August 25, 2022

Assessing Impact of Second Circuit's Rio Tinto Decision on Scheme Liability

Holland & Knight Alert
Scott Mascianica


  • A recent ruling by the U.S. Court of Appeals for the Second Circuit in SEC v. Rio Tinto plc shows that the U.S. Supreme Court's 2019 decision in Lorenzo v. SEC did not completely settle the debate over whether misrepresentations can serve as the sole basis for "scheme liability" violations of the antifraud provisions of the Securities Exchange Act of 1934.
  • The Rio Tinto holding makes clear that, within the Second Circuit, "something extra" is required beyond misstatements for there to be violations of the scheme liability subsections, although the court was clear that the issue is one that "awaits further development."
  • Though the Second Circuit's ruling brings some clarity to the issue within the circuit for now, the narrow holding and divergent opinions outside the circuit reveal that this may be an issue that ends up back at the U.S. Supreme Court.

When it comes to the federal securities laws, clear answers can occasionally be hard to find. There may be no better example than the question around the overlap of the "misstatement liability" and "scheme liability" subsections of the antifraud provisions of the Securities Exchange Act of 1934. For decades, courts have grappled with the degree of overlap and reached divergent conclusions. The U.S. Supreme Court's 2019 decision in Lorenzo v. SEC seemingly brought some measure of clarity to the debate. However, the U.S. Court of Appeals for the Second Circuit's recent decision in SEC v. Rio Tinto plc proved that the waters remain muddied. In this client alert, we'll provide a brief overview of federal court decisions on scheme liability, detail the Rio Tinto matter and the Second Circuit's opinion, and provide some key takeaways.

Background of Scheme Liability in the Second Circuit

Rule 10b-5 makes it unlawful: "(a) To employ any device, scheme, or artifice to defraud, (b) [t]o make any untrue statement of a material fact …, or (c) [t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit … in connection with the purchase or sale of any security."1 To state a claim under subsection (b) (the "misstatement liability" subsection) the plaintiff has the burden to plead and prove that the defendant was the "maker" of the false statement—"the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it."2 A plaintiff asserting a claim under subsection (b) must also meet the heightened pleading standards of the Private Securities Litigation Reform Act (PSLRA).

Concerning subsections (a) and (c)—the "scheme liability" subsections—the Second Circuit has long held that there is no claim "where the sole basis of the claims is alleged misrepresentations or omissions[.]"3 In other words, a defendant may be liable under the scheme liability subsections only when the conduct also encompasses conduct beyond those misrepresentations or omissions.

Similarly, for U.S. Securities and Exchange Commission (SEC) enforcement matters, courts within the Second Circuit have held that "where the primary purpose and effect of a purported scheme is to make a public misrepresentation or omission, courts have routinely rejected the SEC's attempt to bypass the elements necessary to impose 'misstatement' liability under section (b) by labeling the alleged misconduct a 'scheme' rather than a 'misstatement.'"4 District courts within the Second Circuit historically have drawn a distinction between "conduct that is itself deceptive" and "conduct that became deceptive only through … misstatements …"5 Courts have held that the SEC recasting misrepresentations as a scheme is tantamount to a "back door" for imposing liability on those "who did no more than facilitate preparation of material misrepresentations or omissions actually communicated by others …"6 Such a result "would swallow" the bright-line test between primary and secondary liability.7

Lorenzo v. SEC

In 2015, following an appeal from an administrative law judge finding, the Commission found that Francis Lorenzo had violated Section 10(b) of the Exchange Act and each subsection of Rule 10b-5 by sending false and misleading statements to investors with an intent to defraud.8 Lorenzo, the director of investment banking at a registered broker-dealer, sent two emails to prospective investors describing a debt offering.9 Lorenzo sent the emails at the direction of his boss, who supplied the content and "approved" the messages.10 The emails described an investment as having, among other things, $10 million in "confirmed assets."11 The emails omitted the fact that the company had publicly stated that its assets were in fact worth less than $400,000.12 The Commission found such conduct violated both the misrepresentation and scheme liability subsections of Rule 10b-5.

Lorenzo appealed to the U.S. Court of Appeals for the District of Columbia Circuit, which reversed, in part, holding that, under Janus, Lorenzo could not be held liable for the misrepresentations as a "maker" under subsection (b) of the Rule because his boss "asked Lorenzo to send the emails, supplied the central content, and approved the messages for distribution."13 However, the D.C. Circuit affirmed the Commission's scheme liability finding under subsections (a) and (c) of the Rule.14 Lorenzo, acting with scienter, produced email messages containing misstatements, sent the messages directly to potential investors, and encouraged them to contact him personally with any questions.15 Thus, Lorenzo's own active "role in producing and sending the emails constituted employing a deceptive 'device,' 'act,' or 'artifice to defraud' for purposes of" scheme liability under subsections (a) and (c).16

Lorenzo appealed and the U.S. Supreme Court granted certiorari to "resolve disagreement about whether someone who is not a 'maker' of a misstatement under Janus can nevertheless be found to have violated the other subsections of Rule 10b-5 and related provisions of the securities laws, when the only conduct involved concerns a misstatement."17 The Supreme Court affirmed the D.C. Circuit's ruling and held that dissemination of false or misleading statements with intent to defraud can render one liable under the scheme liability subsections, even if the disseminator did not "make" the statements and consequently has no misstatement liability under Rule 10b-5(b).18 Importantly, the Court rejected Lorenzo's arguments that the scheme liability subsections "are violated only when conduct other than misstatements is involved" and that holding to the contrary would render Rule 10b-5(b) "superfluous."19 The Court pointed to Supreme Court precedent, the "expansive language" of the Rule, and the Court's history of recognizing "considerable overlap among the subsections of the Rule and related provisions of the securities laws."20

SEC v. Rio Tinto Overview and Second Circuit Holding

The SEC v. Rio Tinto matter involves a long and winding road dating back to October 2017, when the SEC filed a 60-page complaint against Rio Tinto and its former CEO and CFO (collectively, Rio Tinto Defendants) for alleged misconduct dating back to 2011. The SEC's complaint outlined the company's $3.7 billion acquisition of a Mozambique coal mine, and the Rio Tinto Defendants' alleged failure to disclose value impairments and other associated problems with the coal mine. Among the SEC's claims were allegations that the Rio Tinto Defendants violated the scheme liability provisions.

The Rio Tinto Defendants moved to dismiss the complaint. One week before the Supreme Court issued its decision in Lorenzo, the U.S. District Court for the Southern District of New York granted the motion to dismiss many of the SEC's claims, including its claims around scheme liability.21 Relying on the Second Circuit's holding in Lentell and the district court's holding in Kelly, Judge Analisa Torres found that all of the SEC's allegations amounted to misstatements or omissions and that "the SEC must allege 'the performance of an inherently deceptive act that is distinct from an alleged misstatement.'"22

On the SEC's motion for reconsideration in light of the intervening decision in Lorenzo, the SEC argued that Lorenzo expanded the scope of scheme liability so that allegations of misstatements and omissions alone are sufficient to state a scheme liability claim under subsections (a) and (c)."23 Judge Torres denied reconsideration, finding that although dissemination of false statements with the intent to defraud provides a basis for scheme liability under Lorenzo, the SEC did not allege that the Rio Tinto Defendants disseminated false information—only that they failed to prevent misleading information from being disseminated by others.24

The SEC filed an interlocutory appeal on the question of whether "misstatements and omissions—without more—can support scheme liability."25 The Second Circuit affirmed, holding that "[u]ntil further guidance from the Supreme Court (or in banc consideration here), Lentell binds: misstatements and omissions can form part of a scheme liability claim, but an actionable scheme liability claim also requires something beyond misstatements and omissions, such as dissemination."26 Like the district court, the Second Circuit interpreted Lorenzo narrowly, holding that Lorenzo does not stand for the proposition that misstatements alone could be the sole basis for scheme liability; rather, in Lorenzo, "dissemination of those misstatements was key."27 Although the court noted that its opinion was limited to the legal issue, it was clear that "Lorenzo tells us that dissemination is one example of something extra that makes a violation a scheme."28

The Second Circuit made several other key observations:

  • "Were misstatements and omissions alone sufficient to constitute a scheme, the scheme subsections would swallow the misstatements subsections …," and although Lorenzo acknowledged "considerable overlap," the Court "did not announce that the misstatement subsections were subsumed."29
  • "Using Janus as a backstop, Lorenzo signaled that it was not giving the SEC license to characterize every misstatement or omission as a scheme." The Second Circuit viewed Lorenzo as a Janus "carve out" for the dissemination of false statements, but otherwise preserving the holding in Janus that mere participation in preparation of misstatements did not create primary liability.30
  • An "overreading" of Lorenzo could allow private litigants to "repackage their misstatement claims as scheme liability claims" to avoid the heightened pleading standards of the PSLRA. 31 Under the PSLRA, the heightened pleading requirements only apply to misstatement claims—not scheme liability claims.
  • Similarly, an "overreading" of Lorenzo would "muddle primary and secondary liability," which has significant collateral consequences given that only the SEC can bring actions for aiding and abetting liability. The Second Circuit found that such distinctions are consistent with Supreme Court precedent, which does not permit shortcuts around the limitations of liability for a secondary actor's role in the misstatements of others.32

Key Takeaways

  • Clear as Mud? The Second Circuit held that Lorenzo's holding that dissemination of false and misleading statements "is one example of something extra that makes a violation a scheme."33 However, the Second Circuit did not opine on whether the SEC's allegations in the Rio Tinto complaint were sufficient to constitute "something extra." As the court noted, "[w]e do not consider, for example, whether corruption of an auditing process is sufficient for scheme liability under Lorenzo or allegations that a corporate officer concealed information from auditors."34 The court noted that it had "no occasion" to consider these types of arguments based on the narrow issue on appeal. The court also opined that, to the extent Lorenzo "blur[s] the distinctions" between the various subsections of Rule 10b-5, it is "a matter that awaits further development."35

Although the Second Circuit ruling brings some clarity—for now—to the issue within the circuit, the narrow holding warrants a deeper assessment of how courts within the Second Circuit historically considered Lorenzo prior to Rio Tinto. For example, a few months before the Second Circuit issued its Rio Tinto opinion, Judge Naomi Reice Buchwald of the Southern District of New York noted that "there is a split in authority regarding Lorenzo's holding."36 Additionally, in a 2021 SEC enforcement action in the Southern District of New York, Judge J. Paul Oetken denied a motion to dismiss the SEC's scheme liability claims, noting that "[m]any courts in the Second Circuit have come to the same conclusion: Lorenzo instructs that a plaintiff may make out a scheme liability claim by identifying manipulative or deceptive acts grounded in alleged misrepresentations or omissions." 37

Going forward, courts within the Second Circuit will have the benefit of the Rio Tinto decision as "further development" of this issue unfolds. However, the divergent views on Lorenzo within the circuit and the cabined nature of the Second Circuit's holding suggest that far more debate—and possibly disagreement—on this issue are sure to follow.

  • What About Outside the Second Circuit? Further complicating matters, courts outside the Second Circuit have reached different interpretations of Lorenzo than the Second Circuit. For example, in Malouf v. SEC, the U.S. Court of Appeals for the Tenth Circuit rejected the defendant's argument that his failure to correct another's misstatements was a theory that was "inseparable from the misstatements themselves" and "obliterated the distinction" between misrepresentation and scheme liability.38 In addressing Lorenzo, the Malouf court held:

The Supreme Court granted certiorari in Lorenzo to decide "whether someone who is not a 'maker' of a misstatement under [Rule 10b-5(b)] … can nevertheless be found to have violated [Rule 10b-5(a) and (c)] and related provisions of the securities laws, when the only conduct involved concerns a misstatement." The Supreme Court answered "yes."39

Two district courts within the U.S. Court of Appeals for the Seventh Circuit reached similar conclusions to Malouf. For example, in SEC v. Kameli, the U.S. District Court for the Northern District of Illinois rejected the argument that defendants' false or misleading statements or omissions could not also be used as a basis for scheme liability claims.40 The Kameli court noted that "until recently, this position enjoyed considerable support among courts," but found that position "is no longer tenable, however, in light of the Supreme Court's decision in [Lorenzo].41 Following a summary of Lorenzo, the Kameli court rejected the defendants' argument that Lorenzo merely carves out an exception where defendants have disseminated misrepresentations.42 Instead, the court found that Lorenzo "effectively abrogated the line of cases on which defendants rely and permits liability under Rule 10b-5(a) and (c) for both making and disseminating misleading statements—despite some resulting redundancy with Rule 10b-5(b).43

Similarly, in SEC v. Winemaster, the court initially noted that to state a claim under the scheme liability provisions, it must be premised on a course of deceptive or manipulative conduct.44 However, in light of Lorenzo, the court found that there was no basis to find the 10b-5 subsections as "governing different, mutually exclusive, spheres of conduct."45 The court found that although the defendant's conduct was tied to another making misstatements, this did not put his actions outside the reach of the scheme liability provisions.46 Notably, the court held that the defendant's failure to disclose certain agreements for proper accounting consideration constituted a deceptive act.47 Perhaps most relevant for purposes of the Rio Tinto decision, the Winemaster court addressed an argument from the defendant concerning SEC v. Lucent Technologies, Inc., a District of New Jersey case cited with approval by the Rio Tinto court.48 After summarizing the holding in the Lucent opinion, the Winemaster court held "[o]f course, the [Lucent] court's holding is no longer viable following the Supreme Court's decision in Lorenzo …"49

If courts outside the Second Circuit continue down this path, it could present a situation where this very issue will boomerang back to the Supreme Court.

  • What About that Janus/Section 17(a)(2) Finding? Although not covered in the Second Circuit's opinion given the limited nature of the appeal, one aspect of the Rio Tinto matter that has received little attention is the district court's dismissal of the SEC's Section 17(a)(2) claims against the individual defendants because they were not "makers" of the false statements in accordance with Janus.50 Courts across the country have typically found that Janus does not apply to claims under Section 17(a)(2).51 Notably, courts within the Second Circuit have reached similar conclusions.52

Conversely, in addition to Rio Tinto, the Southern District of New York in Kelly found that Janus did apply to the SEC's claims under Section 17(a).53 Although overshadowed by the scheme liability holdings to date, the applicability of Janus to Section 17(a)(2) claims will be an intriguing matter to follow in its own right.


1 17 C.F.R. § 240.10b-5.

2 Janus Capital Grp., Inc. v. First Deriv. Traders, 564 U.S. 135, 142 & 145 (2011) (holding that investment adviser who merely participated in the drafting of misstatement that was made by another could not be liable under Rule 10b-5(b) because he was not the "maker" of the misstatement, which is the "person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.").

3 Lentell v. Merrill Lynch & Co. Inc., 396 F.3d 161, 177 (2d Cir. 2005) (italics added).

4 SEC v. Kelly, 817 F. Supp. 3d 340, 343 (S.D.N.Y. 2011) (citations omitted).

5 Id. at 343-44.

6 Id. at 343.

7 Id.

8 In the Matter of Francis Lorenzo, AP File No. 3-15211, 2015 WL 1927763 (Apr. 29, 2015).

9 Id. at *4.

10 Id. at *10.

11 Id. at *4.

12 Id. at *5.

13 Lorenzo v. SEC, 872 F.3d 578, 588 (D.C. Cir. 2017).

14 Id. Notably, then-Circuit Court Judge Brett Kavanaugh's dissent emphasized that the majority's holding "creates a circuit split by holding that mere misstatements, standing alone, may constitute the basis for so-called scheme liability under the securities laws—that is, willful participation in a scheme to defraud—even if the defendant did not make the misstatements. No other court of appeals has adopted the approach that the majority opinion adopts here. Other courts have instead concluded that scheme liability must be based on conduct that goes beyond a defendant's role in preparing mere misstatements or omissions made by others." Id. at 600-601 (Kavanaugh, J., dissenting) (citations omitted).

15 Id. at 589.

16 Id.

17 Lorenzo v. SEC, 139 S. Ct. 1094, 1100 (2019).

18 Id. at 1099.

19 Id. at 1101.

20 Id. at 1102-03.

21 SEC v. Rio Tinto plc, No. 17-cv-7994, 2019 WL 1244933 (S.D.N.Y. Mar. 18, 2019) (hereinafter, "Dismissal Order").

22 Id. at *15-16 (quoting Kelly, 817 F. Supp. 2d at 344)).

23 SEC v. Rio Tinto PLC, No 17-cv-7994, 2021 WL 818745, at *2 (S.D.N.Y. Mar. 3, 2021) (hereinafter, "Reconsideration Order").

24 Id.

25 SEC v. Rio Tinto PLC, 41 F.4th 47, 49 (2d Cir. 2022).

26 Id.

27 Id. at 53.

28 Id.

29 Id. at 54.

30 Id.

31 Id. at 55.

32 Id. (citing SEC v. Lucent Techs., Inc., 610 F. Supp. 2d 342, 361 (D.N.J. 2009)).

33 Rio Tinto, 41 F.4th at 49.

34 Id. at 54.

35 Id. at 53-54.

36 SEC v. MiMedx Grp., Inc., No. 19-cv-10927, 2022 WL 902784, at *11 (S.D.N.Y. Mar. 28, 2022) (Buchwald, J.) (denying motion to dismiss SEC's scheme liability claims because the SEC "adequately alleges that [the defendant] engaged in deceptive acts beyond issuing misstatements, including his concealment of material facts from MiMedx's Audit Committee and auditors.").

37 SEC v. Sequential Brands Grp., Inc., No. 20-cv-10471, 2021 WL 4482215, at *6 (S.D.N.Y. Sept. 30, 2021) (Oetken, J.) (citing Puddu v. 6D Glob. Techs., Inc., No. 15 Civ. 8061, 2021 WL 1198566, at *11 (S.D.N.Y. Mar. 30, 2021) ("In line with the reasoning in Lorenzo, the Court sees no basis to conclude that a plaintiff may not establish, in a scheme liability claim, the existence of a 'manipulative or deceptive act' by pointing to alleged misrepresentations or omissions."); SEC v. Fiore, 416 F. Supp. 3d 306, 320 (S.D.N.Y. 2019) ("[T]he Supreme Court's recent ruling in SEC v. Lorenzo forecloses [D]efendants' … argument in this case."); SEC v. SeeThruEquity, LLC, No. 18 Civ. 10374, 2019 WL 1998027, at *5 (S.D.N.Y. Apr. 26, 2019) (rejecting argument "that the SEC inadequately alleges 'scheme' liability under Rule 10b-5(a) and (c) and Section 17(a)(1) and (3) because it fails to allege a deceptive act that is distinct from misstatements").

38 933 F.3d 1248, 1259 (10th Cir. 2019)

39 Id. at 1259-60.

40 No. 17-C-4686, 2020 WL 2542154, at *14 (N.D. Ill. May 19, 2020).

41 Id.

42 Id.

43 Id. (citing SeeThruEquity, 2019 WL 1998027, at *5); see also In re Cognizant Tech. Sols. Corp. Sec. Litig., No. 16-06509, 2020 WL 3026564, at *17 (D.N.J. June 5, 2020) ("[U]nder Lorenzo, unlike prior precedent, a plaintiff need not necessarily allege deceptive conduct that extends beyond the alleged misstatement itself.").

44 529 F. Supp. 3d 880, 917-18 (N.D. Ill. 2021).

45 Id. at 918.

46 Id.

47 Id. at 919 (citing SEC v. Sells, No. C-11-4941 CW, 2012 WL 3242551, at *9 (N.D. Cal. Aug. 10, 2012) (finding that the SEC pleaded a deceptive act where the defendants' activities or the concealment of their actions resulted in the misrepresentations to the market by others)).

48 Rio Tinto, 41 F.4th at 55; SEC v. Lucent Techs., Inc., 610 F. Supp. 2d 342 (D.N.J. 2009).

49 Winemaster, 529 F. Supp. 3d at 919.

50 Dismissal Order, at *16-17; Reconsideration Order, at *3.

51 See, e.g., SEC v. Big Apple Consulting USA, Inc., 783 F.3d 786, 796 (11th Cir. 2015) ("any attempts by the defendants to import the [Supreme] Court's narrow holding [in Janus] to the entirety of § 17(a) is untenable on its face"); SEC v. Monterosso, 756 F.3d 1326, 1334 (11th Cir. 2014) ("Janus has no bearing on this case" involving claims under Section 17(a) and 10b-5(a) and (c)); SEC v. Pocklington, No. EDCV18701JGBSPX, 2018 WL 6843663, at *14 (C.D. Cal. Sept. 10, 2018) (joining other district courts within the Ninth Circuit that refuse to extend Janus to Section 17(a) claims); SEC v. Benger, 931 F. Supp. 2d 904, 906 (N.D. Ill. 2013) (noting "the vast majority of courts dealing with the question of whether Janus also applies to claims under Section 17 have answered that question with a resounding 'no.'").

52 SEC v. Hurgin, 484 F. Supp. 3d 98, 116-17 (S.D.N.Y. 2020) (finding that claims under Section 17(a) of the Securities and Section 14(a) of the Exchange do not require defendant to have personally made or prepared misleading statements); SEC v. Pentagon Capital Mgmt. PLC, 844 F. Supp. 2d 377, 422 (S.D.N.Y. 2012), aff'd in part, vacated in part and remanded in part on other grounds, 725 F.3d 279 (2d Cir. 2013) ("Nor does Janus apply to SEC enforcement actions brought pursuant to Section 17(a) of the Securities Act"); SEC v. Stoker, 865 F. Supp. 2d 457, 465 (S.D.N.Y. 2012) (compiling list of cases that Janus does not apply to Section 17(a) claims by SEC).

53 Kelly, 817 F. Supp. 2d at 345.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

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