Lorenzo v. Securities and Exchange Commission

Justia Summary

SEC 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. The Supreme Court has held that to be a “maker” of a statement under subsection (b), one must have “ultimate authority over the statement, including its content and whether and how to communicate it.” Lorenzo, a brokerage firm's director of investment banking, sent e-mails to prospective investors. The content, supplied by Lorenzo’s boss, described a potential investment in a company with “confirmed assets” of $10 million. Lorenzo knew that the company had recently disclosed that its total assets were worth less than $400,000. The SEC found that Lorenzo had violated Rule 10b–5, 17 CFR 240.10b–5; section 10(b) of the Exchange Act, 15 U.S.C. 78j(b); and section 17(a)(1) of the Securities Act, 15 U.S.C. 77q(a)(1).

The Supreme Court affirmed the D.C. Circuit in holding that Lorenzo could not be held liable as a “maker” under Rule 10b-5(b) but affirmed with respect to subsections (a) and (c) and statutory sections 10(b) and 17(a)(1). Dissemination of false or misleading statements with intent to defraud can fall within the scope of Rules 10b–5(a) and (c), and the statutory provisions, even if the disseminator did not “make” the statements under Rule 10b–5(b). By sending e-mails he understood to contain material untruths, Lorenzo “employ[ed]” a “device,” “scheme,” and “artifice to defraud” under subsection (a) and section 17(a)(1); he “engage[d] in a[n] act, practice, or course of business” that “operate[d] . . . as a fraud or deceit” under subsection (c). There is considerable overlap among the Rule’s subsections and related statutory provisions. The “plainly fraudulent behavior” at issue might otherwise fall outside the Rule’s scope. The Court rejected Lorenzo’s claim that imposing primary liability upon his conduct would erase or weaken the distinction between primary and secondary liability under the statute’s “aiding and abetting” provision.