The US Supreme Court heard oral arguments Monday in Lorenzo v. Securities and Exchange Commission (SEC), which will decide whether false statements alone can violate SEC regulations.
Francis Lorenzo brought this case against the SEC after the SEC charged him with violating 17 CFR § 240.10b-5 and subsequently fined him $15,000 and banned him from working in the securities industry. Lorenzo claims that the SEC sanctions are unfair because all he did was copy and paste misleading statements into emails. He claims that he cannot be held liable unless he crafted the statements himself. The SEC Administrative Law Judge and the DC Circuit Court found that he produced the emails but he did not craft their content as required in subsection b. He alleges that the SEC then repackaged the claims under subsections a and c to continue pursuing them.
The court heard Lorenzo’s oral argument from Mr. Heim first. Heim’s argument focused on the potential invalidation of subsection b if the SEC is just allowed to repackage a charge that should be a misstatement as either employment of a device or scheme under subsection a or as an act or conduct on subsection c. He argued that for Lorenzo to be charged under a or c there had to be some additional conduct beyond just copying statements of a superior into an email and transmitting it. The court questioned whether these sections are meant to act in concert with acceptable overlap or whether they are separate independent clauses. The court seemed to reason that if there is overlap then the transmission of the emails may be enough.
The court then heard from Christopher Michel of the Department of Justice for the SEC. Michel argued that the mere sending of the emails with false statements is enough to have fulfilled either the necessary scheme to deceive or the necessary conduct to deceive under the statute. The court appeared uncomfortable with the idea of allowing the SEC to repackage the crime in the way alleged by Lorenzo and challenged the government on this stance. In addition, the court challenged the government that the act may not be enough on its own, but may require a specific intent to deceive which the government has not shown here.
The parties now await a ruling from the Supreme Court, which will either allow the SEC a lot of latitude in future charges or restrict the scope to the specific limited subsection and intent.