly “narrow dimensions.”

Janus, 564 U.S. at 142 (quoting Stoneridge, 552 U.S.

at 167).

In Central Bank, the Court held that “Rule 10b–5’s

private right of action does not include suits against

aiders and abettors.” Id. at 143. Following Central

Bank, Congress amended the law to allow aiding and

abetting claims to be brought, but only by the Commission, 15 U.S.C. § 78t(e), leaving that side door firmly

shut to private litigants. That legislative choice has informed the Court’s reasoning in subsequent Section

10(b) cases. In Stoneridge, the Court rejected the petitioner’s “view of primary liability,” since it would have

made “any aider and abettor liable under § 10(b) if he

or she committed a deceptive act in the process of

providing assistance.” 552 U.S. at 162. And in Janus,

the Court reasoned that “[a] broader reading of ‘make,’

including persons or entities without ultimate control

over the content of a statement, would substantially

undermine Central Bank. If persons or entities without control over the content of a statement could be

considered primary violators who ‘made’ the statement, then aiders and abettors would be almost nonexistent.” 564 U.S. at 143.

The D.C. Circuit suggested that its holding could be

squared with Janus because “Lorenzo himself communicated with investors” and “his involvement was

transparent to them.” Pet. App. 24–25. The flaw in

that rationale should be apparent: aiders and abettors

may act visibly, and often do, as this Court’s Section

10(b) cases well illustrate. The investment adviser in

Janus and the indenture trustee in Central Bank both

had investor-facing roles that were visible to the plaintiffs in those cases. More broadly, conduct that qualifies as aiding and abetting is very often “transparent”—driving the getaway car is a quintessential example. See 2 Wayne R. LaFave, Substantive Criminal

Law § 13.2(a) (3d ed. 2017). And nothing in Janus or

Central Bank or recent congressional enactments provides any ground for suggesting, as the D.C. Circuit

did, that some aiders and abettors (the “visible” ones)

may be treated as primary violators of Section 10(b).

Judge Kavanaugh put his finger on another aspect

of this key issue in his dissenting opinion below. “For

decades [] the SEC has tried to erase” the distinction

between primary and secondary liability this Court

has worked hard to maintain. Pet. App. 46–47; see also

Andrew N. Vollmer, SEC Revanchism and the Expansion of Primary Liability Under Section 17(a) and Rule

10b-5, 10 VA. L. & Bus. Rev. 273, 275 (2016) (“much of

Flannery is not consistent with, and is antagonistic to,

a series of prominent Supreme Court decisions that

imposed meaningful boundaries around aspects of primary liability under Rule 10b-5”). The court of appeals

should not have countenanced the Commission’s latest

effort, and this Court certainly should not. It should

instead hold that neither the Commission nor private

litigants can evade the rule of Janus by relabeling misstatement claims as violations of Rule 10b-5 subsections (a) and (c). A person may not be subject to liability for a misstatement unless the misstatement is attributable to that person—merely sending an email,

hosting a webpage, or otherwise being part of the chain

of events that leads to the statement’s distribution is

not enough. To be liable under Section 10(b) and Rule

10b-5, the person must “make” the statement personally or clearly adopt it as his or her own.

3. The D.C. Circuit’s holding also fails to make sense

of the language and structure of Rule 10b-5 as a whole.

Unlike subsection (b), neither subsections (a) nor (c)

uses the word “statement.” See 17 C.F.R. § 240.10b-5.

Instead, subsection (a) speaks of “any device, scheme,

or artifice” and subsection (c) speaks of “any act, practice, or course of business.” Id. These words do not connote speaking, writing, or otherwise communicating,

and are hardly synonymous with making a “statement.” Especially when they are juxtaposed onto subsection (b)’s express focus on “statement[s],” they are

best read to be referring to conduct other than statements. Indeed, if subsection (a) and (c) embody all misstatement cases, then subsection (b) has no purpose or

meaning at all—a result at odds with the established

principle that courts should not read “text in a way

that makes part of it redundant.” See Nat’l Ass’n of

Home Builders v. Defs. of Wildlife, 551 U.S. 644, 669

(2007).

By contrast, applying Janus to all Section 10(b)

claims would leave plenty of work for Rules 10b-5(a)

and (c). As noted above, while Rule 10b-5(b) addresses

statements, it does not address omissions (except

those that render a statement misleading), or market

manipulation, or insider trading—all of which are

Rule 10b-5(a) and (c) violations routinely charged by

the Commission.

C. The D.C. Circuit’s Interpretation Fails To

Take Account Of Other Securities Law

Provisions That Expressly Address Misuses Of Statements.

Applying the Janus rule to all misstatement cases

under Section 10(b) would help give effect to Congress’s careful allocation of responsibilities and liability across the securities laws. In particular, the Commission’s effort to extend primary liability for merely

assisting in the dissemination or circulation of a statement made by another runs up against the fact that

Congress knew how to create liability for precisely that

type of conduct, and expressly did so elsewhere in the

1933 and 1934 Acts.

Section 9(a)(5) of the 1934 Act. To take one prime

example, Section 9(a)(5) of the 1934 Act makes it unlawful for anyone receiving consideration from certain

market actors (such as selling broker-dealers) “to induce the purchase of any security . . . by the circulation

or dissemination of information to the effect that the

price of any such security will or is likely to rise or fall

because of the market operations of any 1 or more persons” for that purpose. 15 U.S.C. § 78i(a)(5) (emphasis

added). For another, Section 17(b) of the 1933 Act

makes it unlawful in certain circumstances “to publish, give publicity to, or circulate any notice, circular,

advertisement, newspaper, article, letter, investment

service, or communication which, though not purporting to offer a security for sale, describes such security.”

Id. § 77q(b) (emphasis added).

More broadly, multiple provisions of the 1933 and

1934 Acts provide various avenues for liability for secondary involvement in statements, but subject to restrictions that do not apply to Section 10(b). These include Sections 9 and 18 of the 1934 Act, both of which

this Court has long seen as “close in structure, purpose, and intent to the 10b-5 action,” Musick, Peeler &

Garrett v. Employers Ins. of Wausau, 508 U.S. 286, 295

(1993), and both of which “target the precise dangers

that are the focus of § 10(b),” id. at 296 (quoting

Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 360 (1991)).

Section 9(f) of the 1934 Act. Section 9(f) of the

1934 Act, 15 U.S.C. § 78i(f), reaches beyond defendants

who use or employ the specified unlawful devices. Sections 9(a)–(c) prohibit certain enumerated forms of

market manipulation, id. § 78i(a)–(c), Section 9(a)(4)

prohibits false or misleading statements by a dealer,

broker, “or other person selling or offering [a security]

for sale” made “for the purpose of inducing the purchase or sale” of that security, id. § 78i(a)(4), and as

noted above, Section 9(a)(5) prohibits circulating or

disseminating certain information, id. § 78i(a)(5). Unlike Section 10(b), Section 9(f) creates additional express private civil liability for “[a]ny person who willfully participates in any act or transaction” prohibited

by Sections 9(a)–(c). Id. § 78i(f) (emphasis added). As

this Court has held, Section 9(f) shows that “Congress

knew of the collateral participation concept,” and thus

that the concept should not be implied into other civilliability provisions. Pinter, 486 U.S. at 650 n.26.

Section 18(a) of the 1934 Act. Section 18(a) imposes liability on any defendant who “shall make or

cause to be made” a statement that is “false or misleading with respect to any material fact” in “any application, report or document filed” pursuant to the 1934

Act. 15 U.S.C. § 78r(a) (emphasis added). In Section 10(b), by contrast, Congress did not prohibit the

“causing” of a deceptive device, but instead stopped at

the defendant who actually “use[s] or employ[s]” the

deceptive device in connection with a purchase or sale

of securities.

Section 20(a) of the 1934 Act and § 15 of the

1933 Act. In Sections 20(a) of the 1934 Act, 15 U.S.C.

§ 78t(a), and Section 15(a) of the 1933 Act, 15 U.S.C.

§ 77o(a), Congress authorized liability against “control

persons.” These two statutes make a person who “controls” another liable “to the same extent” as the “controlled person.” Id. §§ 77o(a), 78t(a). By reaching control persons, these statutes, “in marked contrast to the

implied [Section] 10 remedy . . . impose derivative liability.” Musick, Peeler, 508 U.S. at 296. There is no

need to stretch Section 10(b) and Rule 10b-5 to do work

that Congress has already done elsewhere and with

greater precision.

Sections 11 and 12 of the 1933 Act. Section 11 of

the 1933 Act creates a claim only against enumerated

defendants for misrepresentations or omissions in a

registration statement for an offering of new securities. See 15 U.S.C. § 77k(a). This list includes directors

of the issuer, underwriters, and those who sign or consent to be named in a registration statement. Id. Section 12(a)(1) and (a)(2) claims are directed against anyone who “[o]ffers or sells a security . . . by means of a

prospectus or oral communication” that is false or misleading, or in violation of registration requirements,

and may be brought only by “the person purchasing

such security from him.” Id. § 77l(a)(1)–(2) (emphasis

added). The class of defendants is limited to those in

privity with the plaintiff or who directly solicit the

plaintiff’s purchase at least in part for their own financial gain. This Court rejected extending Section 12 liability further to someone “whose participation in the

buy-sell [securities] transaction is a substantial factor

in causing the transaction to take place.” Pinter, 486

U.S. at 649–50; see Cent. Bank, 511 U.S. at 174–75,

179. Neither Section 11 nor Section 12 is enforceable

by the Commission.

The PSLRA. In enacting the Private Securities Litigation Reform Act (PSLRA), Congress rejected proposals to overrule Central Bank and expand the scope

of private civil liability under Section 10(b) to secondary actors. Instead, by enacting Section 20(e) of the

1934 Act, 15 U.S.C. § 78t(e), Congress expressly provided that aiders and abettors may be pursued in actions brought by the Commission. Thus, Congress gave

the Commission, but not private plaintiffs, an express

claim for conduct (“substantial assistance”) by those

who did not commit a primary violation of Section

10(b)—and required the Commission to pursue them

as aiders and abettors, not primary violators.

More Recent Legislation. In considering the 2002

Sarbanes-Oxley Act, Congress again rejected proposals to allow private civil plaintiffs to sue secondary

actors under Section 10(b). Specifically, the proposal

was to give “the victims of fraud the right to sue those

who aid issuers in misleading and defrauding the public.” H.R. Rep. No. 107-414, at 53–54 (2002). That effort was rejected.

In the 2010 Dodd-Frank Act, Congress once more rejected similar provisions that were included in the

original Senate version of the bill, in a stand-alone bill

proposed in the Senate, and in a conference amendment proposed in the House. See S. 1551, 111th Cong.

(2009); 156 Cong. Rec. S3569, S3618 (daily ed. May 12,

2010) (statement of Sen. Specter regarding Amendment No. 3776); Discussion Draft of Restoring American Financial Stability Act of 2009 § 984 (Nov. 10,

2009); Ronald D. Orol, Dodd Unveils Bank Reform Bill

Without GOP Support, MarketWatch, Nov. 10, 2009;

Press Release, Rep. Maxine Waters, Waters Wins Big

for Consumers, Homeowners, Minorities and Shareholders in Wall Street Reform and Consumer Protection Legislation (June 30, 2010). Instead, Congress expanded the Commission’s authority to pursue and

sanction aiders and abettors, see Dodd-Frank Wall

Street Reform and Consumer Protection Act, Pub. L.

No. 111-203, tit. IX, § 929M 124 Stat. 1376, 1861–62

(2010), and ordered a GAO study of private aiding and

abetting claims, see id. at, § 929Z 124 Stat. at 1871.

The study, issued after Janus, noted the competing

policy considerations and produced no recommendations. See GAO-11-664, Securities Fraud Liability of

Secondary Actors (July 21, 2011).

These legislative decisions make “unsupportable” a

reading of Section 10(b) and Rule 10b-5 that would

transform a large number of aiders and abettors into

primary violators. See Stoneridge, 552 U.S. at 162.

And yet the D.C. Circuit held that at least those aiders

and abettors whose involvement with actionable misstatements “was not ‘undisclosed’ to investors” may be

treated as primary violators. Pet. App. 24.

D. The D.C. Circuit’s Interpretation Will

Harm The Securities Markets.

Ratifying the bright-line “attribution is necessary”

rule adopted in Janus, 564 U.S. at 147 n.11, would

bring much-needed certainty to the securities laws and

therefore to the securities markets. The Court has repeatedly stressed the need for unambiguous, readily

administrable rules to govern and constrain securitiesfraud litigation. Without these rules, the Court has admonished, private lawsuits can be employed “abusively to impose substantial costs on companies and

individuals whose conduct conforms to the law.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308,

313 (2007). “[P]laintiffs with weak claims [can] extort

settlements” from “innocent” companies that nevertheless fear “extensive discovery and the potential for

uncertainty and disruption in a lawsuit.” Stoneridge,

552 U.S. at 163; see also Merrill Lynch, Pierce, Fenner

& Smith Inc. v. Dabit, 547 U.S. 71, 80–81 (2006).

These are not hypothetical concerns. In 2017, the

number of federal securities class actions reached a

record high—leapfrogging the previous record set in

2016. Press Release, Cornerstone Research, Securities

Class Action Filings Reach Record High for Second

Straight Year (Jan. 30, 2018), https://www.cornerstone.

com/Publications/Press-Releases/Securities-ClassAction-Filings-Reach-Record-High. Although these

suits are purportedly brought on behalf of shareholders, it is at least ironic that it is the shareholders who

typically come out on the losing end of this phenome-

non. Since Congress enacted the PSLRA in 1995, securities class actions have wiped out over $701 billion in

investment value and given shareholders only $90 billion. Inst. for Legal Reform, Economic Consequences:

The Real Costs of U.S. Securities Class Action Litigation (Feb. 28, 2014), https://www.instituteforlegal

reform.com/research/economic-consequences-the-realcosts-of-us-securities-class-action-litigation.

The direct cost of shareholder class actions, large as

it is, is dwarfed by the indirect cost to the country’s

litigation-attracting public markets. Both SIFMA and

the Chamber were involved in a recently issued report

detailing the decline of public companies among American businesses. Ctr. for Capital Mkts. et al., Expanding the On-Ramp: Recommendations to Help More

Companies Go and Stay Public (2018), https://www.

centerforcapitalmarkets.com/wp-content/uploads/2018/

04/IPO-Report_EXPANDING-THE-ON-RAMP.pdf.

The sad fact is that fewer entrepreneurs are taking

their companies public today, and when they do, they

tend to do so later in their company’s life cycle. At the

same time, public companies increasingly are going

private in part to avoid the litigation risks. The threat

of abusive Section 10(b) and Rule 10b-5 litigation is

one deterrent to going (and staying) public. That deterrent is largely grounded in a cause of action this

Court created—the Court must ensure it remains appropriately narrow.

Of course, this is an action by the Commission, not a

private suit. But this does not make the need for clarity any less acute. The Court’s decisions delimiting categories of liability under Section 10(b) and Rule 10b-5

do not distinguish between Commission enforcement

actions and civil suits. What the Court decides in this

case will apply equally to suits brought by private

plaintiffs. And in any event, clarity about scope of the

government’s enforcement powers serves important

ends as well. The investing public, regulated businesses, and the government officials charged with the

prudent and lawful exercise of the powers conferred by

the securities laws all stand to benefit from a decision

that brings clarity by rejecting the Commission’s effort

to end-run Janus and undermine the well-defined liability rule established by that decision. See Chiarella,

445 U.S. at 235 n.20 (“a judicial holding that certain

undefined activities ‘generally are prohibited’ by

§ 10(b) would raise questions whether either criminal

or civil defendants would be given fair notice that they

have engaged in illegal activity.”); FCC v. Fox Television Stations, Inc., 567 U.S. 239, 254 (2012) (agencies

must give a “person of ordinary intelligence fair notice

of what is prohibited” (quoting United States v. Williams, 553 U.S. 285, 304 (2008))).

II. THE D.C. CIRCUIT FAILED TO SEPARATELY DETERMINE WHETHER LORENZO COMMITTED A PUNISHABLE VIOLATION OF SECTION 17(a)(1).

Lorenzo also was held liable for violating Section

17(a)(1) of the Securities Act of 1933. Pet. App. 22, 77,

110. This Court should vacate this determination and

remand to the D.C. Circuit for further proceedings for

three reasons.

First, the D.C. Circuit’s decision devoted little independent analysis to text, context, or history of Section

17(a)(1). Pet. App. 20–22; see also id. at 77 (Commission decision). The D.C. Circuit concluded that Lorenzo had violated Rule 10b-5(a) and (c), treated Section 17(a)(1) as a fellow traveler to those regulatory

provisions, and thus concluded that Lorenzo must

have violated Section 17(a)(1). For reasons shown

above, however, the D.C. Circuit erred in concluding

that Lorenzo violated Section 10(b) and Rule 10b-5,

and it is unclear from the lower court’s opinion

whether it would have sustained the Commission’s

finding that Lorenzo violated Section 17(a)(1) absent

that error. Indeed, the D.C. Circuit never articulated

any specific view of what conduct that statutory provision covers, stating only, at a high level, that Section

17(a)(1) “readily encompasses Lorenzo’s actions.” Pet.

App. 22; see also id. at 33 (“Lorenzo’s particular conduct . . . fits comfortably within the language of . . .

Section[] . . . 17(a)(1).”). But of course, the D.C. Circuit

made exactly the same observation—erroneously—

about Rule 10b-5(a) and (c).

To be sure, the D.C. Circuit’s treatment of Section

17(a)(1) as more or less equivalent to Rule 10b-5(a) and

lower courts. See, e.g., SEC v. Monarch Funding Corp.,

192 F.3d 295, 308 (2d Cir. 1999) (“Essentially the same

elements are required under Section 17(a)(1)–(3) in

connection with the offer or sale of a security” as under

Rule 10b-5.”); Landry v. All Am. Assurance Co., 688

F.2d 381, 386 (5th Cir. 1982). The lower courts have

treated Section 17(a) and Rule 10b-5 similarly because

the language of the two provisions is similar. In fact,

the Rule’s language was likely “derived in significant

part” from Section 17(a). Ernst, 425 U.S. at 213 n.32.

But while the language is similar, it is not identical.

For instance, Section 17(a) as a whole applies “in the

offer or sale” of securities, 15 U.S.C. § 77q(a), whereas

Section 10(b)’s applies to conduct “in connection with”

covered transactions, id. § 78j(b). Cf. United States v.

Naftalin, 441 U.S. 768, 773 n.4 (1979) (noting possible

distinction between “in” and “in connection with”).

Moreover, Section 17(a), unlike Rule 10b-5, is not governed by the limitations imposed by Section 10(b)’s

“manipulative or “deceptive” language.

In part because of these differences—and in contrast

to the D.C. Circuit’s casual parallel construction—this

Court has in the past interpreted Section 17(a) and

Rule 10b-5 differently. For instance, the Court in Aaron concluded that a lesser state of mind was required

by Sections 17(a)(2) and 17(a)(3) than by Rules 10b5(b) and (c). See Aaron, 446 U.S. at 695–97. And the

plaintiffs in Santa Fe argued that their broad reading

of Rules 10b-5(a) and (c) was supported by the parallel

text of Section 17(a)(1) and 17(a)(3). See Respondents’

Brief at *9–15, Santa Fe Indus., Inc. v. Green, No. 751753, 1976 WL 181700 (U.S. Dec. 17, 1976). The Court,

however, declined to tie Section 17(a)(1) and (a)(3) to

Rule 10b-5 and resolved the case solely on the basis of

Section 10(b).

In short, the Court has already held that Section

10(b) and Section 17(a) are not coterminous at least as

regards the required mental state, and there are good

reasons to think they may diverge in other ways as

well. The Court accordingly should not adopt the D.C.

Circuit’s assumption that Section 17(a)(1) prohibits exactly the same sweep of conduct as Section 10(b) and

Rule 10b-5(a) and (c).

Second, the posture of this case provides an additional reason for this Court to defer consideration of

Section 17(a)(1), and in particular how it interacts

with Sections 17(a)(2) and 17(a)(3). Section 17(a)(1)

prohibits employing a “scheme” to defraud (a term

found in Rule 10b-5(a) but not in Section 10(b)), but

the Commission found only that “Lorenzo’s role in producing and sending the emails constituted employing

a deceptive ‘device,’ ‘act,’ or ‘artifice to defraud’ for purposes of liability under Section 10(b), Rule 10b-5(a)

and (c), and Section 17(a)(1)”—pointedly omitting any

reference to a “scheme.” Pet. App. 77. The D.C. Circuit

did the same. Id. at 34 (Lorenzo “‘engaged’ in a fraudulent ‘act’ and ‘employed’ a fraudulent ‘device’ when,

with knowledge of the statements’ falsity and an intent to deceive, he sent the statements to potential investors carrying his stamp of approval as investment

banking director.”). At least one court of appeals has

observed that a fraudulent scheme under Section

17(a)(1) may require “conduct beyond just misrepresentations or omissions” and thus set a higher bar

than a Rule 10b-5(b) violation. SEC v. Quan, 817 F.3d

583, 589 (8th Cir. 2016) (quoting jury instructions).

Given the absence of any fraudulent scheme finding in

the record, this case does not present the Court with

the opportunity to address the coverage of Section

17(a)(1) as a whole. A decision that implicates this critical provision without addressing its full contours

would likely generate more heat than light and is in

any event premature.

Third, as the Commission argued in opposition to Lorenzo’s Petition, there is no substantial or developed

Circuit split on the interpretation of Section 17(a)(1).

BIO 17–18. Section 17(a) has in general received far

less attention over the years than Section 10(b) and

Rule 10b-5. Accordingly, the better course for this

Court to follow is to remand to the D.C. Circuit for further proceedings regarding the Commission’s Section

17(a)(1) charge. If the issue here is a recurring one,

which is not clear, the Court can address Section 17(a)

more fully in a later case.

CONCLUSION

For the foregoing reasons, the Court should vacate

the D.C. Circuit’s judgment and remand to that court

for further proceedings with respect to Section

17(a)(1).

Respectfully submitted,

DANIEL A. MCLAUGHLIN

SIDLEY AUSTIN LLP

787 Seventh Avenue

New York, NY 10019

(212) 839-5300

CARTER G. PHILLIPS

KWAKU A. AKOWUAH*

KURT A. JOHNSON

SIDLEY AUSTIN LLP

1501 K Street, N.W.

Washington, D.C. 20005

(202) 736-8000

kakowuah@sidley.com

Counsel for Amici Curiae

STEVEN P. LEHOTSKY

U.S. CHAMBER LITIGATION CENTER

1615 H Street, N.W.

Washington, D.C. 20062

(202) 463-5337

Counsel for Amicus

Curiae Chamber of

Commerce of the United

States of America

August 27, 2018

IRA D. HAMMERMAN

KEVIN CARROLL

SECURITIES INDUSTRY &

FINANCIAL MARKETS ASSOCIATION

1101 New York Avenue,

N.W.

Washington, D.C. 20005

(202) 962-7382

Counsel for Amicus

Curiae Securities Industry & Financial Markets

Association

* Counsel of Record

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.