Saturday, December 8, 2018
I posted about Lorenzo v. Securities & Exchange Commission when the SEC first granted certioriari; you can read my long thoughts about it here. Now that the Court held oral argument, I’ll offer my quick comments (and I’ll probably say still more when the decision comes down; this is a bountiful source of blogging material).
Picking up where I left off in my earlier post (I’ll assume you’ve either read that or are otherwise familiar with the issues in this case):
Lorenzo poses a quandary because the Supreme Court backed itself into a corner in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011). There, the Court narrowly construed what it means to “make” a statement for the purposes of Rule 10b-5(b), but then went further and suggested – via its invocation of Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994) – that a wide range deceptive conduct falling outside of that definition not only would not involve making statements, but also would not be prohibited by Section 10(b) at all.
All of which has come back to bite the Court in Lorenzo. There, Lorenzo – acting with scienter – sent a deceptive email drafted by and attributed to his boss. And his argument is, he didn’t “make” a statement for Janus purposes, and if his conduct is considered otherwise deceptive or manipulative for Section 10(b) purposes, then Janus itself accomplishes nothing. Certainly, he didn’t commit any more of a deceptive act than the Janus defendants, and if their conduct didn’t fall within Section 10(b)’s prohibitions, well, then, neither did Lorenzo’s.
Based on the transcript, I’d tentatively say the Court is not inclined to buy Lorenzo’s argument. Counting heads is interesting here; the original Janus opinion was your typical 5-4 conservative/liberal split, but this time around one of the two new conservatives (Kavanaugh) is recused, because he was on the original panel that decided the case in the DC Circuit (where he sided with Lorenzo). Which means, if the Court breaks the same way it did in Janus, it would create a 4-4 split and affirm the lower court, handing at least a temporary win to the SEC.
That said, most of the questions were highly critical of Lorenzo, but, then, most of the questions came from the liberals who dissented in Janus, making it tough to use them as a gauge.
From the conservative side of things, Gorsuch was the only justice to offer a full-throated defense of Lorenzo’s position – one that was more effective than Lorenzo’s counsel, I’d add – but even with Gorsuch, I couldn’t tell if he was genuinely convinced or simply trying to articulate Lorenzo’s argument. Gorsuch basically laid out the claim that the only deceptive conduct here was the text of the email itself, and since Lorenzo was not the “maker” of that statement, he at best aided a deception, and did not himself engage in any deceptive conduct.
Roberts also defended Lorenzo, on the ground that the SEC’s position would render Janus a dead letter, but he didn’t talk much and, as with Gorsuch, he may have simply been offering the argument rather than stating his own position.
Alito, however – who was a member of the Janus majority – seemed convinced that Lorenzo’s act of knowingly sending a false email was sufficiently deceptive to violate Section 10(b). Which suggests the Court will ultimately rule in favor of the SEC with at least a 5-3 split.
That, however, puts the Court in the awkward position of reconciling a holding against Lorenzo with its Janus holding.
If I’m right about where the Court is going, it seems to me like there are a few potential paths. First, the Court can say that Janus was solely about interpreting 10b-5(b), and its references to Central Bank were irrelevant. This would mean that other kinds of conduct beyond “making” a statement (including the defendant’s conduct in the Janus case itself) may well violate Section 10(b) via 10b-5(a) or (c). If the Court goes that route, though, it is potentially broadening 10b-5 liability even for private plaintiffs, past what’s currently available now.
The second path would be to say that because Lorenzo included other verbiage in his email (like, directing clients to call him with questions), he functionally adopted the false statements and therefore became their “maker” even under Janus. This isn’t the position taken by the SEC but would be the least disruptive course of action for the Court.
(The Court could, I suppose, distinguish between private plaintiffs and the SEC but no one seemed interested in that possibility.)
A final path, I guess, would be to duck everything, say that Lorenzo violated Section 17(a), and that there is somehow no need to reach the Section 10(b) question. But no one offered that as a possibility, either, so I can’t tell if it’s something the Court is inclined to try.
Anyhoo, we’ll know by June, I suppose – so watch this space for updates.