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U.S. Supreme Court Rules That A Person Who Disseminates the Misstatements of Another Can Be Liable Under the Federal Securities Laws

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  • Posted on: Apr 1 2019

In June of 2018, this Blog wrote about the United States Supreme Court’s decision to grant certiorari in a case concerning the scope of investor protection laws. (Here.) In Lorenzo v. SEC, No. 17-1077 (certiorari granted on June 18, 2018), the Court agreed to consider whether an individual who passed along false statements about a company’s financial condition could be found liable for engaging in securities fraud under the scheme liability provisions of the Securities and Exchange Act of 1934 (Exchange Act) and Rule 10b-5 promulgated thereunder. On March 27, 2019, in a decision written by Justice Breyer, a 6-2 majority of the Court ruled that a person who disseminates the false and misleading statements of another, even though he/she did not make the statement, can be held liable under the scheme liability provisions of Section 10(b) of the Exchange Act. (Here.)


Francis Lorenzo (“Lorenzo”), the petitioner, was the director of investment banking at Charles Vista, LLC (“Charles Vista”), a registered broker-dealer in Staten Island, New York. Lorenzo’s only investment banking client at the time relevant to the action was Waste2Energy Holdings, Inc. (“Waste2Energy”), 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 the 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 Charles Vista to sell $15 million worth of debentures to investors.

In early October 2009, Waste2Energy publicly disclosed, and Lorenzo was told, that its intellectual property was worthless, that it had written off all of its intangible assets. As a result, Waste2Energy reported total assets (as of March 31, 2009) of $370,552.

Shortly thereafter, on October 14, 2009, Lorenzo sent two e-mails to prospective investors describing the debenture offering. According to 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 did not reveal 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.”

In 2013, the Securities and Exchange Commission (“SEC” or “Commission”) instituted proceedings against Lorenzo (along with his boss, Gregg Lorenzo (the owner of Charles Vista), and Charles Vista). The Commission alleged that Lorenzo violated Rule 10b-5, Section 10(b) of the Exchange Act, and Section 17(a)(1) of the Securities Act of 1933 (the “Securities Act”). Ultimately, the Commission found that Lorenzo had violated these provisions by sending false and misleading statements to investors with the intent to defraud. As a sanction, the Commission 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, Section 10(b), and Section 17(a)(1). With one judge dissenting (then-Judge Kavanaugh), the Court of Appeals for the D.C. Circuit rejected Lorenzo’s lack-of intent argument. Lorenzo v. SEC, 872 F. 3d 578, 583 (D.C. Cir. 2017). Lorenzo did not challenge the panel’s scienter finding.

Lorenzo also argued that, in light of Janus Capital Group, Inc. v. First Derivate Traders, 564 U.S. 135 (2011), he could not be held liable under subsection (b) of Rule 10b-5. Id. at 586-87. 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. Nevertheless, the Court of Appeals sustained the Commission’s finding that, by knowingly disseminating false information to prospective investors, Lorenzo had violated Rule 10b-5(a) and (c), as well as Section 10(b) and Section 17(a)(1) of the Securities Act.

Lorenzo then filed a petition for certiorari in the Court. The Court granted review to resolve disagreement about whether someone who is not a “maker” of a misstatement under Janus could be found to have violated the other subsections of Rule 10b-5 and related provisions of the securities laws, when the only conduct involved concerned a misstatement.

The Court’s Decision

“After examining the relevant language, precedent, and purpose” of Section 10(b) and Rule 10b-5, the Court concluded that “dissemination of false or misleading statements with intent to defraud” can be actionable under the federal securities laws, “even if the disseminator did not “make” the statements. Slip Op. at 5.

Justice Breyer noted that Lorenzo understood that the emails he sent contained material untruths. After all, said the Court, “Lorenzo [did] not challenge the appeals court’s scienter finding,” that he sent the emails with the “intent to deceive, manipulate, or defraud” the recipients of the emails. Slip Op. at 6. Under those facts, Justice Breyer concluded that it was “difficult to see how [Lorenzo’s] actions could escape the reach” of Rule 10b-5(a) and (c). Id.

Recognizing the potential wide reach of its holding, the Court cautioned that its ruling should not be interpreted to reach every scenario, underscoring the factual nature of each case: “These provisions capture a wide range of conduct. Applying them may present difficult problems of scope in borderline cases. Purpose, precedent, and circumstance could lead to narrowing their reach in other contexts.” Id. at 6-7.  To emphasize the point, the Court distinguished the conduct of a peripheral actor, such as a mailroom clerk, and someone like Lorenzo who was directly involved in the dissemination of the false information:

But we see nothing borderline about this case, where the relevant conduct (as found by the Commission) consists of disseminating false or misleading information to prospective investors with the intent to defraud. And while one can readily imagine other actors tangentially involved in dissemination – say, a mailroom clerk – for whom liability would typically be inappropriate, the petitioner in this case sent false statements directly to investors, invited them to follow up with questions, and did so in his capacity as vice president of an investment banking company.

Id. at 7.

The Court rejected Lorenzo’s argument, also shared by Justice Thomas, writing for the dissent (in which Justice Gorsuch joined), that each section of Rule 10b-5 “should be read as governing different, mutually exclusive, spheres of conduct.” Id. The Court noted that the underlying premise of the argument was inconsistent with the recognition by the Court and the Commission of the “considerable overlap among the subsections of the Rule and related provisions of the securities laws.” Id. (citations omitted). Given such overlap and the Court’s repeated rejection of attempts to narrow the reach of the proscriptions of Rule 10b-5, the Court concluded that it “should not hesitate to hold that Lorenzo’s conduct ran afoul of subsections (a) and (c), as well as the related statutory provisions.” Id. at 9.

The Court also observed that if Lorenzo’s reading of Rule 10b-5 was correct, “behavior that, though plainly fraudulent, might otherwise fall outside the scope of the Rule.” Id.  It would mean that “those who disseminate false statements with the intent to cheat investors might escape liability under the Rule altogether.” Id.  Such a result, said Justice Breyer, was inimical to the “basic purpose behind” the Rule –  “to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry” – and the enforcement of the securities laws: “We do not know why Congress or the Commission would have wanted to disarm enforcement in this way.” Id.

Justice Breyer addressed other arguments raised by Lorenzo and the dissent, rejecting each one as inconsistent with the securities laws and Congress’ intent in enacting them.

For example, both Lorenzo and the dissent claimed that the majority’s decision rendered Janus “a dead letter,” Id. at 10 and Dissent at 9. Justice Breyer noted that the Janus Court did not address the application of Rule 10b-5 “to the dissemination of false or misleading information.” Id.  Instead, the focus in Janus was on the “maker” of the statement – that is, “the “person or entity with ultimate authority over the statement.” Id. (quoting Janus, 564 U. S. at 142). Thus, the Court concluded that “Janus would remain relevant (and preclude liability) where an individual neither makes nor disseminates false information.” Id.

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