Supreme Court finds investment banker does not have to draft fraudulent communication to be held liable for fraud News
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Supreme Court finds investment banker does not have to draft fraudulent communication to be held liable for fraud

The US Supreme Court ruled Wednesday that an investment banker may be held liable under 17 CFR § 240.10b-5 (Rule 10b-5) for sending fraudulent information about a potential investment even if the employee did not draft the correspondence and sent it at the behest of their boss.

In Lorenzo v. Securities and Exchange Commission the court considered of whether Lorenzo, then a director of investment banking at a brokerage firm, committed fraud when, at the request of his boss, he sent two emails to clients about an investment opportunity at a company with assets of $10 million. Lorenzo knew the real valuation of the company’s assets was closer to $400,000. Lorenzo copied and pasted the information from his boss and sent the emails anyway.

Lorenzo argued that since he copied and pasted the emails from information created by his boss, he did not commit primary fraud because he did not “make” the fraudulent statements as per Rule 10b-5(b), which says:

To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.

Therefore, he argued that he should be held secondarily liable. The court held that Rules 10b-5(a) and (c) were sufficiently broad enough to find that Lorenzo had an intent to defraud despite not “making” the fraudulent statements as defined in Rule 10b-5(b).

The line we adopt today is just as administrable: Those who disseminate false statements with intent to defraud are primarily liable under Rules 10b-5(a) and (c), §10(b) [of the Exchange Act], and §17(a)(1) [of the Securities Act], even if they are secondarily liable under Rule 10b-5(b).

Justice Clarence Thomas, joined by Justice Gorsuch, dissented on the grounds that the majority “eviscerate[d] th[e] distinction” between primary and secondary liability that the court had created in Janus Capital Group, Inc. v. First Derivative Traders.