In this Sidley Update:
- “Making” False Statements Under Section 10(b)
- Section 12(a)(2) Sellers, Materiality, Reasonable Care and Morrison
- Insider Trading and Tipping
- SLUSA Dismissals Without Prejudice and False Promises
- Section 29(b) and Releases
- Spokeo and Breach of Contract
“Making” False Statements Under Section 10(b)
A divided panel of the D.C. Circuit, in Lorenzo v. SEC, No. 15-1202 (D.C. Cir. Sept. 29, 2017), held that an investment banker did not violate Rule 10b-5(b) under Janus by forwarding emails to clients labeled as “at the request of” his boss and containing false statements: “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.” Slip op. at 2. The dissent agreed, but parted company with the panel majority’s conclusion that the defendant willfully violated Sections 10b-5(a) and (c) and Section 17(a)(1) of the Securities Act of 1933. The latter conclusion opens a Circuit split on whether conduct that does not violate Rule 10b-5(b) can still violate Section 10(b) where the conduct consists entirely of the defendant’s role in creating and/or distributing a false or misleading statement.
The defendant/petitioner in Lorenzo sent emails to two potential investors in a company that was his only investment banking client, and which he knew was in severe financial distress. Id. at 3-4. The court found that the content of the emails misrepresented the company’s financial condition, and that Lorenzo knew facts showing the falsehood of those statements. Id. at 5-13. (The dissent disagreed with some of these conclusions to the extent that the SEC had overturned findings by the Administrative Law Judge).
While Lorenzo sent the emails from his own account, they were not merely labeled as “at the request of” others; he literally just copied and pasted text provided by his boss. Id. at 5, 15-17. This was insufficient for liability for “making” a statement under Rule 10b-5(b):
To be sure, Lorenzo played an active role in perpetrating the fraud by producing the emails containing the false statements and sending them from his account in his capacity as director of investment banking (and doing so with scienter). But under the test set forth in Janus, [his boss], and not Lorenzo, was “the maker” of the false statements in the emails….The Commission noted that Lorenzo “put his own name and direct phone number at the end of the emails, and he sent the emails from his own account.”...That sort of signature line, however, can often exist when one person sends an email that “publishes a statement on behalf of another,” with the latter person retaining “ultimate authority over the statement.” Janus, 564 U.S. at 142.
Id. at 17 (quotations and citations omitted). In this sense, Lorenzo was no different from the defendant in Janus that had not authored the statement but hosted it on its website.
Unlike in Janus, however, the panel majority concluded — largely without analysis of Section 10(b) itself, or many of the leading cases construing its limits — that distributing a statement directly to investors without being the author can violate Rules 10b-5(a) and (c) (as well as Section 17(a)(1)):
Lorenzo...produced email messages containing three false statements about a pending offering, sent the messages directly to potential investors, and encouraged them to contact him personally with any questions. …[H]is own active role in producing and sending the emails constituted employing a deceptive ‘device,’ ‘act,’ or ‘artifice to defraud’ for purposes of liability under Section 10(b), Rule 10b-5(a) and (c), and Section 17(a)(1)....
Lorenzo’s conduct fits comfortably within the ordinary understanding of those terms. Indeed, he presents no argument that his actions fail to satisfy the statutory and regulatory language.... Lorenzo does not contend before us, for instance, that he simply passed along information supplied by [his boss] without pausing to think about the truth or falsity of what he was sending to investors. If those were the facts, he might attempt to argue that he cannot be considered to have “employed” any fraudulent device or artifice, or “engaged” in any fraudulent or deceitful act, within the meaning of Rules 10b-5(a) and (c), and of Sections 10(b) and 17(a)(1)....
...Lorenzo, having taken stock of the emails’ content and having formed the requisite intent to deceive, conveyed materially false information to prospective investors about a pending securities offering backed by the weight of his office as director of investment banking. On that understanding, the language of Sections 10(b) and 17(a)(1), and of Rules 10b-5(a) and (c), readily encompasses Lorenzo’s actions.
...Lorenzo, unlike the defendants in Janus and Stoneridge, transmitted misinformation directly to investors, and his involvement was transparent to them.
Id. at 20-21, 23 (emphasis added). Where this conflicts with other Circuits is in the panel’s conclusion that Rule 10b-5(a) and (c) liability can arise from a case in which the only conduct at issue is a statement the defendant did not “make” within the meaning of Rule 10b-5(b). Id. at 29-31 (noting contrary decisions by the Second, Eighth and Ninth Circuits).
Sidley Austin LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship.
Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, 212.839.5300; One South Dearborn, Chicago, IL 60603, 312.853.7000; and 1501 K Street, N.W., Washington, D.C. 20005, 202.736.8000.