Supreme Court Decides Lorenzo v. SEC

On March 27, 2019, the Supreme Court decided Lorenzo v. SEC, No. 17-1077, holding that a defendant who disseminates false or misleading statements to potential investors with the intent to defraud can violate Securities and Exchange Commission (SEC) Rules 10b–5(a) and (c), as well as the relevant statutory provisions, even if the disseminator cannot be held liable under SEC Rule 10b–5(b).

Francis Lorenzo was the director of investment banking at Charles Vista, LLC, a registered broker-dealer in Staten Island, N.Y. Lorenzo’s only investment banking client at the time was Waste2Energy Holdings, Inc., a company developing technology to convert “solid waste” into “clean renewable energy.” In early October 2009, Waste2Energy publicly disclosed, and Lorenzo was told, that its total assets amounted to $370,552. On October 14, 2009, Lorenzo sent two emails to prospective investors in which he stated that Waste2Energy had “confirmed assets” of $10 million. Although Lorenzo signed the emails with his own name, he testified that he sent the emails at the direction of his supervisor.

The SEC instituted proceedings against Lorenzo and found that Lorenzo violated SEC 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. The SEC fined Lorenzo $15,000 and barred him from working in the securities industry for life. Lorenzo appealed to the U.S. Court of Appeals for the D.C. Circuit. The D.C. Circuit held that in light of Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011), a prior Supreme Court opinion holding that only the “maker” of a statement is liable for its falsity under SEC Rule 10b-5(b), Lorenzo could not be charged with “making” false statements under Rule 10b-5(b) because his supervisor asked Lorenzo to send the emails, supplied the central content of the emails, and approved the emails for distribution. Lorenzo’s supervisor was therefore the “maker” of those false statements. Nevertheless, the D.C. Circuit sustained the SEC’s finding that by knowingly disseminating false information to prospective investors, Lorenzo violated subsections (a) and (c) of Rule 10b-5, as well as the related statutory provisions.

The Supreme Court affirmed. Subsection (a) of Rule 10b-5 makes it unlawful to “employ any device, scheme, or artifice to defraud.” Subsection (b) makes it unlawful to “make any untrue statement of a material fact.” And subsection (c) makes it unlawful to “engage in any act, practice, or course of business” that “operates . . . as a fraud or deceit.” Relying on the plain language of Rules 10b-5(a) and (c), the Court held that these broadly-worded provisions include within their scope the dissemination of false or misleading information with the intent to defraud. By sending emails that he understood to contain material untruths, Lorenzo “employ[ed]” a “device,” “scheme,” and “artifice to defraud” within the meaning of Rule 10b-5(a), and “engage[d] in a[n] act, practice, or course of business” that “operate[d] . . . as a fraud or deceit” under Rule 10b-5(c). Lorenzo could therefore be held liable for violating these provisions even if he could not be held liable for “mak[ing]” a false statement under Rule 10b-5(b).

Justice Breyer delivered the opinion of the court, in which Chief Justice Roberts and Justices Ginsburg, Alito, Sotomayor, and Kagan joined. Justice Thomas filed a dissenting opinion, in which Justice Gorsuch joined. Justice Kavanaugh did not participate in the consideration or decision of the case.