Lorenzo v. SEC. & Exch. Comm'n
2019 U.S. LEXIS 2295, 203 L. Ed. 2d 484, 139 S. Ct. 1094 (2019)
Rule of Law:
An individual who knowingly disseminates false or misleading statements to investors with the intent to defraud can be held primarily liable for securities fraud under Rule 10b-5(a) and (c), even if they are not the 'maker' of the statements under Rule 10b-5(b).
Facts:
- Francis Lorenzo was the director of investment banking at Charles Vista, LLC, a registered broker-dealer.
- Lorenzo's sole investment banking client was Waste2Energy Holdings, Inc., which hired his firm to sell $15 million in debentures to investors.
- Waste2Energy initially reported total assets of approximately $14 million, including over $10 million in intangible intellectual property, which Lorenzo privately believed was a 'dead asset'.
- In early October 2009, Waste2Energy publicly disclosed that its intellectual property was worthless and its total assets were only $370,552; Lorenzo was aware of this disclosure.
- On October 14, 2009, Lorenzo sent two emails to prospective investors at the direction of his boss, who supplied the content.
- The emails stated that the investment was protected by '$10 million in confirmed assets' and failed to mention the recent asset write-down.
- Lorenzo signed the emails with his own name and his title, 'Vice President-Investment Banking,' and invited recipients to contact him with any questions.
Procedural Posture:
- The Securities and Exchange Commission (SEC) instituted administrative proceedings against Francis Lorenzo.
- An SEC administrative law judge found that Lorenzo violated securities laws, including Rule 10b-5, and the Commission affirmed this finding, fining Lorenzo, issuing a cease-and-desist order, and barring him from the securities industry for life.
- Lorenzo, as petitioner, appealed the SEC's order to the U.S. Court of Appeals for the District of Columbia Circuit.
- The Court of Appeals held that Lorenzo was not the 'maker' of the false statements under Rule 10b-5(b) per Janus, but affirmed that his conduct violated the scheme liability provisions of Rule 10b-5(a) and (c).
- Lorenzo filed a petition for a writ of certiorari with the U.S. Supreme Court, which was granted.
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Issue:
Does an individual who knowingly disseminates false or misleading statements, but is not the 'maker' of those statements, engage in a fraudulent scheme or practice that violates Rule 10b-5(a) and (c) and related securities laws?
Opinions:
Majority - Justice Breyer
Yes. Disseminating false or misleading statements with the intent to defraud falls within the scope of subsections (a) and (c) of Rule 10b-5, as well as related securities statutes. The language of these provisions, which prohibits employing a 'device, scheme, or artifice to defraud' and engaging in any 'act' or 'practice' that operates as a fraud, is sufficiently broad to encompass Lorenzo's conduct. The subsections of Rule 10b-5 are not mutually exclusive and have considerable overlap, a design intended to provide broad protection to investors. Holding that only the 'maker' of a statement can be liable for misrepresentations would create a serious loophole, allowing a knowing disseminator of fraud to escape liability, which would undermine the fundamental purpose of the securities laws. This decision does not render Janus a 'dead letter,' as Janus only addressed the narrow definition of a 'maker' under subsection (b) and did not concern liability for dissemination under the scheme provisions.
Dissenting - Justice Thomas
No. An individual who does not 'make' a false statement cannot be held primarily liable for it under the general anti-fraud provisions of Rule 10b-5. The majority's holding eviscerates the distinction between primary and secondary liability established in Janus. Rule 10b-5(b) specifically governs false statements, and under the canon of construction that the specific governs the general, it should be the exclusive provision for misstatement liability. By allowing the broad scheme liability provisions of subsections (a) and (c) to cover the same conduct, the majority renders subsection (b) superfluous. Lorenzo's conduct should be assessed under principles of secondary (aiding and abetting) liability, not primary liability. The majority’s decision blurs a critical line and could improperly expand primary liability to individuals, like secretaries or assistants, who are only tangentially involved in disseminating information.
Analysis:
This decision significantly clarifies and arguably expands the scope of primary liability for securities fraud following the Court's more restrictive holding in Janus. It establishes that the act of disseminating false information, separate from the act of creating it, can be a primary violation under the 'scheme liability' provisions of Rule 10b-5. This provides the SEC and private plaintiffs a powerful alternative path to pursue secondary actors, such as investment bankers or lawyers who knowingly pass on fraudulent information, as primary violators. The ruling blurs the previously clearer line between primary violators and aiders/abettors, potentially increasing the litigation risk for a wider range of participants in securities transactions.
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