Be careful before you forward that email. That’s the lesson from the recent Supreme Court decision in Lorenzo v. Securities and Exchange Commission, in which the court held that that the director of investment banking for a broker-dealer was liable for participating in a scheme to defraud investors when he forwarded two emails prepared by his boss. The contents of the emails reported that the investment target had “confirmed assets” of $10 million, a statement Mr. Lorenzo knew to be false. The emails did not reveal the fact that the company had publicly stated that its assets were worth less than $400,000.
The Securities and Exchange Commission found Mr. Lorenzo liable for sending statements to investors that were false and misleading with the intent to defraud, thus violating Rule 10b-5, § 10(b) of the Exchange Act and § 17(a)(1) of the Securities Act. The SEC barred Mr. Lorenzo from working in the securities industry for life and fined him $15,000. On appeal from the D.C. Circuit, the Supreme Court held that dissemination of false or misleading statements with intent to defraud can fall within Rules 10b-5(a) and (c) even if the disseminator did not “make” the statements himself. “By sending emails he understood to contain material untruths, Lorenzo ‘employ[ed]’ a ‘device,’ ‘scheme,’ and ‘artifice to defraud’ within the meaning of subsection (a) of the Rule…. By the same conduct, he ‘engage[d] in a[n] act, practice, or course of business’ that ‘operate[d] … as a fraud or deceit’ under subsection (c) of the Rule,” the Supreme Court said. In so holding, the court noted Rule 10b’s expansive language and reasoned that to absolve Mr. Lorenzo from liability on the basis that he was not the “maker” of the statements would be to allow plainly fraudulent behavior to fall outside the scope of the rule.
Writing for a 6-2 majority (Justice Kavanaugh took no part in the case), Justice Breyer’s opinion bolsters the authority of the SEC in enforcement actions, particularly in affirming Mr. Lorenzo’s primary liability for his conduct (as opposed to secondary liability, e.g., aiding and abetting the maker’s fraudulent statement). Justice Thomas’ dissent argued that Mr. Lorenzo’s “essentially administrative” conduct was more appropriately addressed by secondary liability and that other acts beyond forwarding someone else’s false statement would be required to find primary liability under subsections (a) and (c). Under the majority’s rationale, might primary liability attach, Justice Thomas wondered, to a secretary in the same situation as Mr. Lorenzo? For the majority, the fact that the emails were sent with intent to defraud – significantly, Mr. Lorenzo did not challenge the D.C. Circuit’s finding that he acted with the necessary scienter – seemed to carry the day. As Justice Breyer concluded, “Congress intended to root out all manner of fraud in the securities industry. And it gave the Commission the tools to accomplish that job.” Lorenzo thus reinforces the SEC’s broad powers and may well lead to even more robust enforcement actions.