Author: Doug Cornelius

You can find out more about Doug on the About Doug page

DOJ’s New Evaluation of Corporate Compliance Programs

The Justice Department released a refreshed set of guidelines on how prosecutors should evaluate corporate compliance programs.

The Principles of Federal Prosecution of Business Organizations in the United States Attorney’s Manual describe factors that prosecutors should consider in conducting an investigation of a corporate entity, determining whether to bring charges, and negotiating plea or other agreements. One of these factors is “the existence and effectiveness of the corporation’s pre-existing compliance program” and the corporation’s remedial efforts “to implement an effective corporate compliance program or to improve an existing one.” The Guidelines are meant to assist prosecutors in making informed decisions as to whether, and to what extent, the corporation’s compliance program was effective.

For those of us involved in compliance for high-regulated companies in finance, I take the guidance with a word of caution. Regulators are the first line of compliance program creation. If you screw up badly, they pull in the agency’s lawyers. It’s only when you end up in the super serious list, like criminal charges, that you end up with the Department of Justice where these Guidelines are operative.

So what has changed in the Guidelines document?

It’s bigger. The original guidance was only four pages. The new guidance blossoms up to 19 pages.

It’s written for non-compliance people. The previous guidelines were written more like a checklist for those with a compliance background. I heard the new guidelines were released in a training session for DOJ attorneys. I guess it will be the front-line prosecutors using these guidelines to help in their decision-making process.

I need to take a deeper dive into the guidelines. More to come.

Sources:

Compliance Bricks and Mortar for May 3

I’m in Chicago today at the SCCE Regional Compliance & Ethics Conference. I’m speaking in the morning on compliance and corporate governance.

If you’re also attending, grab me for a cup of coffee.

Meanwhile, here are some of the compliance-related stories that recently caught my attention.

Whistleblower Challenges SEC Over Delay on Award Decision
by Kristin Broughton
Risk & Compliance Journal in WSJ.com

Between 2014 and 2017, the SEC took an average of more than two years to decide if a whistleblower deserved a reward, according to an analysis by The Wall Street Journal. That is more than twice as long as in 2012 and 2013, the early years of the whistleblower program.
The decision-making process has taken longer as the agency has sorted through a flood of requests for awards and tips on potential corporate wrongdoing. The SEC last year received 5,282 whistleblower tips, an increase of 18% from a year earlier, and nearly twice the number received in 2012, the first full year after the program took effect, according to an SEC report to Congress.

https://www.wsj.com/articles/whistleblower-challenges-sec-over-delay-on-award-decision-11556668694

New Compliance Evaluation Guidelines
By Matt Kelly
Radical Compliance

In fact, that was my biggest impression when comparing the 2017 and 2019 guidelines; that the new guidelines are more comprehensive, so they can be used by people less familiar with corporate compliance. Whether that’s comforting news for corporate compliance officers sitting across the negotiating table, or exasperating news, I’m not sure.

Recall that when the Justice Department first developed their evaluation guidelines in 2016 and 2017, the department had a compliance counsel: Hui Chen. She was a seasoned veteran in corporate compliance, and the thinking at the time was that Chen (or subsequent compliance counsels) would help prosecutors evaluate the compliance programs of companies under investigation.

Benczkowski eliminated that compliance counsel role.

http://www.radicalcompliance.com/2019/04/30/new-compliance-evaluation-guidelines/

Insider Trading and Disclosure: The Case of Cyberattacks
By Eli Amir, Shai Levi and Tsafrir Livne
The CLS Blue Sky Blog

When a cyberattack with material negative consequences occurs, security regulations require companies to disclose information on the event to the public, as in other incidents with material negative effects. Executives can opportunistically sell shares (or avoid buying shares or granting stock options) before disclosing information on cyberattacks to the public. However, they are unlikely to trade on private information that the firm intends to disclose. Disclosure of the negative information will expose and label preceding sales as insider trading, and executives will not sell shares if they wish to avoid the legal ramifications of insider trading. In some cases, however, firms withhold information and do not disclose the cyberattack to investors; and if the firm chooses to withhold information on the cyberattack, insiders’ sales of shares are less likely to be identified as insider trading.

We predict that the likelihood of insider trading is higher for firms that withhold the information than for firms that voluntarily disclose it. 

http://clsbluesky.law.columbia.edu/2019/04/25/insider-trading-and-disclosure-the-case-of-cyberattacks/

Teaching Compliance Part I of III
by Veronica Root Martinez
NYU Law’s Compliance & Enforcement

I decided to tackle teaching the course in a manner that I hoped would allow students to think through the different roles they might play within compliance efforts, followed by a few classes dedicated to specific compliance areas in an attempt to allow students to better understand how their role might look in practice.  To do so, I draw on enforcement, compliance, behavioural ethics, and professional responsibility materials.  Each class session has one dedicated case study to help students understand the concept being presented.

https://wp.nyu.edu/compliance_enforcement/2019/04/16/teaching-compliance-part-i-of-iii/

New SEC/Musk settlement spells out which Tesla tweets require preapproval
by Anne Sherry, J.D.
Jim Hamilton’s World of Securities Regulation

Musk’s response to the contempt proceedings argued that the “500k” tweet could not reasonably be considered material. Settlement 2.0 attempts to clear up any ambiguity by substituting a more specific list of topics for 1.0’s materiality standard. Pointedly, the list includes “potential or proposed mergers, acquisitions, dispositions, tender offers, or joint ventures” and “production numbers or sales or delivery numbers” that are new or deviate from previously published guidance.

https://jimhamiltonblog.blogspot.com/2019/04/new-secmusk-settlement-spells-out-which.html

Regulation S-P – Privacy Notices and Safeguard Policies

The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) issued a risk alert on compliance issues related to privacy regulations. The alert comes from recent examinations of broker-dealers and registered investment advisers.

Regulation S-P is the primary SEC rule regarding privacy notices and safeguards. The Risk Alert doesn’t cover all of the requirements of Reg S-P or all of the problems OCIE found regarding Reg S-P over the last two years.

The most frequent deficiencies and weaknesses:

  • Failure to provide notification, including initial privacy notices, annual privacy notices, and opt-out notices.
  • Lack of policies and procedures as required by Regulation S-P.
  • Lack of safeguards of customer data on personal devices
  • Sending unencrypted email communication with personally identifiable information (PII)
  • Lack of data privacy training
  • Sending PII to networks outside of the registrant’s network
  • Failure to follow privacy policies regarding outside vendors
  • Failure to maintain a PII inventory
  • Insufficient incident response plans
  • Storage of PII in insecure physical locations
  • Making customer login information available to more employees than permitted under the firm’s policies and procedures
  • Failure to remove login rights from departed employees

Sources:

Howey Test – Framework for “Investment Contract” Analysis of Digital Assets

To show the markets that the Securities and Exchange Commission is not just about slapping around wrong-doers, but also trying to help people navigate the securities laws, the SEC’s FinHub published a framework for analyzing whether a digital asset is a security.

The framework is not intended to be an exhaustive overview of the law; rather, it is a tool to help market participants assess whether the federal securities laws apply to the offer, sale, or resale of a particular digital asset.

Did anyone find it strange that the “framework” document had not statement of the author or publisher? There is not even an SEC symbol.

That should be a warning that you can’t rely on it. It’s not official guidance. It’s not a no-action letter.

It is a comprehensive look at the Howey test in the lens of cryptocurrency. The Supreme Court’s decision in SEC v. W.J. Howey Co. found that an “investment contract” exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.  If it’s an “investment contract,” it’s a security and subject to securities laws.

The framework quickly jumps over the first two prongs of the Howey test:
the “investment of money” and “a common enterprise.” That’s true in most of the “What is a Security?” cases. 

The framework focuses on the “expectation of profits from the effort of others” prong of the Howey test. The Framework splits that into two parts.

Generally, if you make an investment you expect to make a profit. Otherwise it’s just a purchase for use. I bought a cup of coffee this morning. I had not expectation of profit. I had an expectation of getting coffee. I bought it with a stored value card from Starbucks. It’s not an investment. Those could have been Starbucks coins.

You can see an obvious problem with ICOs that talk about how much the coins are going to increase in value. That injects an expectation of profit. The framework lays out a long list of characteristics that make sit likely the SEC will see that there is an expectation of profits.

“Lambo, Lambo, Lambo” was not specifically on the list. They took a more demure “able to earn a return on their purchase.”

The framework inquiry into whether a digital coin purchaser is relying on the “efforts of others” focuses on two key issues:

  • Does the purchaser reasonably expect to rely on the efforts of an active participant in running the underlying platform?
  • Are those efforts “the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise,” as opposed to efforts that are more ministerial in nature?

If there is a key person responsible for the development of the platform and making the decisions, that makes it look an investment.

To put this framework into play the SEC also announced a no-action letter for the Turnkey Jet token sale (TKJ) and found that it would not recommend enforcement because it was not a securities offering.

In reaching this position, we particularly note that:

1. TKJ will not use any funds from Token sales to develop the TKJ Platform, Network, or App, and each of these will be fully developed and operational at the time any Tokens are sold;
 
2. the Tokens will be immediately usable for their intended functionality (purchasing air charter services) at the time they are sold;
 
3. TKJ will restrict transfers of Tokens to TKJ Wallets only, and not to wallets external to the Platform;
 
4. TKJ will sell Tokens at a price of one USD per Token throughout the life of the Program, and each Token will represent a TKJ obligation to supply air charter services at a value of one USD per Token;
 
5. If TKJ offers to repurchase Tokens, it will only do so at a discount to the face value of the Tokens (one USD per Token) that the holder seeks to resell to TKJ, unless a court within the United States orders TKJ to liquidate the Tokens; and
 
6. The Token is marketed in a manner that emphasizes the functionality of the Token, and not the potential for the increase in the market value of the Token.

The Turnkey Jet token is a stored value card saved on the blockchain instead of a central account. That’s closer to buying a cup coffee than it is to investing.

Of course, the framework is just the SEC’s view on securities law question under federal law. There are also state law analyses that need to be done.

Sources:

Compliance Bricks and Mortar for April 5

These are some of the compliance-related stories that recently caught my attention.

Companies Need to Pay More Attention to Everyday Unethical Behavior
by Yuval Feldman
Harvard Business Review

Numerous studies have documented the prevalence of practices such as stealing office supplies, inflating business expenditures reports, and engaging in behaviors that raise conflicts of interest. While these may sound negligible, these violations reduce trust over time and alter prevailing business and legal norms. Their aggregated effect can be quite harmful.

Behavioral ethics research suggests that this type of misconduct occurs not because people are unethical or deliberately choose to act unethically, but because they fail to understand that their behavior is indeed unethical and can have harmful consequences. Studies show that employees have a “blind spot” that prevents them from seeing the ethical and legal meaning of their own behavior.

https://hbr.org/2019/03/companies-need-to-pay-more-attention-to-everyday-unethical-behavior

Insider Guessing Can Still Land You in Jail
by Caitlin M. Poe
The National Law Review

But what does it mean to learn secret company information?  Usually, this issue is also straightforward enough.  The insider has received testing results for a product, or has worked on an upcoming merger, or has seen the earnings report in advance of release.  But what if the insider hasn’t been told something, but instead makes an educated deduction that turns out to be right?  Is insider guessing illegal?

https://www.natlawreview.com/article/insider-guessing-can-still-land-you-jail

Andreessen Horowitz Is Blowing Up The Venture Capital Model (Again)
Alex Konrad
Forbes

Why? Well, venture capitalists have long traded a lack of Wall Street-style oversight for the promise that they invest mainly in new shares of private companies. It was a tradeoff firms gladly made—until the age of crypto, a type of high-risk investment the SEC says requires more oversight. So be it, says Andreessen Horowitz. By renouncing its venture capital status, it’ll be able to go deeper on riskier bets: If the firm wants to put $1 billion into cryptocurrency or tokens, or buy unlimited shares in public companies or from other investors, it can. And in doing so, the thinking goes, it’ll again make other firms feel like they have one hand tied behind their back. 


https://www.forbes.com/sites/alexkonrad/2019/04/02/andreessen-horowitz-is-blowing-up-the-venture-capital-model-again/#4163d0b27d9f

Prof. Coffee Testifies on Insider Trading Legislation Before the House Financial Services Subcommitee on Investor Protection
By John C. Coffee, Jr.
The CLS Blue Sky Blog

I have been asked to comment on several proposed bills, all of which I basically support, but I will focus my limited time today primarily on Congressman Himes’ Discussion Draft of an “Insider Trading Prohibition Act.” I want to commend Congressman Himes for having supervised the drafting of a very careful, balanced and sophisticated bill that should serve as a model for a long overdue effort to codify the law of insider trading. To date, the law of insider trading has been solely the product of judicial law-making, and courts have been confined by the words set forth in Section 10(b) of the Securities Exchange Act of 1934. In effect, insider trading is the best example of a common law crime that survives today.

http://clsbluesky.law.columbia.edu/2019/04/03/putting-investors-first-reviewing-proposals-to-hold-executives-accountable/

SEC Nominee Emerges
by Matt Kelly
Radical Compliance

[Allison] Lee previously worked at the SEC from 2005 to 2018, including a stint as counsel for former Democratic commissioner Kara Stein, who stepped down from the SEC in December. So essentially, Lee would replace her former boss. If confirmed, Lee would serve until 2022.

http://www.radicalcompliance.com/2019/04/03/sec-nominee-finally-emerges/

Leave it to Trump to show us how not to hire a CCO
By Joe Mont
Compliance Week

According to a report this week in the Wall Street Journal, George Sorial, who worked for The Trump Organization since 2007 and served as chief compliance counsel, is stepping down from that post. The stated reason: He wanted extra time to promote a new book he co-authored. 

https://www.complianceweek.com/news/opinion/leave-it-to-trump-to-show-us-how-not-to-hire-a-cco

Pre-existing, Substantive Relationships and General Solicitation

As cryptocurrency issuance declines, the Securities and Exchange Commission is continuing to clean out the fraud, mis-steps, and foolishness of coin promoters. These actions have carried over to the services and investment managers involved in coin offerings.

Usman Majeed wanted to make his money by running a fund that invests in cryptocurrency. He ran into the same mistakes and ignorance of the securities laws that coin promoters stumble over. His platform was Mutual Coin Fund, with an approach that is “purely quantitative and involves algorithmic trading with intense backtesting…” and develops “new trading strategies involving artificial intelligence and machine learning through neural networks.”

That sounds like a lot of the same gobbley-gook for a crypto-fund offering that you hear for a coin offering.

That aside, he still managed to raise over $500,000 from investors from August 2017 to May 2018. Then managed to lose 62% of it by March 2019.

From the SEC order, it sounds like enforcement decided to focus on the marketing failure. Mr. Majeed and the fund didn’t have a pre-existing, substantive relationship with the investors. The fund engaged in general solicitation through its website and media interviews.

The fund could have engaged in general solicitation if it checked the 506(c) box on its Form D. But it checked the 506(b) box.

Of course, with 506(c) the fund would have needed to take reasonable steps to confirm that investors were accredited investors. But at least one investor was not accredited according to the SEC order.

Sources:

Cross Platform Sale Leads to Trouble

It is generally bad to have one client trade with another client. Rule 206(3)-2 imposes some very specific requirements and leaves you with a final twist:

This rule shall not be construed as relieving in any way the investment adviser or another person relying on this rule from acting in the best interests of the advisory client, including fulfilling the duty with respect to the best price and execution for the particular transaction for the advisory client ….

The problem is especially enhanced when cross-trade involves illiquid, hard-to-value assets, like complex securities or real estate. Mortgage loans fall into that category. As the investment matures, you find out if the underwritten price was good or bad. One side is likely to make out better than the other.

Talimco added to the problem by acting in bad faith during the cross-trade.

According to the Securities and Exchange Commission charges against Talimco LLC and its former chief operating officer, Grant Gardner Rogers, they manipulated the auction of a commercial real estate mortgage asset on behalf of one client for the benefit of another in a cross-trade. 

Talimco was the collateral manager for a collateralized debt obligation client on one hand and a commercial real estate investment fund on the other hand.  The CDO had a defaulted mortgage loan participation that it was trying to sell.

As an investment adviser, Talimco owed a general fiduciary duty to the CDO. In addition, the CDO governing documents required Talimco to dispose of the assets in a competitive auction with at least three bids.

The real estate fund wanted the investment at a certain price, so Rogers rigged the auction. Rogers convinced two unwilling bidders to participate in the auction by giving assurances that the bidders would not win the auction.  As a result of this manipulation, Talimco’s real estate fund client was the highest bidder and acquired the asset.

To prove the problem with cross-trade, the real estate fund ended up selling the interest for a substantial profit and the CDO ended up underwater.  It was going to be a good enough investment that Rogers committed an additional $1 million to the fund during the acquisition. That may have been coincidence, but it looks bad.

Not as bad as the written messages about the rigged auction disclosed in the SEC order: 

I get it, for you guys and other people that we’ve talked to it’s like, you know it’s not that attractive. It’s small, it’s a non-controlling participation. But, you know, in order to, for us to purchase this, we need like, we need a bid from three different market makers …. And look, I won’t hit you on this, but I need a bid for it.

“By rigging the auction, Talimco and Rogers failed to fulfill their fiduciary duty to their client,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.  “Investment adviser firms are expected to have controls in place to detect and disclose conflicts of interest.  This action evidences the vigilance of the SEC’s exam and enforcement staff in identifying investments advisers that exploit client relationships and harm investors.”

Notably, the case started with an examination by the Private Funds Unit, who handed the investigation over to the Complex Financial Instruments Unit and the New York Regional Office. 

Sources:

Billing Employees to the Fund

The Yucaipa Master Manager didn’t properly inform investors of all costs tied to preparing tax returns. Yucaipa resolved the case without admitting or denying the SEC’s allegations.

Under the fund documents for the Yucaipa American Alliance private equity funds, the cost of preparing the funds’ tax tax returns are an expense of the funds. Yucaipa decided to bill a portion of the costs of the fund manager’s in-house tax partner and in-house tax manager to the fund for their time spent preparing the funds’ tax returns.

The funds’ documents also provided that the fund manager/general partner bears the cost of its normal operating overhead, including “salaries, other compensation and benefits of the Manager’s employees.”

There is some conflict between the provisions in the fund documents. The in-house employees were less expensive than the outside vendors also involved in the tax work. For the funds’ it was likely a cost savings or at least not any more expensive.

The problem is not apparent when not looking from the funds’ perspective, but from the manager’s perspective. This is an extra revenue source for the manager. There is a conflict that had to be approved by investors.

It’s not that a manager can’t charge in-house employees to the fund. But to do so, it must be disclosed to the investors or otherwise approved by the investors.

Sources:

Compliance Bricks and Mortar for March 29

These are some of the compliance-related stories that recently caught my attention.

Conflicts of interest for “the little people”
by Jeff Kaplan
Conflicts of Interest Blog

The conclusion of the Mueller investigation does little to resolve the much broader set of concerns regarding President Trump’s conflicts of interest. These are too numerous to be chronicled on this site, but are being tracked on a weekly basis by the Sunlight Foundation, which even offers a searchable data base of Trump COIs. Additionally, a study recently conducted by USA Today showed that by failing to divest his various investments before taking office, Trump has created more than 1400 COIs.

http://conflictofinterestblog.com/2019/03/conflicts-of-interest-for-the-little-people.html

$50M SEC Whistleblower Award
by Matt Kelly
Radical Compliance

In other words, if you want that SEC payday — you have bring high-quality information, and bring it quickly. That’s what Claimant 2 did, Claimant 4 did not, and Claimant 1 kinda sorta did but not quite quickly enough. Rest assured, the whistleblower bar will be making that point to your employees in prompt fashion, too. Compliance officers should respond accordingly.

http://www.radicalcompliance.com/2019/03/26/50m-sec-whistleblower-award/

Deciphering Americans’ Views on Cryptocurrencies
by Sean Hundtofte, Michael Lee, Antoine Martin, and Reed Orchinik
Liberty Street Economics

Individuals who owned cryptocurrency or were interested in buying it were particularly likely to perceive cryptocurrency as being similar to gold (41 percent) and stocks or bonds (39 percent). This suggests that such individuals may think of cryptocurrencies as an investment vehicle. In addition, 37 percent of respondents within this group likened cryptocurrency to traditional money. If we think of traditional money as a means of payment, then this distribution of views is consistent with the idea that cryptocurrencies are currently perceived less as a payments mechanism than as an investment, even if they can play both roles. 

https://libertystreeteconomics.newyorkfed.org/2019/03/deciphering-americans-views-on-cryptocurrencies.html

Assessing Why Compliance Programs Fail
by Veronica Root Martinez
The CLS Blue Sky Blog

In an article recently published in the Indiana Law Journal, I argue that institutions can improve their assessments of compliance failures—and thereby their future compliance efforts—by changing the way they think about such programs in the first place. I explain that the compliance process consists of four, distinct stages: prevention, detection, investigation, and remediation.  I argue that more root-cause analyses will occur if firms ask at what stage or stages within the compliance program a failure or failures occurred. By conducting this sort of analysis when compliance failures occur, firms may be better equipped to address and prevent similar, future misconduct.

http://clsbluesky.law.columbia.edu/2019/03/26/assessing-why-compliance-programs-fail/

The Compliance Process: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3151893

SEC Employees to Get More Co-Workers, But Smaller Raises
by Benjamin Bain
Bloomberg

The Wall Street regulator will add 100 people this year after lifting a hiring freeze, Clayton said in an email to staff this week. In the same message, he said current employees would be getting pay increases averaging 2.4 percent, acknowledging that the boost might disappoint some workers because it’s less of a jump than they’ve gotten in recent years.

https://www.bloomberg.com/news/articles/2019-03-21/sec-pay-raise-plan-gets-cold-shoulder-from-agency-union-leaders

Insider Trading and Executive Overreach
By Kevin R. Douglas
The CLS Blue Sky Blog

The recent controversy over President Donald Trump’s use of his emergency authority to fund a wall on the U.S. southern border has awakened many Americans to the problem of executive overreach. Yet, what few may appreciate is that executive overreach can cause trouble in contexts far beyond immigration or border security. For example, consider U.S. securities regulation. Executive overreach was a major factor in creating confusion in the current U.S. laws against insider trading, and some reformers propose using new executive actions to correct the problem.

http://clsbluesky.law.columbia.edu/2019/03/22/insider-trading-and-executive-overreach/

Lorenzo: A Win for the SEC and All Plaintiffs
by T. Gorman
SECActions

Finally, the Court’s determination may also be a victory for the class action bar. While private litigants cannot bring fraud claims based on an aiding and abetting theory, they can now pursue even “bit” players in a securities fraud by wedging the conduct into the expansive contours of the statutes. Lorenzo is the ode to expanding securities fraud liability.

http://www.secactions.com/lorenzo-a-win-for-the-sec-and-all-plaintiffs/

Supreme Court: Even One Who Did Not “Make” a False Statement May Still be Subject to Scheme Liability
By Kevin LaCroix
The D&O Diary

The relationship the court drew between “making” and “dissemination” a false statement is interesting, particularly in the current age when so much information is shared electronically, often as an attachment or a link. The court’s conclusion that someone can be liable for disseminating a false statement even without having “made” it could potentially have some interesting implications in the current electronic age when so much information is “forwarded” in electronic communications.

https://www.dandodiary.com/2019/03/articles/securities-laws/supreme-court-even-one-who-did-not-make-a-false-statement-may-still-be-subject-to-scheme-liability/

SEC Wins at SCOTUS

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. “

Sources: