Term: 2018
Docket: 17-1077
Lorenzo v. Securities And Exchange Commission
- Pro
17-1077 LORENZO V. SECURITIES AND EXCHANGE COMMISSION DECISION BELOW: 872 F3d 578 JUSTICE KAVANAUGH IS RECUSED IN THIS CASE. CERT. GRANTED 6/18/2018 QUESTION PRESENTED: 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. LOWER COURT CASE NUMBER: 15-1202
In the case of Lorenzo v. Securities and Exchange Commission (2018), the Supreme Court ruled in favor of the SEC, upholding a previous decision that Francis V. Lorenzo, an investment banker, was liable for participating in fraudulent activities under federal securities laws. The case centered around deceptive emails sent by Lorenzo to potential investors at his boss's direction which contained false information about a company’s financial status. Although he did not draft these messages himself, he disseminated them with intent to deceive investors about key facts related to an upcoming debenture offering from his client firm. The court held that even though Lorenzo may not have been the "maker" of these statements as defined by Rule 10b-5(b) under Securities Exchange Act - since they were drafted by his superior - he still violated other provisions within this rule and Section 17(a)(1) of Securities Act due to knowingly engaging in fraudulent scheme.
In the dissenting opinion for Lorenzo v. Securities and Exchange Commission, Justice Clarence Thomas, joined by Justice Neil Gorsuch, argued that Lorenzo did not violate Rule 10b-5 as he neither made nor materially misrepresented any statements. They contended that the majority's decision expanded the scope of Rule 10b-5 in a way Congress never intended. According to them, only those who have ultimate authority over a statement can be held liable for fraudulent misstatements under this rule; hence they believed Lorenzo was not responsible since his boss had final say on its content and dissemination. The dissenters also expressed concern about blurring lines between primary and secondary liability in securities fraud cases which could lead to an unpredictable application of laws.
