The Supreme Court May Soon Resolve a Circuit Split to Decide Once and for All
The federal securities laws have long prohibited two types of misconduct: making fraudulent statements and employing fraudulent schemes, both in connection with the offering or sale of securities. Only a person who has “ultimate authority” for a misstatement may be held liable under the former prohibition. [1] The latter prohibition — enshrined in Section 17(a)(1) of the Securities Act of 1933 and SEC Rules 10b-5(a) and (c) — is often referred to as imposing “scheme liability” because such claims “make deceptive conduct actionable, as opposed to . . . deceptive statements.” [2]
With its December 3, 2018, argument in Lorenzo v. Securities and Exchange Commission, the U.S. Supreme Court is now poised to resolve an issue at the intersection of these two prohibitions: may a securities fraud claim proceed under a “scheme liability” theory if the only alleged misconduct is fraudulent misstatements that the defendant himself never made?
The facts of Lorenzo are fairly straightforward. In February 2009, while he was the director of investment banking at Charles Vista, LLC (“Charles Vista”), Francis Lorenzo (“Lorenzo”) emailed links to two SEC filings by Waste2Energy Holdings, Inc. (“W2E”), to various Charles Vista brokers. Lorenzo did not read the SEC filings in detail before doing so, and thus he was purportedly unaware that the filings disclosed that W2E’s intangible assets had no value. Thereafter, “at the request of” his boss and a Charles Vista broker, Lorenzo separately emailed potential investors about investing in a W2E debenture offering. Lorenzo’s emails made no mention of the devaluation of W2E’s intangible assets.
The SEC subsequently began enforcement proceedings against both Lorenzo and his boss. After hearing testimony and other evidence, the SEC administrative law judge (“ALJ”) concluded that Lorenzo did not read the portions of the emails that he sent at his boss’s request and that Lorenzo “sent the emails without even thinking about the contents.” Nevertheless, citing other evidence, the SEC ALJ ruled that Lorenzo had “willfully” violated the securities laws, both by making fraudulent misstatements and by participating in a scheme to defraud potential investors in connection with W2E’s offering. The SEC itself subsequently confirmed the ALJ’s ruling.
On appeal, the D.C. Circuit unanimously reversed the SEC’s finding that Lorenzo was liable...
