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Lorenzo v. Securities and Exchange Commission

United States Supreme Court

March 27, 2019

FRANCIS LORENZO, PETITIONER
v.
SECURITIES AND EXCHANGE COMMISSION

          Argued December 3, 2018

          ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

         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 "employfed]" 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 "engagefd] 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 "engaging] 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.

          BREYER, J., delivered the opinion of the Court, in which ROBERTS, C. J., and GlNSBURG, ALITO, SOTOMAYOR, and KAGAN, JJ., joined. THOMAS, J., filed a dissenting opinion, in which GORSUCH, J., joined. KAV-ANAUGH, J., took no part in the consideration or decision of the case.

          OPINION

          BREYER JUSTICE.

         Securities and Exchange Commission Rule 10b-5 makes it unlawful:

(a) To employ any device, scheme, or artifice to defraud, "
(b) To make any untrue statement of a material fact. . ., or
"(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit. in connection with the purchase or sale of any security." 17CFR§240.10b-5(2018).

         In Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011), we examined the second of these provisions, Rule 10b-5(b), which forbids the "mak[ing]" of "any untrue statement of a material fact." We held that the "maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it." Id., at 142 (emphasis added). We said that "[w]ithout control, a person or entity can merely suggest what to say, not 'make' a statement in its own right." Ibid. And we illustrated our holding with an analogy: "[W]hen a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit-or blame-for what is ultimately said." Id., at 143. 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) of Rule 10b-5. Id., at 145.

         In this case, we consider whether those who do not "make" statements (as Janus defined "make"), but who disseminate false or misleading statements to potential investors with the intent to defraud, can be found to have violated the other parts of Rule 10b-5, subsections (a) and (c), as well as related provisions of the securities laws, § 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, as amended, 15 U.S.C. §78j(b), and §17(a)(1) of the Securities Act of 1933, 48 Stat. 84-85, as amended, 15 U.S.C. §77q(a)(1). We believe that they can.

         I

         A

         For our purposes, the relevant facts are not in dispute. Francis Lorenzo, the petitioner, was the director of investment banking at Charles Vista, LLC, a registered broker-dealer in Staten Island, New York. 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 a June 2009 public filing, Waste2Energy stated that its total assets were worth about $14 million. This figure included intangible assets, namely, intellectual property, valued at more than $10 million. Lorenzo was skeptical of this valuation, later testifying that the intangibles were a "dead asset" because the technology "didn't really work."

         During the summer and early fall of 2009, Waste2Energy hired Lorenzo's firm, Charles Vista, to sell to investors $15 million worth of debentures, a form of "debt secured only by the debtor's earning power, not by a lien on any specific asset," Black's Law Dictionary 486 (10th ed. 2014).

         In early October 2009, Waste2Energy publicly disclosed, and Lorenzo was told, that its intellectual property was worthless, that it had "'"[w]rit[ten] off . . . all [of its] intangible assets, "'" and that its total assets (as of March 31, 2009) amounted to $370, 552.

         Shortly thereafter, on October 14, 2009, Lorenzo sent two e-mails to prospective investors describing the debenture offering. According to later testimony by Lorenzo, he sent the e-mails at the direction of his boss, who supplied the content and "approved" the messages. The e-mails described the investment in Waste2Energy as having "3 layers of protection," including $10 million in "confirmed assets." The e-mails nowhere revealed the fact that Waste2Energy had publicly stated that its assets were in fact worth less than $400, 000. Lorenzo signed the e-mails with his own name, he identified himself as "Vice President-Investment Banking," and he invited the recipients to "call with any questions."

         B

         In 2013, the Securities and Exchange Commission instituted proceedings against Lorenzo (along with his boss and Charles Vista). The Commission charged that Lorenzo had violated Rule 10b-5, § 10(b) of the Exchange Act, and § 17(a)(1) of the Securities Act. Ultimately, the Commission found that Lorenzo had run afoul of these provisions by sending false and misleading statements to investors with intent to defraud. As a sanction, it fined Lorenzo $15, 000, ordered him to cease and desist from violating the securities laws, and barred him from working in the securities industry for life.

         Lorenzo appealed, arguing primarily that in sending the e-mails he lacked the intent required to establish a violation of Rule 10b-5, § 10(b), and § 17(a)(1), which we have characterized as "'a mental state embracing intent to deceive, manipulate, or defraud.'" Aaron v. SEC, 446 U.S. 680, 686, and n. 5 (1980). With one judge dissenting, the Court of Appeals panel rejected Lorenzo's lack-of-intent argument. 872 F.3d 578, 583 (CADC 2017). Lorenzo does not challenge the panel's scienter finding. Reply Brief 17.

         Lorenzo also argued that, in light of Janus, he could not be held liable under subsection (b) of Rule 10b-5. 872 F.3d, at 586-587. The panel agreed. Because his boss "asked Lorenzo to send the emails, supplied the central content, and approved the messages for distribution," id., at 588, it was the boss that had "ultimate authority" over the content of the statement "and whether and how to communicate it," Janus, 563 U.S., at 142. (We took this case on the assumption that Lorenzo was not a "maker" under subsection (b) of Rule 10b-5, and do not revisit the court's decision on this point.)

         The Court of Appeals nonetheless sustained (with one judge dissenting) the Commission's finding that, by knowingly disseminating false information to prospective investors, Lorenzo had violated other parts of Rule 10b-5, subsections (a) and (c), as well as §10(b) and §17(a)(1).

         Lorenzo then filed a petition for certiorari in this Court. We granted review to resolve disagreement about whether someone who is not a "maker" of a misstatement under Janus can nevertheless be found to have violated the other subsections of Rule 10b-5 and related provisions of the securities laws, when the only conduct involved concerns a misstatement. Compare e.g., 872 F.3d 578, with WPP Luxembourg Gamma Three Sari v. Spot Runner, Inc., 655 F.3d 1039, 1057-1058 (CA9 2011).

         II

...


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