The U.S. Security and Exchange Commission accused investment banker Francis V. Lorenzo, from Charles Vista LLC, of the intent to cheat investors with false statements regarding energy investments. The alleged misstatements were in emails that had been drafted by Lorenzo's boss, but were sent and signed by Lorenzo himself, who was the director of investment banking at the time.
What Constitutes a “Maker” Under the Law?
The main issue in this case is the term “make” as provided in the statute, 17 CFR § 2240.10b-5(b) - Employment of Manipulative and Deceptive Devices.
In the Supreme Court ruling of Janus Capital Group, Inc. v. First Derivative Traders, the court concluded that “the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. Without control, a person or entity can merely suggest what to say, not ‘make’ a statement in its own right.”
Who Has Financial Authority?
Although the D.C. Circuit court found that Lorenzo wasn't the “ultimate authority” and therefore not liable under rule 10b-5(b), he still could be held liable for false statements made by someone else.
Even though Lorenzo did not rise to the level of “maker,” he still was complicit in his boss's deception and therefore his actions of submitting the misleading emails to clients rose the level of “engaging” in the fraud.
What Was the Ruling?
The U.S. Supreme Court found former Charles Vista LLC Investment Banker Francis Lorenzo liable for fraud, agreeing with the SEC’s allegations. The Court upheld the D.C. Circuit court's decision that Lorenzo violated rule 10b-5 subsections (a) and (c). The Supreme Court ruled that “those who disseminate false statements with the intent to cheat investors” shouldn't escape liability altogether simply because they aren't the “maker” of the misstatements. Therefore, private plaintiffs who had been harmed by the misstatements can file claims against those like Lorenzo who aided in the fraud. While the dissenting opinion argued that the majority rule in this case makes the distinction between secondary and primary liability too ambiguous.
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