By: Matthew Haan, IAC Student Intern Fall 2018
Welcome back to our six-part series discussing an important upcoming Supreme Court case involving the Securities and Exchange Commission. Last time, I gave you a brief introduction to Lorenzo v. SEC. If you missed it, go back and catch up. This time, I will give you the factual background you need to understand what is going on in this case. Without further ado, let’s get to it.
All the way back in 2009 (this actually is not a long time in Supreme Court context), Francis Lorenzo—the petitioner in the case—was the director of investment banking at Charles Vista, LLC, an SEC-registered broker-dealer. One of Charles Vista’s clients was a public company called Waste2Energy Holdings, Inc. (W2E). According to Lorenzo’s certiorari petition, W2E made representations about a new technology and included the technology in its June 2009 Form 8-K, which valued W2E’s tangible assets just over $10 million. When the new technology did not work out, W2E filed an amended Form 8-K on October 1, 2009 in which it valued its assets at $370,552 as of March 2009. On the same day, W2E filed a Form 10-Q in which it valued its assets at $660,408 as of June 2009.
After Lorenzo’s secretary told him about W2E’s amended filings, he circulated these October filings to other Charles Vista broker’s. But, apparently Lorenzo did not read the filings and thus did not know that W2E wrote down the value of its assets. Unaware of the change in value, Lorenzo told two investors in an e-mail that W2E had over $10 million in assets. Importantly, Lorenzo represented in the e-mails that he sent them at the request of others at Charles Vista.
At first glance, you probably agree that circulating false statements to potential investors is wrong, but you might wonder what the big deal is. Remember that in Janus Capital Group the Supreme Court held that a mutual fund investment adviser is not liable for making false statements under Rule 10b-5(b) when the allegedly false statements come from the mutual fund prospectus. That is kind of what is going on here, but there are some important differences. Lorenzo’s e-mails did not contain statements from a mutual fund prospectus, but they did contain statements about an investment opportunity that he himself did not make.
Thanks for reading. There is a lot more to these claims, including important proceedings that happened before the D.C. Circuit Court of Appeals heard the case. More on this next time.