By: Matthew Haan, IAC Student Intern Fall 2018
You’ve made it to the end! In this conclusion, I will tell you what this case means for investors, broker-dealers, and the SEC. You might even find my prediction (kind of) buried in here somewhere.
So, what’s all this mean? Way back in Part 1, I told you about the SEC being in the Supreme Court a lot over the past year or so. In each of those cases, the SEC took the loss. This all started back in June 2017, when a unanimous Supreme Court ruled in Kokesh v. SEC that if the SEC is going to seek disgorgement (the return of ill-gotten gains) from a violator of the securities laws, it must do so within five years of the date the claim accrued. Later, the Court ruled against the SEC again when it decided the Commission misinterpreted a whistleblower law. The Court held in Digital Realty Trust, Inc. v. Somers that there is no protection against retaliation for individuals who report corporate fraud but failed to report the violation to the SEC. The latest blow to the SEC came in June 2018, when the Court ruled in Lucia v. SEC that the SEC’s administrative law judges, the kind that first ruled against Lorenzo in this case, are officers of the United States and subject to the Constitution’s Appointments Clause. We have written about this decision on this blog before. You can read more about Lucia and its implications here.
A decision in Lorenzo’s favor would make it even harder for the SEC to prove that a broker‑dealer violated the securities laws. If the Court rules against the SEC again, there are suddenly less people potentially subject to enforcement actions. What’s my prediction, you ask? I have no idea what happens here. Only eight justices will participate in this decision. Newly‑confirmed Justice Kavanaugh sat, and wrote a fiery dissent, when the case was in the Court of Appeals for the D.C. Circuit, making him ineligible to hear the case at the Supreme Court. If Kavanaugh was eligible to participate, I would be confident in predicting a win for Lorenzo. But his absence leaves open the possibility that the remaining Justices could end up in a tie if they vote along partisan lines: four “liberal” Justices—Ginsburg, Breyer, Sotomayor, and Kagan—voting one way, and four “conservative” Justices—Roberts, Thomas, Alito, and Gorsuch—voting the other way. This happened in Janus Capital Group, Inc. v. First Derivative Traders, with Justice Kennedy serving as the tiebreaking vote. If the Justices tie, the Court of Appeals opinion gets confirmed, but no Supreme Court precedent results. Don’t be surprised if this happens.