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A Slight Expansion in Liability Under Federal Securities Laws

Legal15

Do you ever copy-and-paste a statement without thinking twice of the implications? The United States Supreme Court recently expanded the reach of federal securities laws and who can be held liable for violating them. In Lorenzo v. Securities and Exchange Commission, 139 S. Ct. 1094 (2019), the Court held that a person can be found primarily liable for securities fraud if they “knowingly” solicit investors with a false statement, even if that false statement was made by another person.

The securities rule at issue in Lorenzo made it unlawful for a person to “make any untrue statement of a material fact” in connection with the purchase or sale of securities. An investment banker, Lorenzo, worked at an SEC-registered brokerage firm that was soliciting potential investors for a company that was developing a technology to make “clean renewable energy” out of “solid waste.” At the direction of his boss, who provided the content for and approved the messages, Lorenzo emailed 2 potential investors that the energy company had $10 million in “confirmed assets.” However, at that time, Lorenzo knew that the energy company had just released a public statement saying that its assets were, in fact, valued under $400,000.

The Securities and Exchange Commission (“SEC”) later instituted proceedings against Lorenzo (and his boss), claiming that Lorenzo violated securities laws by knowingly disseminating the false statements to potential investors. After a number of appeals, the case went to the Supreme Court to answer whether Lorenzo could be held primarily liable—as opposed to secondarily liable for aiding and abetting—under the securities laws even though he was not the “maker” of the misstatement. The Court said “yes.”

Pointing out the broad language of the rule, the Court found that, given the overlap of fraudulent conduct described within the rule and the purpose of the rule, Lorenzo violated the rule by employing a “device,” “scheme,” or “artifice to defraud,” and by engaging in an act that operated as a fraud. The Court noted that Lorenzo did not challenge the lower court’s finding that he sent the emails with “intent to deceive, manipulate, or defraud” the potential investors. This was an important detail because the Court implied that, if Lorenzo had challenged his knowledge of the statement’s falsity or his intent in sending the email, there may have been a different result. Thus, given the facts, the Court held that Lorenzo’s conduct would easily fall within a violation of the securities laws.

Critics of the decision believe that this holding will open the door to expanding the class of defendants who can be held primarily liable for securities laws violations. They argue that individuals such as Lorenzo can only be held secondarily liable, having assisted in the fraudulent conduct but not themselves planning the fraudulent scheme.

Supporters of the decision, however, believe that it is necessary for someone to be held liable for knowingly disseminating a false statement, whether or not the sender was the maker of that statement. Otherwise, there would be a loophole in the securities laws.

If you feel you have been the victim of fraudulent or misleading statements about investments, please contact our law firm for a free consultation.

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