Supreme Court Affirms That Dissemination of False and Misleading Statement Can Result In Liability Under Subsections (a) and (c) of SEC Rule 10b-5

On March 27, 2019, the United States Supreme Court issued a decision in Lorenzo v. Securities and Exchange Commission, No. 17-1077, -- S. Ct. --, 2019 WL 1369839 (2019) affirming the D.C. Circuit Court of Appeals’ and the Securities and Exchange Commission’s (“SEC”) finding that “by knowing disseminating false information to prospective investors, [Francis] Lorenzo had violated other parts of Rule 10b-5, sections (a) and (c), as well as § 10(b) and § 17(a)(1)” of the Securities Exchange Act of 1934 (“Exchange Act”).  Id. at *4, *8.  The primary issue on appeal was “whether those who do not ‘make’ statements (as Janus defined ‘make’), but who disseminate false or misleading statements to potential investors with the intent to defraud, can be found to have violated the other parts of [SEC] Rule 10b–5, subsections (a) and (c), as well as related provisions of the securities laws, § 10(b) of the [Exchange Act].”  Id. at *3 

By way of background, Lorenzo was the director of investment banking at Charles Vista, LLC, a registered broker dealer which was retained by Waste2Energy Holdings, Inc. (“Waste2Energy”) to sell $15 million worth of debentures to investors.  Id. at *3.  Lorenzo sent two e-mails to prospective investors describing the debenture offering claiming that Waste2Energy had “3 layers of protection, including $10 million in ‘confirmed assets.’”  Id.  However, Lorenzo’s e-mails failed to disclose that Waste2Energy’s “intellectual property was worthless, that it had ‘[w]rit[ten] off . . . all [of its] intangible assets,’ and that its total assets (as of March 31, 2009) amounted to $370,552,” in contrast to the $10 million in confirmed assets Lorenzo touted.  Id.  Lorenzo testified that these false and misleading e-mails were sent “at the direction of [Lorenzo’s] boss, who supplied the content and ‘approved’ the messages.”  Id.

The SEC fined Lorenzo $15,000, ordered him to cease and desist from violating securities laws, and barred him from working in the securities Industry for life.  Id.  Lorenzo appealed to the D.C. Circuit Court of Appeals, arguing the following: (1) “that he lacked the intent required to establish a violation of Rule 10b-5,” i.e., scienter; and (2) that in light of the Supreme Court’s decision in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011), “he could not be held liable under subsection (b) of Rule 10b-5,” because it was Lorenzo’s boss, not Lorenzo, who had “ultimate authority” over the content of his false and/or misleading emails.  Lorenzo, 2019 WL 1369839 at *4.  The Court of Appeals agreed with Lorenzo, but sustained the SEC’s finding that by knowingly disseminating false information to investors, Lorenzo had violated other parts of Rule 10b-5, subsections (a) and (c), as well as § 10(b) and § 17(a)(1) of the Exchange Act. 

The Supreme Court affirmed, concluding that “dissemination of false or misleading statements information with the intent to defraud can fall within the scope of subsections (a) and (c) of Rule 10b-5[.]”  Id.  Specifically, “[b]y sending emails he understood to contain material untruths, Lorenzo ‘employ[ed]’ a ‘device,’ ‘scheme,’ and ‘artifice to defraud[,]’” Lorenzo violated Rule 10b-5(a).  Id. at *5.  As well, by doing the same, Lorenzo “engage[d] in a[n] act, practice, or course of business’ that ‘operate[d] . . . as a fraud or deceit’” as prohibited by Rule 10b-5(c).  Id.  The Supreme Court’s decision concludes, “Congress intended to root out all manner of fraud in the securities industry.  And it gave the [SEC] the tools to accomplish that.” 

The full opinion is linked below.