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...