Recent Case Law Developments Expand the Scope of Liability for Securities Transactions: An Analysis of the Interplay Between Expansions of Primary Liability Under Statutory Seller and Scheme Liability Theories and Proposals for Clarification or Reform
ABSTRACT
In 2022 the Ninth and Eleventh Circuits opened up a Circuit split regarding the definition of a “seller” under § 12(a) of the Securities Act of 1933. These Circuits expanded the scope of defendants liable as “sellers” by rejecting a rule agreed upon by every other Circuit to have considered the question that held that in order to qualify as a seller the defendant must have had direct personal contact with the purchaser-plaintiff. This has implications both for industry actors who are now considered “sellers” in these two Circuits, as well as for purchasers seeking to file suit in deciding who to name.
This split came just a few years after the 2019 Supreme Court opinion in Lorenzo v. SEC where it first countenanced a “scheme liability” theory of Rule 10b-5(a) and (c) securities fraud against a party who had disseminated, but not made, false or misleading statements. Finding scheme liability to be a primary liability theory, the Supreme Court thus expanded the scope of the defendant class under Rule 10b-5. This likewise has implications both for industry actors who can be sued only post-Lorenzo and for plaintiffs.
Given that releasing the types of non-targeted publications into the markets which the Ninth and Eleventh Circuits have now said suffice to make someone a “seller” would also likely count as “dissemination” under 10b‑5, these simultaneous developments create a legal landscape where a defendant can be liable both as part of a fraudulent scheme and as a seller, despite not having any discernible relationship with the plaintiff. Clarity of definitions and limiting principles in the scope of the defendant class for securities fraud cases under the two legal provisions at issue,10b-5 and § 12(a), are needed either from courts or regulators to preserve the predictable functioning of the financial markets, as well as the congressional intent behind the two separate laws.