Second Circuit Rejects SEC Request To Revisit Holding That “Scheme Liability” Requires Conduct Beyond Misstatements And Omissions
Company Acquired By SPAC Agrees To Pay $125 Million To Settle SEC Probe Months After CEO Was Charged With Fraud
On July 15, 2022, a panel of the United States Court of Appeals for the Second Circuit ruled against the Securities and Exchange Commission (“SEC”) in an interlocutory appeal the SEC had brought seeking to expand the scope of “scheme liability” under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c) thereunder. SEC v. Rio Tinto plc, No. 21-2042 (2d Cir. Jul. 15, 2022). Specifically, the SEC had urged the Second Circuit, in a case it had brought against a mining company and certain of its former executives (the “Defendants”), to hold that the Supreme Court’s decision in Lorenzo v. SEC, 139 S. Ct. 1094 (2019), abrogated the Second Circuit’s prior decision in Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005), which had found that a defendant can only be liable for scheme liability under Rule 10b-5(a) and (c) where they engage in misleading conduct beyond misstatements and omissions. The Second Circuit panel ruled that Lentell remains good law, and that any expansion of the scheme liability provisions of Rule 10b-5(a) and (c) would need to come either from the Second Circuit en banc or the Supreme Court.
On December 21, 2021, the Securities and Exchange Commission (SEC) announced that Nikola Corporation—a publicly traded company that develops, manufactures, and sells electric trucks—had agreed to a $125 million settlement agreement to end the SEC’s investigation into claims that the company, both directly and through its former CEO, Trevor Milton, had deceived investors about the company’s ability to build hydrogen-powered vehicles and other issues. As part of the settlement, Nikola neither admitted nor denied the claims against it, and agreed to continue cooperating with the SEC in its separate investigation into Milton himself. The SEC previously brought a suit against Milton, who was also charged by the Department of Justice (“DOJ”), and that case remains pending.