DC Circuit Vacates Brokers SEC Punishments, But Not Liability
The U.S. Court of Appeals for the D.C. Circuit upheld the SEC's finding that a broker violated securities laws, but remanded the case to the agency for reconsideration of the penalties.
September 29, 2017 at 03:10 PM
5 minute read
The federal appeals court in Washington, D.C., vacated the U.S. Securities and Exchange Commission's lifetime ban for an investment broker Friday, but to a dissenting judge's disappointment, did not completely clear him of liability.
The U.S. Court of Appeals for the D.C. Circuit ruled 2-1 that Francis Lorenzo, whose boss ordered him to send emails to investors that contained misleading information, did not technically “make” false statements about an investment by sending the emails. However, the opinion written by Judge Sri Srinivasan said Lorenzo still played an “active role in perpetrating the fraud.”
Judge Brett Kavanaugh, who dissented from the ruling by Srinivasan and Judge Thomas Griffith, wrote the majority's opinion amounted to “legal jujitsu.”
“The majority opinion emphatically holds that Lorenzo did not 'make' the statements in the emails,” Kavanaugh wrote. “At the same time, however, the majority opinion emphatically holds that Lorenzo nonetheless willfully engaged in a scheme to defraud solely because of the statements made by his boss. That combined holding makes little sense (at least to me) under the facts of this particular case.”
Lorenzo's attorney said the ruling was still a win for his client. That's because the court vacated the SEC's punishments, which included a lifetime ban from the industry and a $15,000 fine, and remanded the case to the SEC to reconsider.
“We are very pleased with the appellate court's ruling vacating the SEC's sanctions on Mr. Lorenzo,” said Meyers & Heim partner Robert Heim. “We are hopeful that the SEC will follow the reasoning of the dissent and dismiss this case outright at this stage.”
SEC spokesman Ryan White declined to comment. The remand process at the SEC usually takes between one and two months.
In 2013, the SEC charged Lorenzo, his boss, Gregg Lorenzo (no relation to the plaintiff) and their investment firm, Charles Vista, with violations of three securities-fraud provisions under the Securities Act and the Securities Exchange Act. The SEC accused the brokers of lying to investors about a clean-energy company value, citing the emails Gregg Lorenzo instructed Francis Lorenzo to send.
Gregg Lorenzo and the firm settled with the SEC, but Francis Lorenzo challenged the charges. After an in-house trial, an administrative law judge ruled Lorenzo recklessly sent the false emails. The full commission sustained the ALJ's decision on appeal. The SEC ruled Lorenzo “knew each of [the emails' key statements] was false and/or misleading when he sent them.”
In the opinion Friday, the court agreed Lorenzo committed two of the three violations the SEC charged him with, including “employ[ing] any device, scheme or artifice to defraud” when selling a security and “us[ing] or employ[ing] … any manipulative or deceptive device or contrivance” in violation of the SEC's rules.
“Lorenzo, acting with scienter (i.e., an intent to deceive or defraud, or extreme recklessness to that effect), produced email messages containing three false statements about a pending offering, sent the messages directly to potential investors, and encouraged them to contact him personally with any questions,” the opinion said.
The court vacated the third charge, that Lorenzo “made” false statements, under the Supreme Court's 2011 Janus opinion. That decision said only those with authority over a statement, including its content and when and how it's disseminated, can be considered the “maker” of the statement. Because Lorenzo sent the email on instruction from his boss, and copy and pasted the contents from his boss's email, he could not be the “maker,” the court said.
Kavanaugh, on the other hand, argued that making false statements was central to the entire case against Lorenzo, so if he had not done that, he could not be liable. Kavanaugh wrote the administrative law judge's factual findings were “favorable” to Lorenzo, that the judge's decision at that level “contraven[ed] basic due process,” and that on appeal, the SEC should have dismissed the case.
Kavanaugh wrote that instead, the commission pulled a “Houdini-like move” and found Lorenzo had willfully sent the emails and was responsible for their contents. The judge bemoaned his colleagues' deference to the SEC's conclusions on liability.
“The good news is that the majority opinion vacates the lifetime suspension,” Kavanaugh wrote. “The bad news is that the majority opinion—invoking a standard of deference that, as applied here, seems akin to a standard of 'hold your nose to avoid the stink'—upholds much of the SEC's decision on liability.”
This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.
To view this content, please continue to their sites.
Not a Lexis Subscriber?
Subscribe Now
Not a Bloomberg Law Subscriber?
Subscribe Now
NOT FOR REPRINT
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
You Might Like
View AllAttorneys Ordered to Apologize to South Philadelphia Residents Following 'Scream Test' Experiment
5 minute readWhich 1-Judge Division Districts Have Adopted Anti-Forum Shopping Guidance?
Bitnomial Exchange Preemptively Sues SEC Over Alleged Enforcement Conflict With CFTC
4 minute readFederal Judge Rejects Lyft's 'Competitive Harm' Claims in Attempt to Seal Safety Procedures, Storage Information
4 minute readTrending Stories
Who Got The Work
Dechert partners Andrew J. Levander, Angela M. Liu and Neil A. Steiner have stepped in to defend Arbor Realty Trust and certain executives in a pending securities class action. The complaint, filed July 31 in New York Eastern District Court by Levi & Korsinsky, contends that the defendants concealed a 'toxic' mobile home portfolio, vastly overstated collateral in regards to the company's loans and failed to disclose an investigation of the company by the FBI. The case, assigned to U.S. District Judge Pamela K. Chen, is 1:24-cv-05347, Martin v. Arbor Realty Trust, Inc. et al.
Who Got The Work
Arthur G. Jakoby, Ryan Feeney and Maxim M.L. Nowak from Herrick Feinstein have stepped in to defend Charles Dilluvio and Seacor Capital in a pending securities lawsuit. The complaint, filed Sept. 30 in New York Southern District Court by the Securities and Exchange Commission, accuses the defendants of using consulting agreements, attorney opinion letters and other mechanisms to skirt regulations limiting stock sales by affiliate companies and allowing the defendants to unlawfully profit from sales of Enzolytics stock. The case, assigned to U.S. District Judge Andrew L. Carter Jr., is 1:24-cv-07362, Securities and Exchange Commission v. Zhabilov et al.
Who Got The Work
Clark Hill members Vincent Roskovensky and Kevin B. Watson have entered appearances for Architectural Steel and Associated Products in a pending environmental lawsuit. The complaint, filed Aug. 27 in Pennsylvania Eastern District Court by Brodsky & Smith on behalf of Hung Trinh, accuses the defendant of discharging polluted stormwater from its steel facility without a permit in violation of the Clean Water Act. The case, assigned to U.S. District Judge Gerald J. Pappert, is 2:24-cv-04490, Trinh v. Architectural Steel And Associated Products, Inc.
Who Got The Work
Michael R. Yellin of Cole Schotz has entered an appearance for S2 d/b/a the Shoe Surgeon, Dominic Chambrone a/k/a Dominic Ciambrone and other defendants in a pending trademark infringement lawsuit. The case, filed July 15 in New York Southern District Court by DLA Piper on behalf of Nike, seeks to enjoin Ciambrone and the other defendants in their attempts to build an 'entire multifaceted' retail empire through their unauthorized use of Nike’s trademark rights. The case, assigned to U.S. District Judge Naomi Reice Buchwald, is 1:24-cv-05307, Nike Inc. v. S2, Inc. et al.
Who Got The Work
Sullivan & Cromwell partner Adam S. Paris has entered an appearance for Orthofix Medical in a pending securities class action arising from a proposed acquisition of SeaSpine by Orthofix. The suit, filed Sept. 6 in California Southern District Court, by Girard Sharp and the Hall Firm, contends that the offering materials and related oral communications contained untrue statements of material fact. According to the complaint, the defendants made a series of misrepresentations about Orthofix’s disclosure controls and internal controls over financial reporting and ethical compliance. The case, assigned to U.S. District Judge Linda Lopez, is 3:24-cv-01593, O'Hara v. Orthofix Medical Inc. et al.
Featured Firms
Law Offices of Gary Martin Hays & Associates, P.C.
(470) 294-1674
Law Offices of Mark E. Salomone
(857) 444-6468
Smith & Hassler
(713) 739-1250