Lorenzo v. SEC

Whether an insufficient fraudulent statement claim can form the basis for fraudulent scheme claim under the Securities Exchange Act of 1934 and SEC Rule 10b-5(b).

Petitioner’s client reported a total devaluation of its assets after its business model failed. Petitioner received notification of the client’s report, but still emailed potential investors about pending debenture offerings, assuring them that the client had over $10 million in confirmed assets, $43 million in purchase orders and letters of intent, and that the Petitioner’s employer would repay investors if necessary. The SEC held that Petitioner willfully violated three securities-fraud provisions, ordering Petitioner to cease and desist, barring him for life from the securities industry, and imposing a civil penalty of $15,000. On review, the D.C. Circuit held that Petitioner’s emails contained false or misleading statements and that Petitioner had the required intent to deceive; however, the D.C. Circuit vacated the sanctions and remanded the case for a determination of appropriate penalties under SEC Rule 10b-5(b) on the grounds that Petitioner’s employer retained ultimate responsibility for the statements. Petitioner argues that the D.C. Circuit’s decision allows the SEC to pursue insufficient fraudulent statement claims by relabeling them fraudulent scheme claims while holding the Petitioner liable for misstatements that he did not make, thereby ignoring the distinction between primary and secondary actors in securities fraud liability. The Second, Eighth, and Ninth Circuit have held that fraudulent statements alone cannot be the basis for a fraudulent scheme claim, while the D.C. Circuit and Eleventh Circuit have held that they are a sufficient basis.