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Lorenzo v. Securities and Exchange Commission

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Supreme Court of the United States
Lorenzo v. Securities and Exchange Commission
Term: 2018
Important Dates
Argument: December 3, 2018
Decided: March 27, 2019
Outcome
Affirmed
Vote
6-2
Majority
Chief Justice John G. Roberts • Ruth Bader Ginsburg • Stephen Breyer • Samuel Alito • Sonia Sotomayor • Elena Kagan
Dissenting
Clarence Thomas • Neil Gorsuch

Lorenzo v. Securities and Exchange Commission is a case argued before the Supreme Court of the United States on December 3, 2018, during the court's 2018-2019 term. The court affirmed the ruling of the United States Court of Appeals for the District of Columbia Circuit, holding that an individual can be liable for disseminating false statements with intent to defraud under Securities and Exchange Commission (SEC) rules 10b-5(a) and (c), even if he or she cannot be held liable as the "maker" of the statements under Rule 10b-5(b). The case came on a writ of certiorari to the United States Court of Appeals for the District of Columbia Circuit.[1][2][3]

HIGHLIGHTS
  • The case: Francis Lorenzo, the director of investment banking at Charles Vista, LLC, sent emails containing false statements to potential investors. The SEC charged Lorenzo with violating three securities-fraud laws. The U.S. Court of Appeals for the D.C. Circuit agreed with the SEC that Lorenzo had violated two of the laws. However, it reversed in regards to the third provision, finding Lorenzo's boss had ultimate authority over the statements and therefore Lorenzo did not truly make the statements.
  • The issue: Whether a misstatement claim that does not meet the elements set forth in Janus Capital Group, Inc. v. First Derivative Traders can be repackaged and pursued as a fraudulent scheme claim.[4]
  • The outcome: The court affirmed the ruling of the D.C. Circuit, holding that an individual can be liable for disseminating false statements with intent to defraud under SEC rules 10b-5(a) and (c), even if he or she cannot be held liable as the "maker" of the statements under Rule 10b-5(b).[3][5]


    • You can review the lower court's opinion here.[6]

    Timeline

    The following timeline details key events in this case:

    • March 27, 2019: U.S. Supreme Court affirmed the D.C. Circuit's ruling
    • December 3, 2018: Oral argument
    • June 18, 2018: U.S. Supreme Court agreed to hear case
    • January 26, 2018: Petition filed with U.S. Supreme Court
    • September 29, 2017: The United States Court of Appeals for the District of Columbia Circuit partly reversed the SEC's ruling, finding that Lorenzo could not be charged with making false statements because it was his boss who had authority over the statements.

    Background

    Francis Lorenzo, the director of investment banking at Charles Vista, LLC, sent emails containing false statements about the company Waste2Energy Holdings (W2E) to potential investors. The SEC charged Lorenzo with violating three securities-fraud laws. An administrative judge found that Lorenzo "willfully violated the antifraud provisions of the Securities and Exchange Acts by his material misrepresentations and omissions concerning W2E in the emails."[6][7]

    Lorenzo petitioned the SEC to review the case, and the SEC agreed with the administrative law judge's decision. Lorenzo then appealed to the U.S. Court of Appeals for the D.C. Circuit. The appeals court agreed with the SEC that Lorenzo's emails did contain false statements and that Lorenzo did have intent to deceive or defraud. The court reversed in regards to the third provision, citing Janus Capital Grp., Inc. v. First Derivative Trader. The ruling read, "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."[6]

    Questions presented

    The petitioner presented the following questions to the court:[4]

    Questions presented:
    • 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.

    Audio

    • Audio of oral argument:[8]

    Transcript

    • Transcript of oral argument:[9]

    Outcome

    Justice Stephen Breyer delivered the 6-2 opinion of the court. The court affirmed the ruling of the D.C. Circuit, holding that an individual can be liable for disseminating false statements with intent to defraud under SEC rules 10b-5(a) and (c), even if he or she cannot be held liable as the "maker" of the statements under Rule 10b-5(b).[3][5]

    Justice Clarence Thomas delivered a dissenting opinion, to which Justice Neil Gorsuch joined. Click here for more information.

    Justice Brett Kavanaugh did not participate in the consideration or decision of the case. He recused himself because he considered the case while he was a judge on the D.C. Circuit Court of Appeals.

    Opinion

    In his opinion, Justice Breyer wrote:[5]

    “ By sending emails 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. ... Under the circumstances, it is difficult to see how his actions could escape the reach of those provisions. ...


    Lorenzo’s view that subsection (b), the making-false-statements provision, exclusively regulates conduct involving false or misleading statements would mean those who disseminate false statements with the intent to cheat investors might escape liability under the Rule altogether. [10]

    		”

    Dissenting opinion

    Justice Thomas issued a dissenting opinion, joined by Justice Gorsuch. In his dissent, Thomas wrote that the court's decision "misconstrues the securities laws and flouts our precedent in a way that is likely to have far-reaching consequences." He argued that Janus Capital Group, Inc. v. First Derivative Traders (2011) set the precedent that a person is not liable for a fraudulent statement if the person does not have "ultimate authority over the statement."[5]

    “ Under the Court’s rule, a person who has not “made” a fraudulent misstatement within the meaning of Rule 10b–5(b) nevertheless could be held primarily liable for facilitating that same statement; the SEC or plaintiff need only relabel the person’s involvement as an “act,” “device,” “scheme,” or “artifice” that violates Rule 10b–5(a) or (c). ... In short, Rule 10b–5(b) and §17(a)(2) are rendered entirely superfluous in fraud cases under the majority’s reading. ...


    I would hold that Lorenzo’s conduct did not amount to a primary violation of the securities laws and reverse the judgment of the Court of Appeals. Accordingly, I respectfully dissent. [10]

    		”

    Text of the opinion

    • Read the full opinion here.

    See also

    External links

    Footnotes

    1. ↑ Supreme Court of the United States, "17-1077 Lorenzo v. Securities and Exchange Commission," accessed November 1, 2018
    2. ↑ SCOTUSblog, "Lorenzo v. Securities and Exchange Commission," accessed March 28, 2019
    3. ↑ 3.0 3.1 3.2 SCOTUSblog, "Opinion analysis: Justices uphold securities liability for distributing false statements," March 27, 2019
    4. ↑ 4.0 4.1 Supreme Court of the United States, "QPReport 17-1077 Lorenzo v. Securities and Exchange Commission," accessed November 1, 2018
    5. ↑ 5.0 5.1 5.2 5.3 Supreme Court of the United States, Lorenzo v. Securities and Exchange Commission, March 27, 2019
    6. ↑ 6.0 6.1 6.2 SCOTUSblog, "Lorenzo v. Securities and Exchange Commission," accessed November 1, 2018
    7. ↑ Oyez, "Lorenzo v. Securities and Exchange Commission," accessed November 1, 2018
    8. ↑ Supreme Court of the United States, Lorenzo v. Securities and Exchange Commission, argued December 3, 2018
    9. ↑ Supreme Court of the United States, Lorenzo v. Securities and Exchange Commission, argued December 3, 2018
    10. ↑ 10.0 10.1 Note: This text is quoted verbatim from the original source. Any inconsistencies are attributable to the original source.
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