United States: The U.S. Supreme Court Expands The Scope Of Securities Fraud Liability

If an individual is not the "maker" of a false or misleading statement under Janus Capital Group v. First Derivative Traders, 564 U.S. 135 (2011), but disseminates it to the public with the intent to defraud, can he or she still be found liable for securities fraud under Rule 10b–5? The Supreme Court of the United States answered "Yes" in Lorenzo v. Securities and Exchange Commission, 587 U.S. ___ (2019).

Background

Francis Lorenzo was the director of investment banking at a registered broker-dealer in Staten Island, NY. He only had one investment banking client at the time: Waste2Energy, a company that developed technology to convert solid waste into clean renewable energy. Waste2Energy's June 2009 public filing indicated that its total assets were worth $14 million, including intellectual property valued at $10 million. In October 2009, Waste2Energy publicly disclosed – and importantly, disclosed to Mr. Lorenzo – that its intellectual property was "worthless" and that it had "written off all [of its] intangible assets". In other words, its total assets were only worth $370,000.

On October 14, 2009, at the direction of his boss, Mr. Lorenzo sent e-mails to prospective investors claiming that Waste2Energy had $10 million in confirmed assets. Mr. Lorenzo signed the e-mail with his own name and identified himself as "Vice President – Investment Banking". He was later charged by the Securities Exchange Commission and convicted of violating, among others, Securities Exchange Commission Rule 10b–5, which reads as follows:

Rule 10b–5 – Employment of Manipulative and Deceptive Practices

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

a. To employ any device, scheme, or artifice to defraud,

b. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

c. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

Mr. Lorenzo appealed to the United States Court of Appeals for the District of Columbia Circuit, arguing that he could not be held liable under subsection (b) because of the Supreme Court's Janus Capital decision. In Janus Capital, the Supreme Court found in that an individual who was not the maker of a false or misleading statement could not be liable under Rule 10b-5. "Maker" was defined as a "person or entity with ultimate authority over the statement, including its content and whether and how to communicate it". Because his boss had ultimate authority over the content of the statement, Mr. Lorenzo argued, he was not the maker of the statement. The D.C. Circuit agreed, but found that he disseminated the information with the intent to defraud the investors, and therefore his conduct was captured by the broader language of subsections (a) and (c). It is this latter finding which was appealed to the Supreme Court.

Opinion of the Court

Writing for the majority, Breyer J. upheld the D.C. Circuit's decision and found that Mr. Lorenzo, in knowingly disseminating a false or misleading statement with intent to defraud, breached Rule 10b–5(a) and (c). In doing so, the Supreme Court made a number of key observations:

  • First, relying on the ordinary definition of the wording in subsections (a) and (c), the Court found it was "obvious" that the provisions were broad enough to prohibit the dissemination of a false or misleading statement. Both provisions "capture a wide range of conduct", which includes that of Mr. Lorenzo.
  • Second, the Court disagreed with Mr. Lorenzo's interpretation that subsections (a), (b), and (c) should be read as governing different, mutually exclusive spheres of conduct. In doing so, the Court opined that:
    • "the Court and the Commission have long recognized considerable overlap among the subsections of the Rule and related provisions of the securities laws";
    • the SEC thought it prudent to include "both a general proscription against fraudulent and deceptive practices and, out of an abundance of caution, a specific proscription against nondisclosure" and that any general language in subsections (a) and (c) was meant to "cover additional kinds of illegalities" – not narrow the reach of subsection (b). To accept Mr. Lorenzo's argument would mean that an individual who disseminates false statements with the intent to defraud investors would escape liability under Rule 10b–5 altogether; and
    • the broader purpose of the law is to prohibit Mr. Lorenzo's conduct; namely to defraud investors.
  • Third, the Court  found that allowing Mr. Lorenzo's conduct to be captured by subsections (a) and (c) did not weaken or blur the distinction between primary and secondary liability under the "aiding and abetting" provision.1

In dissent, Thomas, J. disagreed that Mr. Lorenzo's conduct amounted to "employ[ing] any device, scheme, or artifice to defraud" or "engag[ing] in any act, practice, or course of business", which connote some form of planning or strategizing. Simply disseminating a note drafted by one's superior, he opined, does not fall under the purview of subsections (a) or (c). Further, Thomas, J. placed greater importance on the distinction between primary and secondary liability: "[i]f a person's only role is transmitting fraudulent misstatements at the behest of the statements' maker" and it is "administrative in nature" (much like Mr. Lorenzo's), his or her conduct would more appropriately be assessed under provisions such as aiding and abetting.

Implications

While the Supreme Court's decision makes it clear that Mr. Lorenzo is liable under Rule 10b–5, they did so knowing that Mr. Lorenzo's intent was to defraud investors (the panel's scienter findings were not at issue). The application of this decision may prove more difficult in "borderline" cases where the individual in question is only "tangentially involved in disseminating" a false statement. Further, if Lorenzo means that a litigant can advance overlapping claims of primary and secondary liability, this could broaden the scope of liability against individuals whose conduct is more akin to aiding and abetting.

Case Information

Lorenzo v. Securities and Exchange Commission, 587 U.S. ___ (2019)

Docket: 17-1077

Date of Decision: March 27, 2019

Footnote

1 Mr. Lorenzo argued that by finding his conduct is in violation of both subsection (a) (i.e., primarily liable) and Section 20(e) of the Exchange Act for aiding and abetting (i.e., secondarily liability),  it could weaken the distinction between primary and secondary liability. The Court used a firearm analogy to dispute his argument: if one sells another an unregistered firearm for the purposes of a bank robbery, the former can simultaneously be found primarily liable for the gun sale, and secondarily liable for a bank robbery.

To view the original article click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions