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SCOTUS Finds Investment Banker Liable for Cutting and Pasting Fraudulent Statement

Alert
03.29.2019
By Steve Quinlivan, Bryan Pitko and Jaclyn Schroeder

The U.S. Supreme Court appears to have reconsidered liability under Rule 10b-5 and other rules of the Securities and Exchange Commission (SEC) and related statutes in Lorenzo v. Securities and Exchange Commission. The facts of the case were undisputed. Francis Lorenzo, while the director of investment banking at an SEC-registered brokerage firm, sent two emails to prospective investors. The content of those emails was cut and pasted from materials which Lorenzo’s boss supplied, and described a potential investment in a company with “confirmed assets” of $10 million. In fact, Lorenzo knew the company had recently disclosed that its total assets were worth less than $400,000.  

In what many view as a departure from existing precedent set forth in the U.S. Supreme Court case of Janus Capital Group, Inc. v. First Derivative Traders, the Supreme Court found that Lorenzo violated Rule 10b-5(a) and (c), Section 10(b) of the Exchange Act and Section 17(a)(1) of the Securities Act even though Lorenzo would not be viewed as the “maker” of the false or misleading statements at issue in the case under the Janus ruling. The case has important implications for those who assist in drafting offering documents, including officers of companies issuing securities, investment bankers, lawyers and law firms.

Given the unique facts of Lorenzo, we believe Janus will remain a strong and viable defense for most offering participants. However, Lorenzo expands potential liability for those who assist in drafting offering documents. Following Lorenzo, it is unclear what actions are necessary beyond hitting the "send" button on an email to impose primary liability under Rule 10b-5(a) or (c), other than acting with scienter. While in our experience offering participants go to great lengths to insure the truth and accuracy of offering documents, and therefore do not act with scienter, they will nonetheless be attractive defendants in litigation involving offerings following the Court’s ruling in Lorenzo

Our full analysis is available on Dodd-Frank.com.

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