Broker Didn’t ‘Make’ False Statements, Appeals Court Says

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By Phyllis Diamond

A divided D.C. Circuit set aside SEC sanctions against Charles Vista LLC broker Francis Lorenzo for sending out emails that misrepresented the key features of a securities offering in a start-up alternative energy company.

The U.S. Court of Appeals for the District of Columbia Circuit agreed Sept. 29 with the Securities and Exchange Commission that the statements in Lorenzo’s emails were false or misleading and that he acted with culpable intent ( Lorenzo v. SEC , 2017 BL 345755, D.C. Cir., No. 15-1202, 9/29/17 ).

However, Judge Sri Srinivasan said, Lorenzo didn’t “make” the misstatements for purposes of a 1934 Securities Exchange Act rule that bars the making of materially false statements in connection with a securities transaction. Rather, Lorenzo’s boss, who supplied the content of the false statements and had “ultimate authority” over them, did.

Because the commission’s sanctions were at least partly based on the “misimpression” that Lorenzo’s conduct violated Rule 10b-5(b) they must be set aside and the case remanded.

Dissenting, Judge Brett Kavanaugh said the “good news” is that the court vacated the lifetime suspension imposed by the SEC. “The bad news,” he said, is that the opinion “upholds much of the SEC’s decision on liability. I would vacate the SEC’s conclusions as to both sanctions and liability,” Kavanaugh said.

The decision sheds light on a six-year old U.S. Supreme Court decision on what it means to “make” a material misstatement for securities fraud purposes. The case “is a useful reminder that the `making’ test can serve as an important limitation on claims brought under Section 10(b) and Rule 10b-5,” Denver lawyer Michael MacPhail, Faegre Baker Daniels LLP, told Bloomberg BNA.

Through a spokeswoman, the SEC declined to comment.

Janus Test

In 2013, the SEC sued Charles Vista, a New York-based brokerage firm, and two unrelated brokers—Lorenzo and his boss Gregg Lorenzo—for allegedly using false and unfounded statements to secure investments in Waste2Energy Holdings Inc., a purported clean energy company.

An SEC administrative law judge found Lorenzo liable for sending investors emails that he knew contained false and misleading information. She fined him $15,000, ordered him to cease and desist from future misconduct, and barred him from the industry. The SEC affirmed and Lorenzo appealed to the D.C. Circuit.

Vacating and remanding, the appeals court said that under the U.S. Supreme Court’s decision in Janus Capital Grp. Inc. v. First Derivative Traders, 564 U.S. 135 (2011), a person can’t have "`made’ a misstatement if he lacked ultimate authority over what it said and whether it was said, including if he prepared or published it on behalf of another.”

Applying that reasoning to this case, it said Lorenzo wasn’t the “maker” of the misstatements in the emails he sent potential investors. “Voluminous testimony established that Lorenzo transmitted statements devised by Gregg Lorenzo at Gregg Lorenzo’s direction,” the appeals court said.

To contact the reporter on this story: Phyllis Diamond in Washington at

To contact the editor responsible for this story: Seth Stern at

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