The U.S. Supreme Court recently held an investment banker liable for fraud even though he did not draft the fraudulent communication that he later transmitted to a potential investor. In Lorenzo v. Securities and Exchange Commission, the Supreme Court deliberated on the issue of whether fraud was committed when Francis Lorenzo, the director of investment banking with an SEC registered brokerage firm, cut and pasted from a draft of an email by his boss about an investment opportunity and then transmitted the emails to prospective investors. The draft email stated that there was an investment opportunity with a company that had assets valued at $10 million, even though he knew that the company in fact had approximately $400,000 worth of assets.
Lorenzo claimed that he did not commit a primary fraud within in the meaning of rule 10 (b) 5b as he was not the “maker” of the fraudulent email. He claimed that because his boss drafted the email, and because he simply cut and pasted the email to the prospective investors, he had not committed the primary fraud. He argued that he should only be held secondarily liable. However, the Supreme Court found that Lorenzo’s actions constituted fraud within the broad meaning of Rule 10b-5(a) and (c).
The majority argued that Lorenzo had the intent to defraud the potential investors because he knew that the company he was seeking investment in was valued at far less than what was purported in the email communication. The Supreme Court held that “The line we adopt today is just as administrable: Those who disseminate false statements with intent to defraud are primarily liable under Rules 10b-5(a) and (c), section 10(b) of the Exchange Act, and section 17(a)(a) of the Securities Act, even if they are secondarily liable under Rule 10b-5(b).”
Court Bases Decision on Earlier Precedent Set
Justice Clarence Thomas dissented and was joined by Justice Neil Gorsuch in his dissent while Justice Brett M. Kavanaugh did not participate. Justice Thomas argued that the decision by the majority “eviscerate[d] the distinction” between primary and secondary liability that was the precedent set in Janus Capital Group, Inc. v. First Derivative Traders.
In Janus, the Supreme Court had held 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.” Under Janus, an investment advisor who merely participated in the draft of the statement made by another should not be held liable under Rule 10b-5(b).
Per this decision, employees who assist in drafting documents such as officers, investment bankers and lawyers, may be implicated even if they are not the author of the statement. The Lorenzo case expands liability for officers, investment bankers, lawyers and others who assist in drafting offering documents issuing securities to potential investors.
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