Janus sets the stage
When the U.S. Supreme Court decided Janus Capital Group, Inc. v. First Derivative Traders in 2011, it staked out limits on the types of behavior that could lead to primary liability for making a misstatement in violation of the antifraud provisions of the securities laws. In Janus, the Court held that only the person with the ultimate authority to control the content of a fraudulent misstatement could be liable as a primary violator of SEC Rule 10b-5(b), which makes it unlawful to, with scienter, “make any untrue statement of a material fact.” But Janus opened a new debate: Where a misstatement causes a securities fraud, can someone who is not the “maker” of the statement be held primarily liable under other provisions of the securities laws prohibiting a scheme to defraud? Lorenzo answers that question with a resounding “yes.”
Background on Lorenzo
In 2009, Francis Lorenzo was the director of investment banking at a Staten Island broker dealer. Lorenzo represented a company that was developing technology to turn solid waste into renewable energy. In October 2009, the company publicly disclosed, and told Lorenzo, that it had written off $10 million in intangible assets (largely intellectual property), and that its total assets amounted to less than $400,000. Nevertheless, shortly after that revelation, Lorenzo sent emails to prospective investors in a proposed debenture offering by the company. At the request of his boss, Lorenzo copied and pasted content that his boss had written, but that Lorenzo knew was false, into the emails. The emails claimed that the company had $10 million in assets, and omitted mention of the company’s public disclosure that it, in fact, had fewer than $400,000 in assets. Lorenzo signed the emails in his name as “Vice President of Investment Banking” and invited recipients to call him with any questions.
The SEC subsequently initiated an administrative action against Lorenzo charging him with violations of § 10(b) of the 1934 Exchange Act, and Rule 10b-5 thereunder, as well as § 17(a)(1) of the 1933 Securities Act. The Commission found against Lorenzo, banned him from working in the securities industry for life, and fined him $15,000. On appeal, Lorenzo argued that, according to Janus, he could not be liable under subsection (b) of Rule 10b-5 because his boss had the ultimate authority to control the content that went into the offending emails. The D.C. Circuit agreed, and the question of whether Lorenzo violated Rule 10b-5(b) was not before the Supreme Court.