HELD: Dissemination of false or misleading statements with intent to defraud can fall within the scope of Rules 10b-5(a) and (c), as well as the relevant statutory provisions, even if the disseminator did not "make" the statements and consequently falls outside Rule 10b-5(b).
In the Matter of Francis V. Lorenzo (Opinion, SEC, '33 Act Rel. No. 9762; '34 Act Rel. No. 74836; Admin. Proc. File No. 3-15211 / April 29, 2015)
As set forth in the "Syllabus" to the SEC's Opinion:
A formerly registered representative committed securities fraud by sending two potential investors emails that he knew contained false and misleading information about his firm's client. Held, it is in the public interest to bar respondent from associating with an investment adviser, broker, dealer, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization and from participating in an offering of penny stock; order him to cease and desist from committing or causing any violations or future violations of the provisions violated; and order him to pay a civil monetary penalty of $15,000.
As presented in the introductory portion of the SEC Opinion on pages 2 - 3 of the SEC Opinion [Ed: footnotes omitted; note that "Gregg Lorenzo is not related to Respondent Francis V. Lorenzo"]:
Francis V. Lorenzo, formerly a registered representative, appeals an administrative law judge's finding that he violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5 by sending false and misleading statements to prospective investors. For these violations, the law judge barred Lorenzo from the securities industry, ordered him to cease and desist from violating the antifraud provisions, and ordered him to pay a third-tier civil monetary penalty of $15,000. The Division cross-appeals the imposition of the civil penalty and asks that we increase the penalty to "at least $100,000."
The charges against Lorenzo stem from emails he sent to retail customers that contained false and misleading statements about a debenture offering by his client, Waste2Energy Holdings, Inc. ("W2E"). The emails promised the customers that their investment would have three "layers of protection": (i) that W2E had more than $10 million "in confirmed assets"; (ii) that W2E had "purchase orders and [letters of intent] for over $43 mm in orders"; and (iii) that Lorenzo's employer, Charles Vista, LLC, had "agreed to raise additional monies to repay these Debenture holders (if necessary)." Lorenzo admitted at the hearing that he knew each of these statements was false and/or misleading when he sent them. For the reasons below, his conduct violated the antifraud provisions of the federal securities laws and warrants imposition of an industry-wide bar, a cease-and-desist order, and a $15,000 civil penalty. Our findings are based on an independent review of the record.
[L]orenzo was director of investment banking at Charles Vista, LLC, a registered brokerdealer owned by Gregg Lorenzo, from February 2009 through February 2010 (the relevant time here). As Lorenzo described it, Charles Vista was "a small boiler room." Its registered representatives, Lorenzo explained, engaged in high-pressure sales tactics, were "not being a hundred percent accurate in their presentations" to brokerage clients, and seemed to be "stretching the truth." Lorenzo's only investment banking client during the relevant time was W2E. Lorenzo's responsibilities included preparing offering documents for W2E; making sure the company made all material disclosures; and conducting due diligence, including reviewing the company's financial statements and public filings.
Francis V. Lorenzo, Petitioner, v. Securities and Exchange Commission, Respondent (Opinion, On Petition for Review of an Order of the Securities & Exchange Commission, United States Court of Appeals for the District of Columbia Circuit, 15-1202 / September 29, 2017: Srinivasan and Griffith, J.; Kavanaugh dissenting)
As set forth in the "Syllabus" to the Majority Opinion:
The Securities and Exchange Commission found that Francis Lorenzo sent email messages to investors containing misrepresentations about key features of a securities offering. The Commission determined that Lorenzo's conduct violated various securities fraud provisions. We uphold the Commission's findings that the statements in Lorenzo's emails were false or misleading and that he possessed the requisite intent.
We cannot sustain, however, the Commission's determination that Lorenzo's conduct violated one of the provisions he was found to have infringed: Rule 10b-5(b). That rule bars the making of materially false statements in connection with the purchase or sale of securities. We conclude that Lorenzo did not "make" the false statements at issue for purposes of Rule 10b-5(b) because Lorenzo's boss, and not Lorenzo himself, retained "ultimate authority" over the statements. Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 142 (2011).
While Lorenzo's boss, and not Lorenzo, thus was the "maker" of the false statements under Rule 10b-5(b), Lorenzo played an active role in perpetrating the fraud by folding the statements into emails he sent directly to investors in his capacity as director of investment banking, and by doing so with an intent to deceive. Lorenzo's conduct therefore infringed the other securities-fraud provisions he was charged with violating. But because the Commission's choice of sanctions to impose against Lorenzo turned in some measure on its misimpression that his conduct violated Rule 10b-5(b), we set aside the sanctions and remand the matter to enable the Commission to reassess the appropriate penalties.
As set forth in the "Syllabus" to the Dissent:
Suppose you work for a securities firm. Your boss drafts an email message and tells you to send the email on his behalf to two clients. You promptly send the emails to the two clients without thinking too much about the contents of the emails. You note in the emails that you are sending the message "at the request" of your boss. It turns out, however, that the message from your boss to the clients is false and defrauds the clients out of a total of $15,000. Your boss is then sanctioned by the Securities and Exchange Commission (as is appropriate) for the improper conduct.
What about you? For sending along those emails at the direct behest of your boss, are you too on the hook for the securities law violation of willfully making a false statement or willfully engaging in a scheme to defraud?
According to the SEC, the answer is yes. And the SEC concludes that your behavior - in essence forwarding emails after being told to do so by your boss - warrants a lifetime suspension from the securities profession, on top of a monetary fine.
That is what happened to Frank Lorenzo in this case. The good news is that the majority opinion vacates the lifetime suspension. The bad news is that the majority opinion - invoking a standard of deference that, as applied here, seems akin to a standard of "hold your nose to avoid the stink" - upholds much of the SEC's decision on liability. I would vacate the SEC's conclusions as to both sanctions and liability. I therefore respectfully dissent.
Argument Before Supreme Court
On June 18, 2018, the United States Supreme Court granted certiorari of Francis V. Lorenzo, Petitioner, v. Securities and Exchange Commission, Respondent (17-1077):
The antifraud provisions of the federal securities laws prohibit two well-defined categories of misconduct. One category is the use of fraudulent statements in connection with the offer and sale of securities. The other category is employing fraudulent schemes in connection with the offer and sale of securities. In Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011), this Court considered the elements of a fraudulent statement claim and held that only the "maker" of a fraudulent statement may be held liable for that misstatement under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 (b).
The question presented is whether a misstatement claim that does not meet the elements set forth in Janus can be repackaged and pursued as a fraudulent scheme claim. The Circuits have split 3-2 on this question. The Second, Eighth and Ninth Circuits have held that a misstatement alone cannot be the basis of a fraudulent scheme claim, while the DC Circuit and the Eleventh Circuit have held that a misstatement standing alone can be the basis of a fraudulent scheme claim.
JUSTICE KAVANAUGH IS RECUSED IN THIS CASE
CERT. GRANTED 6/18/2018
Read a copy of the written transcript of the December 3, 2018, Oral Argument
Listen to the December 3, 2018, Oral Argument
Francis V. Lorenzo, Petitioner, v. Securities and Exchange Commission (Opinion, United States Supreme Court, 17-1077; 587 U.S. __ (2019)
In an Opinion delivered by Breyer, J. and joined by Roberts, C.J., Ginsburg, Alito, Sotomayor and Kagan the Supreme Court affirmed the District Court. Thomas, J. and Gorsuch, J. dissented. Kavanaugh, J. took no part. As set forth in the Supreme Court's Syllabus:
As set forth in the Thomas Dissent (Gorsuch joining):
Securities and Exchange Commission Rule 10b-5 makes it unlawful to (a) "employ any device, scheme, or artifice to defraud," (b) "make any untrue statement of a material fact," or (c) "engage in any act, practice, or course of business" that "operates . . . as a fraud or deceit" in connection with the purchase or sale of securities. In Janus Capital Group, Inc. v. First Derivative Traders, 564 U. S. 135, this Court held that to be a "maker" of a statement under subsection (b) of that Rule, one must have "ultimate authority over the statement, including its content and whether and how to communicate it." Id., at 142 (emphasis added). On the facts of Janus, this meant that an investment adviser who had merely "participat[ed] in the drafting of a false statement" "made" by another could not be held liable in a private action under subsection (b). Id., at 145.
Petitioner Francis Lorenzo, while the director of investment banking at an SEC-registered brokerage firm, sent two e-mails to prospective investors. The content of those e-mails, which Lorenzo's boss supplied, described a potential investment in a company with "confirmed assets" of $10 million. In fact, Lorenzo knew that the company had recently disclosed that its total assets were worth less than $400,000.
In 2015, the Commission found that Lorenzo had violated Rule 10b-5, §10(b) of the Exchange Act, and §17(a)(1) of the Securities Act by sending false and misleading statements to investors with intent to defraud. On appeal, the District of Columbia Circuit held that Lorenzo could not be held liable as a "maker" under subsection (b) of the Rule in light of Janus, but sustained the Commission's finding with respect to subsections (a) and (c) of the Rule, as well as §10(b) and §17(a)(1).
Held: Dissemination of false or misleading statements with intent to defraud can fall within the scope of Rules 10b-5(a) and (c), as well as the relevant statutory provisions, even if the disseminator did not "make" the statements and consequently falls outside Rule 10b-5(b). Pp. 5-13.
(a) It would seem obvious that the words in these provisions are, as ordinarily used, sufficiently broad to include within their scope the dissemination of false or misleading information with the intent to defraud. By sending e-mails he understood to contain material untruths, Lorenzo "employ[ed]" a "device," "scheme," and "artifice to defraud" within the meaning of subsection (a) of the Rule, §10(b), and §17(a)(1). By the same conduct, he "engage[d] in a[n] act, practice, or course of business" that "operate[d] . . . as a fraud or deceit" under subsection (c) of the Rule. As Lorenzo does not challenge the appeals court's scienter finding, it is undisputed that he sent the e-mails with "intent to deceive, manipulate, or defraud" the recipients. Aaron v. SEC, 446 U. S. 680, 686, and n. 5. Resort to the expansive dictionary definitions of "device," "scheme," and "artifice" in Rule 10b-5(a) and §17(a)(1), and of "act" and "practice" in Rule 10b-5(c), only strengthens this conclusion. Under the circumstances, it is difficult to see how Lorenzo's actions could escape the reach of these provisions. Pp. 5-7.
(b) Lorenzo counters that the only way to be liable for false statements is through those provisions of the securities laws-like Rule 10b-5(b)-that refer specifically to false statements. Holding to the contrary, he and the dissent say, would render subsection (b) "superfluous." The premise of this argument is that each subsection governs different, mutually exclusive, spheres of conduct. But this Court and the Commission have long recognized considerable overlap among the subsections of the Rule and related provisions of the securities laws. And the idea that each subsection governs a separate type of conduct is difficult to reconcile with the Rule's language, since at least some conduct that amounts to "employ[ing]" a "device, scheme, or artifice to defraud" under subsection (a) also amounts to "engag[ing] in a[n] act . . . which operates . . . as a fraud" under subsection (c). This Court's conviction is strengthened by the fact that the plainly fraudulent behavior confronted here might otherwise fall outside the Rule's scope. Using false representations to induce the purchase of securities would seem a paradigmatic example of securities fraud. Pp. 7-9.
(c) Lorenzo and the dissent make a few other important arguments. The dissent contends that applying Rules 10b-5(a) and (c) to conduct like Lorenzo's would render Janus "a dead letter." Post, at 9. But Janus concerned subsection (b), and it said nothing about the Rule's application to the dissemination of false or misleading information. Thus, Janus would remain relevant (and preclude liability) where an individual neither makes nor disseminates false information- provided, of course, that the individual is not involved in some other form of fraud. Lorenzo also claims that imposing primary liability upon his conduct would erase or at least weaken the distinction between primary and secondary liability under the statute's "aiding and abetting" provision. See 15 U. S. C. §78t(e). But the line the Court adopts today is clear: Those who disseminate false statements with intent to defraud are primarily liable under Rules 10b-5(a) and (c), §10(b), and §17(a)(1), even if they are secondarily liable under Rule 10b-5(b). As for Lorenzo's suggestion that those like him ought to be held secondarily liable, this offer will, too often, prove illusory. Where a "maker" of a false statement does not violate subsection (b) of the Rule (perhaps because he lacked the necessary intent), a disseminator of those statements, even one knowingly engaged in an egregious fraud, could not be held to have violated the "aiding and abetting" statute. And if, as Lorenzo claims, the disseminator has not primarily violated other parts of Rule 10b-5, then such a fraud, whatever its intent or consequences, might escape liability altogether. That anomalous result is not what Congress intended. Pp. 9-13.
872 F. 3d 578, affirmed.
In Janus Capital Group, Inc. v. First Derivative Traders, 564 U. S. 135 (2011), we drew a clear line between primary and secondary liability in fraudulent-misstatement cases: A person does not "make" a fraudulent misstatement within the meaning of Securities and Exchange Commission (SEC) Rule 10b-5(b) -- and thus is not primarily liable for the statement -- if the person lacks "ultimate authority over the statement." Id., at 142. Such a person could, however, be liable as an aider and abettor under principles of secondary liability.
Today, the Court eviscerates this distinction by holding that a person who has not "made" a fraudulent misstatement can nevertheless be primarily liable for it. Because the majority misconstrues the securities laws and flouts our precedent in a way that is likely to have far-reaching consequences, I respectfully dissent. . . .
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