Last week, the Supreme Court ruled in favor of the Security and Exchange Commission’s (SEC) growing sentiment to expand the horizons of rules that dictate who may be held liable for fraudulent activity.
The opinion was a conclusion of the court’s investigation of the Lorenzo v. SEC case, where the agency argued that the defendant, Francis Lorenzo, is liable for disseminating a note falsely claiming to investors that a prospective company’s assets are worth more than $10 million, while being aware that they were in fact worth under $400,0000.
Lorenzo was the director of investment banking at Charles Vista LLC, a registered broker-dealer in Staten Island, New York. The company whose valuation was put into question, Waste2Energy, was Charles Vista’s only investment banking client at the time, and the firm initially calculated an asset valuation north of $10 million, with the vast majority of the value based on the business’ intellectual properties.
However, after some trial and error, those intellectual properties were deemed worthless, and a revision of the company’s assets valued them under $400,000 in aggregate.
The argument then boiled down to whether Lorenzo should be held accountable for the email, which was sent by him from his email address. In a similar case, Janus Capital Group v. First Derivative Traders, the court interpreted the SEC’s rule which forbids the “making of any untrue statement of a material fact,” and ruled that 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.”
Lorenzo argued that his boss was the maker of the email, since he sent the emails at the direction of his boss, who supplied the content and “approved” the messages in October 2009.
The Court of Appeals maintained that Lorenzo can be held liable for fraudulent activity, despite his arguments. He subsequently filed a petition for certoriari in the Supreme Court, which also found that Lorenzo is guilty of fraud. “We conclude that dissemination of false or misleading statements with intent to defraud can fall with [the relevant subsections]. In our view, that is so, even if the disseminator did not “make” the statements and consequently falls outside subsection (b) of the rule,” the court said in a statement.
“By sending emails he understood to contain material untruths, Lorenzo…engaged in an act, practice, or course of business that operated…as fraud or deceit.”
The SEC fined Lorenzo $15,000, ordered him to cease and desist from violating the securities laws, and barred him from working in the securities industry for life.
The decision marked an abrupt end to the SEC’s losing streak of cases presented to the high court. The agency recently lost a case last term where the constitutionality of administrative law judges was debated, and also lost a case where the justices inhibited the SEC’s relatively broad view of Dodd-Frank’s whistleblower protections. The SEC also lost a case last year involving disgorgement claims in enforcement actions.
The court’s opinion “theoretically broadens the potential of liability for individual brokers, and serves as another reason for all investment firms to sharpen the pencil on their processes and ensure they are acting in the best interests of their clients,” said Dennis Simmons, executive director for the Committee on Investment of Employee Benefit Assets (CIEBA). “That said, it’s not a ruling we believe will have a material impact on chief investment officers, who already must meet the highest of fiduciary standards.”“This is an important win that preserves the broad anti-fraud provisions of securities laws as Congress intended and the ability of the SEC to hold con men and fraudsters accountable,” said Dennis Kelleher, president and CEO of watchdog group Better Markets.
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