Monday, October 2, 2017

Forward With Care

A majority of the United States Court of Appeals for the District of Columbia Circuit in the main upheld findings by the SEC

The Securities and Exchange Commission found that Francis Lorenzo sent email messages to investors containing misrepresentations about key features of a securities offering. The Commission determined that Lorenzo’s conduct violated various securities fraud provisions. We uphold the Commission’s findings that the statements in Lorenzo’s emails were false or misleading and that he possessed the requisite intent.

We cannot sustain, however, the Commission’s determination that Lorenzo’s conduct violated one of the provisions he was found to have infringed: Rule 10b-5(b). That rule bars the making of materially false statements in connection with the purchase or sale of securities. We conclude that Lorenzo did not “make” the false statements at issue for purposes of Rule 10b-5(b) because Lorenzo’s boss, and not Lorenzo himself, retained “ultimate authority” over the statements. Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 142 (2011).

While Lorenzo’s boss, and not Lorenzo, thus was the “maker” of the false statements under Rule 10b-5(b), Lorenzo played an active role in perpetrating the fraud by folding the statements into emails he sent directly to investors in his capacity as director of investment banking, and by doing so with an intent to deceive. Lorenzo’s conduct therefore infringed the other securities-fraud provisions he was charged with violating. But because the Commission’s choice of sanctions to impose against Lorenzo turned in some measure on its misimpression that his conduct violated Rule 10b-5(b), we set aside the sanctions and remand the matter to enable the Commission to reassess the appropriate penalties.

Circuit Judge Kavanaugh dissented

Suppose you work for a securities firm. Your boss drafts an email message and tells you to send the email on his behalf to two clients. You promptly send the emails to the two clients without thinking too much about the contents of the emails. You note in the emails that you are sending the message “at the request” of your boss. It turns out, however, that the message from your boss to the clients is false and defrauds the clients out of a total of $15,000. Your boss is then sanctioned by the Securities and Exchange Commission (as is appropriate) for the improper conduct.

What about you? For sending along those emails at the direct behest of your boss, are you too on the hook for the securities law violation of willfully making a false statement or  willfully engaging in a scheme to defraud.  According to the SEC, the answer is yes. And the SEC concludes that your behavior – in essence forwarding emails after being told to do so by your boss – warrants a lifetime suspension from the securities profession, on top of a monetary fine.

That is what happened to Frank Lorenzo in this case. The good news is that the majority opinion vacates the lifetime suspension. The bad news is that the majority opinion – invoking a standard of deference that, as applied here, seems akin to a standard of “hold your nose to avoid the stink” – upholds much of the SEC’s decision on liability. I would vacate the SEC’s conclusions as to both sanctions and liability. I therefore respectfully dissent.

(Mike Frisch)

| Permalink


Post a comment