Saturday, December 8, 2018

Lorenzo Tea Leaves

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.

Ann Lipton | Permalink


I take it from this post that you do not see dispositive/important factual distinctions in the two cases--Janus and Lorenzo. I tend to think about a fact-based rubric in these cases that consists of, e.g., the identity of the drafter(s) of the statement, the identity of the disseminator(s) of the statement/document containing the statement, the identity of the person(s) with legal responsibility outside Section 10(b)/Rule 10b-5 for making the statement (if any). Do you not think that differences in these kinds of facts may make a difference in determining/clarifying the maker of a statement (as opposed to a facilitator? In Janus, the court wrote: “For purposes of Rule 10b–5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it . . . .” Can one not logically argue that Lorenzo is the “maker” here under that kind of rule? (We may want to address this in additional posts--and not here. But I am provoked by your post to write this reply and ask about the fact issues.)

Posted by: joanheminway | Dec 11, 2018 9:15:37 AM

Hi, Joan. Yes, I think you could say Lorenzo was the maker of the statement because of his level of involvement - that would be the easy out for the Court - but the SEC has conceded that he was not the maker, because he attributed the statement to his boss. That was also part of the Janus rule: the person to whom the statement is attributed is the maker. And that's what puts the Court in a pickle. I also don't think Lorenzo decided how to communicate it; that was also his boss. His control over it was pressing "send" and adding the extra language about calling him with questions, etc, so the issue is whether that's enough to attribute the statement to Lorenzo himself.

The problem is, the more nuanced analysis you suggest is exactly what courts used to do pre Central Bank when they imposed aiding and abetting liability - it was a balancing test based on level of knowledge and level of involvement in the statement. But the Court wanted to end that kind of analysis in favor of a clearer rule. Which is why it's in a bind now: if it finds that Lorenzo's conduct was sufficient to impose liability (even though he didn't "make" the statement), we head back to those pre-Central Bank days (though there will still be Stoneridge to prevent pure behind-the-scenes actions from triggering private liability).

Posted by: Ann Lipton | Dec 11, 2018 10:54:38 AM

This may be hard to convey electronically, but I do think that Lorenzo assumed responsibility for "making" the statements by putting his name on the message, although the attribution is, indeed, a complication. But (as you may know) I think Janus is rightly decided. I might more easily quarrel with the overall concept of not finding aiders and abettors liable. But if it;s makers that we're after, I do think that the definition of a "maker" ultimately is a factual issue requiring a balancing of factors. So, I guess I am siding largely with your second path. We'll see.

Posted by: joanheminway | Dec 11, 2018 1:10:25 PM

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