By: Matthew Haan, IAC Student Intern Fall 2018
If you’ve made it this far, congratulations on being a full blown law nerd. You are in great company! Most of this series has focused on Francis Lorenzo, and you are probably wondering what the SEC could argue to support its position. After all, the SEC has won at every stage of the litigation so far, so it must have some pretty decent arguments. Today, I will discuss exactly what those arguments are.
In response to Lorenzo, the SEC made two main arguments in the Court of Appeals. First, it argued that there is substantial evidence to support its findings that Lorenzo violated the securities laws, specifically Rules 10b-5(a) and 10b-5(b). The SEC argued that Lorenzo had “ultimate authority” over the statements—the standard announced by the Supreme Court in Janus Capital Group v. First Derivative Traders—because he “authored” the e-mails. We know that the Court of Appeals rejected this argument and found for Lorenzo on the issue, but the Court of Appeals agreed with the SEC on the other part of this argument. The SEC argued that, regardless of whether he made the statements in the e-mails, communicating with potential investors in this way amounted to using a deceptive scheme that was fraudulent under 10b-5(a). The SEC used the text of the rule to argue that the requirement of making a statement only appears in subsection (b). Thus, it argued that Lorenzo’s role in using the e-mails rose to the level of using a deceptive scheme. Ultimately, the Court of Appeals agreed that Lorenzo’s role in producing and sending the e-mails counted as using a fraudulent scheme.
Predictably, the SEC argued that it acted reasonably by imposing a $15,000 fine and a lifetime ban from the industry. The securities laws allow the SEC to ban a broker-dealer from the industry if the broker-dealer willfully violated the laws and a ban is in the public interest. The Commission rooted its justification for the sanctions in the nature of its work. The SEC’s goal is to protect investors while maintaining fair markets. Based on this, it argued that the sanctions imposed on Lorenzo were in the public interest because his actions were egregious and his disregard showed that there was a high potential that he would violate the securities laws again. The Court of Appeals determined that the SEC partially based the sanctions on its misinterpretation of Rule 10b-5(b), so any sanctions needed to be reassessed. There has not been a reassessment yet, but the SEC’s brief in the Supreme Court does not contain any argument that Lorenzo made the false statements in violation of 10b-5(b).
So that’s where we are. We have made our way through the facts of the case, journeyed through the SEC hearings and lower courts, and deciphered the arguments made by each side in the Court of Appeals. Next time, I will wrap this all up and explain what the Supreme Court’s decision could mean for investors. The grand finale is coming up!