In a long line of cases, the U.S Supreme Court has grappled with the question of who can be held liable under the federal securities laws for fraudulent misrepresentations. Most recently, in the Janus Funds case, the Court has said that only a “maker” of a misrepresentation can be held liable in a private securities lawsuit. On June 18, 2018, the U.S. Supreme Court granted a writ of certiorari to examine whether a person who did not “make” a misrepresentation can nevertheless be held liable under the securities laws on a theory of scheme liability.


The case involves an SEC enforcement action in which the defendant, Francis Lorenzo, sent prospective investors emails at the direction of his boss and with content that he had not created. Lorenzo’s actions were held insufficient to support fraudulent statement liability because he did not “make” the misrepresentations, but Lorenzo nevertheless was held liable for the misrepresentations on a scheme liability theory. The case presents an interesting opportunity for the Court to consider the requirements to establish scheme liability and in particular to determine whether a financial misrepresentation alone is sufficient to support a scheme liability claim. The Supreme Court’s June 18, 2018 order granting the writ of certiorari can be found here.



In 2009, Francis Lorenzo worked as the director of investment banking at Charles Vista, LLC, a broker-dealer. Charles Vista served as the placement agent for a private debenture offering for one of the firm’s clients, Waste2Energy Holdings (“W2E”), a publicly-traded energy company. On October 1, 2009, W2E issued a revised SEC filing indicating that its asset value was dramatically lower than the company had previously reported as result of a revaluation of the company’s intangible assets.  The record shows that Lorenzo received a copy of W2E’s revised SEC filing.


On October 14, 2009, two weeks after W2E had issued its revised filing, Lorenzo sent separate emails to two prospective investors for the debenture offering. Both emails expressly stated that they were being sent at the request of others at Charles Vista. Both emails recited favorable financial attributes of W2E. Neither email mentioned W2E’s revised SEC filing or the company’s revaluation of its intangible assets. In both messages, Lorenzo stated that the recipients could call him with any questions. He signed both messages with his name and title as “Vice President – Investment Banking.”


In February 2013, the SEC commenced enforcement proceedings against Lorenzo and others in connection with the W2E offering. The other defendants settled with the SEC; the action against Lorenzo proceeded to trial before an administrative law judge. After trial, the ALJ issued findings of fact stating that Lorenzo’s boss had drafted the content of the emails and had asked Lorenzo to send the emails. The ALJ also concluded that Lorenzo had not read the emails or even considered the emails’ content before sending them. Nevertheless, the ALJ concluded that Lorenzo should be liable under the securities laws for  having acted with an intent to deceive, manipulate, or defraud on a scheme liability theory. The Commission upheld the ALJ’s decision.


Lorenzo appealed the Commission’s ruling to the D.C. Circuit Court of Appeals. On September 29, 2017, the D.C. Circuit issued its opinion ruling (1) that Lorenzo could not be held liable for a fraudulent misrepresentation under Rule 10b-5(b) because he did not “make” the statements at issue, but (2) nonetheless upholding, in a 2-1 vote, the Commission’s finding of liability under Rule 10b-5(a) and (c) against Lorenzo because the statements in Lorenzo’s emails were false or misleading and he possessed the requisite intent.


Lorenzo filed a petition for writ of certiorari with the U.S. Supreme Court. The petition described the question presented as “whether a misstatement claim that does not meet the elements set forth in Janus can be repackaged and pursued as a fraudulent scheme claim.” In support of his petition, he cited a split among the circuits on the question of whether “a misstatement standing alone can be the basis of a fraudulent scheme claim.” The Court granted the writ on June 18, 2018.



As I have previously noted many time, in recent years the U.S. Supreme Court has seemed particularly keen to take up cases arising under the securities laws, so in that respect, the Court’s decision to take up this case arguably comes as no surprise.


The case does arise in an interesting context. In its prior decision in the Janus Funds case, the Court laid out standards specifying when someone can (and cannot) be held liable for misrepresentations. The key element the Court identified in the Janus Funds case is that only a “maker” of the misrepresentation can be held liable for the misrepresentation. The ALJ concluded, and the Commission and the D.C. Circuit concurred, that Lorenzo did not “make” the misrepresentation at issue. Nevertheless, the D.C. Circuit concluded that Lorenzo could be held liable for the misrepresentation under the federal securities laws, on a scheme liability theory.


Thus, the case presents an opportunity for the Court to specify what is required in order to establish scheme liability. In particular, the Court must consider whether a misrepresentation alone – a misrepresentation for which Lorenzo could not be held on a fraudulent statement theory – is sufficient to establish liability on a scheme liability theory, even if the defendant did not “make” the misrepresentation.


Lorenzo argued in his cert petition that if liability can be supported on this basis, then the “the SEC and private plaintiffs to sidestep Janus’ carefully drawn out elements of a fraudulent statement claim merely by relabeling the claim — with nothing more — as a fraudulent scheme claim.”


In its opposition, the SEC argued “Knowingly sending email messages containing false statements about a company’s financial prospects directly to potential investors, in order to induce recipients to participate in a debenture offering, is naturally described as employing a device, scheme, artifice, or act to defraud,” independently of whether or not the sender was a “maker” of the false statement.


The case, which will be heard in the Court term commencing in October, will provide the Court with an interesting opportunity to delineate the requirements for scheme liability, as well as to define how the requirements specified in Janus intersect with the scheme liability provisions.