Lorenzo v. SEC

SCOPE OF FRAUDULENT-SCHEME CLAIMS

Lorenzo argues that the mere act of forwarding emails containing misstatements cannot render a defendant liable under any of the relevant fraudulent-scheme claims provisions: Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act, or SEC Rules 10b-5(a) and (c). Lorenzo reasons that the plain texts of the statutes and rules—and particularly the scope of Section 10(b)’s prohibitions—require a defendant’s action itself to be deceptive, and that the act of forwarding emails cannot be deceptive when the defendant did not read or write the emails before forwarding them.Lorenzo points out that the ALJ concluded both that Lorenzo had not read the text of the emails before forwarding them to investors and that Lorenzo only forwarded them at the request of his superior, Gregg Lorenzo. Lorenzo asserts that “copying and pasting” emails from his superior in this way does not “employ” a deceptive or fraudulent scheme as the statutes require. Instead, Lorenzo characterizes his conduct in forwarding the emails as merely “ministerial” or “supportive.”

Lorenzo also draws heavily on the Supreme Court’s holding in Janus Capital Group, Inc. v. First Derivative Traders to support his argument that forwarding the emails without reading the content cannot constitute a fraudulent scheme. According to Lorenzo, the Janus court held that a defendant can be held liable for a material misstatement under Rule 10b-5(b) only if the defendant actually made the misstatement. Lorenzo posits that simply providing “substantial assistance” to the maker of the statement, as Lorenzo argues he did by forwarding his superior’s emails without reading their content, cannot render the defendant liable in Lorenzo’s reading of Janus. In Lorenzo’s estimation, the Janus decision carefully distinguished misstatement claims (under Rule 10b-5(b) and Section 17(a)(2)) from fraudulent-scheme claims (under Rules 10b-5(a) and (c) and Section 17(a)(1)). To convict a defendant of making misstatements on the mere basis of providing “substantial assistance,” Lorenzo concludes, would be to undermine the Janus court’s distinction between “misstatements” and “schemes,” and to improperly pursue Rule 10b-5(b) and Section 17(a)(2) claims under the rubric of Rules 10b-5(a) and (c), and Section 17(a)(1). In his reasoning, Lorenzo also points to the structure of Section 17(a) and Rule 10b-5. Lorenzo maintains that the fact that Congress and the SEC listed prohibitions against misstatements and prohibitions against fraudulent schemes in different sections of the provisions proves that courts should maintain distinctions between Rule 10b-5(b), and Rules 10b-5(a) and (c).

The SEC counters that, in forwarding the emails, Lorenzo falsely induced investors, which is prohibited by Rules 10b-5(a) and (c) and by Section 17(a)(1). The SEC disputes Lorenzo’s characterization of his state of mind when he forwarded the emails, pointing out that Lorenzo had first claimed that he had never read the emails and then contradicted himself by claiming that he “believed” the information in the emails to be true. According to the SEC, a person cannot believe a statement to be true without first reading it. Because the D.C. Circuit based its holding on the assumption that Lorenzo had read the emails and thus possessed intent to defraud the investors, the SEC argues that the Supreme Court should similarly assume that Lorenzo was aware of the emails’ misleading content. The SEC further contends that Lorenzo’s argument in front of the D.C. Circuit—that he “believed” the statements in the emails to be true—undermines his argument that he did not “use” or “employ” any fraudulent device because he merely copied and pasted the misleading content.

The SEC also responds that the Janus decision’s “maker” rule, which the D.C. Circuit applied to find that Lorenzo did not “make” the false statements in the emails he forwarded, only implicates Rule 10b-5(b)––not Rules 10b-5(a) or (c), as Lorenzo claims. The SEC characterizes Lorenzo’s logic as an “attempted bootstrapping,” arguing that it improperly implies that Lorenzo cannot be liable for criminal conduct under Rules 10b-5(a) and (c) so long as he is not liable under Rule 10b-5(b). Moreover, the SEC asserts, a textual reading of the statutes provides no indication that the Janus court’s interpretation of the word “make” in Rule 10b-5(b) has any bearing on the scope of different statutory provisions that happen to include the word “make.” Although the SEC concedes that Lorenzo did not “make” a misstatement under Rule 10b-5(b), it nevertheless maintains that by forwarding the emails, Lorenzo engaged in a “device, scheme, or artifice to defraud” of the kind prohibited by Section 17(a)(1) and Rule 10b-5(a). In response to Lorenzo’s argument that courts should maintain distinctions between Rule 10b-5(b), on the one hand, and Rules 10b-5(a) and (c), on the other, the SEC counters that courts have long understood various subsections of Rule 10b-5 to prohibit identical criminal conduct.

PRIMARY AND SECONDARY LIABILITY IN FRAUDULENT-SCHEME CLAIMS

Lorenzo asserts that the Janus decision drew a clear line between primary liability and secondary liability in securities fraud cases. According to Lorenzo, the Janus court limited Rule 10b-5(b) liability to those defendants who actually made misstatements. In doing so, Lorenzo claims, the court ensured that defendants such as himself, who merely supported misstatements, would at most expose themselves to secondary liability—or to charges of “aiding and abetting” a defendant who was primarily liable for the misstatements. Lorenzo points to several cases in which the Supreme Court found the SEC’s interpretation of Rule 10b-5 liability to be overly broad to demonstrate that he cannot be held primarily liable under Rules 10b-5(a) or (c). Lorenzo highlights the distinction between primary and secondary liability, pointing out that each requires the SEC to prove that a defendant committed different criminal elements. According to Lorenzo, the D.C. Circuit’s holding would allow the SEC to sidestep these different requirements, and to hold a secondary actor primarily liable under Rules 10b-5(a) and (c). Lorenzo argues that if the Supreme Court were to uphold this “backdoor,” it would ultimately undercut the careful distinctions between primary and secondary liability that precedent such as Janus delineated.

The SEC responds that Lorenzo is not simply a secondary actor, but that he is primarily liable for fraud. In forwarding the emails, the SEC maintains, Lorenzo “disseminat[ed] false financial information to investors”— an act that constitutes a fraudulent scheme according to Section 17(a)(1) and Rules 10b-5(a) and (c). Holding Lorenzo liable for his own actions, the SEC continues, will not undermine the distinction between primary and secondary liability in the way that Lorenzo claims it will. The SEC contends that Lorenzo misinterpreted the holdings of Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. and Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. Those cases, the SEC argues, considered whether Rule 10b-5 should be extended to cover secondary liability, not whether the defendants in those cases were primarily liable for their actions. According to the SEC, Lorenzo’s own actions were fraudulent, not merely supportive of his superior’s fraudulent conduct, because he knowingly sent misstatements with the intent to defraud potential investors.