Can the Securities and Exchange Commission penalize an investment banker even though he did not “make” false statements? The SEC is claiming that his distribution of those false statements constituted a “device, scheme, or artifice to defraud” or an “act, practice, or course of business which operates . . . as a fraud or deceit” under subsections (a) and (c) of Rule 10b-5.
According to the Supreme Court, the answer is yes.
Francis Lorenzo was the director of investment banking at Charles Vista, LLC, a registered broker-dealer, and his client was Waste2Energy.
Waste2Energy was trying to raise capital and Lorenzo was tasked with helping to sell $15 million of debentures. Lorenzo’s boss drafted the marketing emails that claimed Waste2Energy had $10 million in assets.
Dear Sir:
At the request of Adam Spero and Gregg Lorenzo, the Investment Banking division of Charles Vista has summarized several key points of the Waste2Energy Holdings, Inc. Debenture Offering.
…
Please call with any questions
Truly,
Francis V. Lorenzo Vice President – Investment Banking
Lorenzo had heard that the claim was incorrect and saw that the company had written off those assets in a public filing. Frank blamed his boss Gregg and others for the content of the email. They “made” the false statement. Frank merely delivered it. Frank was merely aiding and abetting, not the primary actor. Frank claims that he did not provide substantial assistance in the violation. He was merely the messenger.
The distinction is one of private party actions. The SEC can bring aiding and abetting claims, but not private plaintiffs.
The SEC thinks that knowingly distributing the false statements of others to sell an investment is a “device, scheme, or artifice to defraud” or an “act, practice, or course of business which . . . would operate as a fraud.” That makes Lorenzo a primary violator of the scheme liability provisions.
The SEC also sees the obvious loophole if it couldn’t penalize because the relevant person did not “make” the false statements. Those who distribute a statement with knowledge of its falsity would be held liable for aiding and abetting.
The Supreme Court took a pragmatic approach and agreed with the SEC.
“But using false representations to induce the purchase of securities would seem a paradigmatic example of securities fraud. We do not know why Congress or the Commission would have wanted to disarm enforcement in this way. “
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