On 3 December 2018, the U.S. Supreme Court heard argument in Lorenzo v. SEC. The case is an appeal of the D.C. Circuit's ruling that a person who does not make the alleged false statement can still be primarily liable for securities fraud.
Lorenzo, the petitioner, sent an email to investors containing misrepresentations about key features of a securities offering. There is no dispute that the emails contained false or misleading statements, and that Lorenzo possessed the requisite intent. The relevant portions of the email, however, were drafted by Lorenzo's boss. Lorenzo merely passed along his boss' statements at his direction. That said, Lorenzo also compiled the email, sent it out on behalf of the investment banking division (of which he was the head), and personally offered to answer any follow-up questions about it.
In his brief before the Court, Lorenzo proposes that the federal securities laws prohibit two distinct categories of fraudulent conduct. First, SEC Rule 10b-5(b), as well as Section 17(a)(2) of the Securities Act prohibit the making of a false statement. Second, SEC Rules 10b-5(a) and (c) and Section 17(a)(1) and (3) of the Securities Act proscribe operating a "device, scheme" or "course of business that would operate as a fraud." The parties agree that Lorenzo cannot be liable under Rule 10b-5(b) and Section 17(a)(2) because he did not "make" the false statement as that term has been defined by the Court in an earlier decision (Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011)). At issue is whether Lorenzo nonetheless can be found liable for having engaged in fraudulent misconduct.
In the Lorenzo decision below, the D.C. Circuit affirmed a finding of liability with respect to Rule 10b-5(a) and (c). The D.C. Circuit agreed with the decision below that Lorenzo's "active role in producing and sending the emails" constituted being "engaged in a fraudulent act [or] employ[ing] a fraudulent device" for purposes of liability" under Rules 10b-5(a) and (c) and Section 17(a)(1). Further, the D.C. Circuit found that the three components of Rule 10b-5 are not mutually exclusive. Instead, they "may overlap in certain respects." For this reason the D.C. Circuit concluded that there is nothing incongruous in finding that Lorenzo did not "make" any false statements under Rule 10b-5(b), but nonetheless engaged in the fraudulent act of preparing and disseminating statements under Rules 10b-5(a) and (c).
Lorenzo's brief before the Court argues that finding Lorenzo liable for the ministerial conduct of facilitating the preparation of others' statements would undo the Court's Janus decision and swallow the bright-line test between primary and secondary liability. The government responds that Lorenzo is impermissibly seeking to re-litigate the facts of the case, and that Janus never suggests that fraudulent conduct could not involve misstatements even in the absence of liability for making those misstatements. As to primary and secondary liability, the government argues that Lorenzo's conduct is a primary violation, so that distinction is not implicated here.
At oral argument before the Court, the Justices focused heavily on the extent of Lorenzo's conduct as distinguished from the mechanical making of the statements. Lorenzo's counsel highlighted his position that "sending the email does not rise to the level of using or employing a fraudulent device." Justice Alito, as well as the four dissenting justices in Janus, expressed doubt as to this view — Justice Alito went so far as to state that Lorenzo "did the act that is described in [Rule 10(b)-5(c)]." Similarly, Justice Kagan suggested that Section 10(b) is a "belt-and-suspenders statute" where there is clear overlap between one section and the other, implying that scheme liability could be found. Justice Gorsuch articulated an opposite view, noting that if "the only false act, the only actus reus, was a statement, and he didn't make it, then what?" A decision is expected in the Spring 2019 term.
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