28 1. “Scheme” Liability Is Incompatible With Central Bank’s Reliance Requirement. Even when a defendant has used or employed a deceptive device, such as a misstatement, but that statement is not disclosed to investors, the defendant itself has not made “a material misstatement (or omission) on which a purchaser or seller of securities relies.” Central Bank, 511 U.S. at 191 (emphasis added). Under Central Bank, reliance upon the public statements of issuers and auditors is insufficient to satisfy the reliance element to hold a different, silent defendant liable as a primary violator. See id. at 180 (“A plaintiff must show reliance on the defendant’s misstatement or omission to recover under 10b-5.”). Lack of reliance on a secondary actor is no different just because the defendant is relabeled from an aider and abettor to a schemer. Such a defendant’s conduct or statements are still unknown to the plaintiff and the market and that defendant still has no relationship that creates a duty to disclose.15 The fraud on the market doctrine is of no assistance in establishing reliance against “scheme” liability defendants. That doctrine applies only to “publicly available information” from the defendant. Basic, 485 U.S. at 247; see Dinsmore v. Squadron, Ellenoff, Plesent, Sheinfeld & Sorkin, 135 F.3d 837, 843 (2d Cir. 1998) (investors did not rely on attorneys’ misrepresentations to SEC that were not public). The 15
As Central Bank recognized, 511 U.S. at 177, 180, it would be particularly inappropriate to apply the word “indirectly” from the preamble to § 10 to make the reliance requirement easier to satisfy in a § 10(b) private damages action. The reliance requirement does not arise from the language of § 10(b) and thus does not apply when the SEC sues. Supra, at 14 & n.17. Rather, the courts created a reliance requirement to keep the judicially implied private damages action within “careful limits.” Central Bank, 511 U.S. at 180. It would be improper to apply the “indirectly” language of § 10(b) to weaken the important reliance limit on the private damages action when the language of § 10(b) does not itself create a private damages action in the first place.
