The U.S. Supreme Court on Wednesday boosted the power of federal law enforcement to pursue securities law violations.

In a 6-2 decision, the high court held in Lorenzo v. Securities and Exchange Commission that sending an email containing false or misleading statements with the intent to defraud violates federal securities laws even if the sender did not “make” the statements. Justice Brett Kavanaugh, who earlier took part in the case in the U.S. Court of Appeals for the D.C. Circuit, was recused. Kavanaugh wrote a dissent that favored the challenger.

Justice Clarence Thomas, joined by Justice Neil Gorsuch, dissented Wednesday. They accused the majority of “eviscerating” the “clear line between primary and secondary liability in fraudulent-misstatement cases” drawn by the high court in its 2011 decision in Janus Capital Group v. First Derivative Traders.

“Because the majority misconstrues the securities laws and flouts our precedent in a way that is likely to have far-reaching consequences, I respectfully dissent,” wrote Thomas, who was the author of the 5-4 decision in Janus.

In Janus, the justices concluded that the “maker” of a statement under Rule 10b-5(b) is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. The dissenters in Janus included Justices Stephen Breyer, Ruth Bader Ginsburg, Elena Kagan and Sonia Sotomayor—who all were in Wednesday's Lorenzo majority along with Chief Justice John Roberts Jr. and Justice Samuel Alito Jr.

“While the result is not surprising, and the affirmance is on its face a victory for the SEC, the underlying issue, which the Court of Appeal recognized in its opinion, remains unaddressed,” said Nick Morgan, a Paul Hastings partner in Los Angeles and a former senior trial counsel at the U.S. Securities and Exchange Commission.

Morgan added: “There is no institutional mechanism at the SEC to check the agency's mission creep beyond what is authorized by statute. We will see additional efforts to push the envelope by the SEC, and additional challenges to keep the SEC within statutory bounds by defendants.”

Wednesday's win for the SEC ends a losing streak at the high court. The justices last term ruled against the SEC in a dispute over the constitutionality of administrative law judges, and the court also curbed the agency's broad view of Dodd-Frank whistleblower protections. In 2017, the agency lost a statute of limitations case involving disgorgement claims in enforcement actions.

Francis Lorenzo, director of investment banking at a New York brokerage firm, was charged by the SEC with engaging in a fraudulent scheme in violation of Rule 10b-5, Section 10 (b) of the Exchange Act and Section 17(a)(1) of the Securities Act. The SEC accused Lorenzo of sending false and misleading statements to investors with intent to defraud. Lorenzo said he sent the emails at the direction of his boss, who supplied the content and approved the messages.

Writing for the majority, Breyer said the words in those provisions, as ordinarily used, are “sufficiently broad” to include the dissemination of false or misleading information with the intent to defraud.

“By sending emails he understood to contain material untruths, Lorenzo 'employ[ed]' a 'device,' 'scheme,' and 'artifice to defraud' within the meaning of subsection (a) of the Rule, §10(b), and §17(a)(1),” Breyer wrote. “By the same conduct, he 'engage[d] in a[n] act, practice, or course of business' that 'operate[d] … as a fraud or deceit' under subsection (c) of the rule.”

But Thomas, in his dissent, said the majority made a “dead letter” of the Janus decision.

“Under the court's rule, a person who has not 'made' a fraudulent misstatement within the meaning of Rule 10b– 5(b) nevertheless could be held primarily liable for facilitating that same statement; the SEC or plaintiff need only relabel the person's involvement as an 'act,' 'device,' 'scheme,' or 'artifice' that violates Rule 10b–5(a) or (c),” Thomas wrote. “And a person could be held liable for a fraudulent misstatement under §17(a)(1) even if the person did not obtain money or property by means of the statement. In short, Rule 10b–5(b) and §17(a)(2) are rendered entirely superfluous in fraud cases under the majority's reading.”

Breyer acknowledged that the law's provisions capture a wide range of conduct and applying them in borderline cases could be difficult. But he said “purpose, precedent, and circumstance could lead to narrowing their reach in other contexts.”

Breyer added: “And while one can readily imagine other actors tangentially involved in dissemination—say, a mailroom clerk—for whom liability would typically be inappropriate, the petitioner in this case sent false statements directly to investors, invited them to follow up with questions, and did so in his capacity as vice president of an investment banking company.”

Thomas agreed that it would be inappropriate to apply the provisions, for example, to a secretary put in a similar situation to Lorenzo. But, he wrote, “I can discern no legal principle in the majority opinion that would preclude the secretary from being pursued for primary violations of the securities laws.”

Robert Heim of New York's Meyers & Heim argued for Lorenzo. Assistant to the Solicitor General Christopher Michel represented the SEC.

Read the opinion in Lorenzo v. SEC:

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