Publication

March 27, 2019Client Alert

U.S. Supreme Court Holds Investment Banker Personally Liable For Disseminating False Statements in Offering Materials Prepared by His Firm

It is settled federal law under the rules of the Securities and Exchange Commission that it is illegal to make “any untrue statement of a material fact” in connection with the purchase or sale of a security. See Janis Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011). But is there liability for an individual who copies and then disseminates a false statement in materials prepared by others? The Court in Lorenzo v. SEC, Case No. 17-1077 (Mar. 27, 2019), held there is, in fact, personal liability under S.E.C. Rule 10b-5.

Lorenzo was an investment banker hired by a company to issue debentures of $15 million. Debentures are securities backed by a company’s future sales and earnings rather than by assets. The company, however, with Lorenzo’s knowledge, disclosed that its total assets were only $370,552.00. Nevertheless, Lorenzo’s firm prepared offering materials and his boss approved the content that represented the company actually had more than $10 million of “confirmed assets.”  Lorenzo sent the offering materials personally, and “cut-and-pasted” some of the firm prepared information into an email but without disclosing the actual value of the company’s assets.

The U.S. Securities and Exchange Commission instituted proceedings against Lorenzo, found that he violated Rule 10b-5, fined him $15,000.00 and barred him from working in the securities industry for life. Lorenzo’s defense was that he did not “make” a false statement because the offering materials were prepared by his firm and approved by his boss. The Supreme Court rejected that defense because he did more than simply send out the offering materials; he adopted them into a personal email and invited recipients to contact him “with any questions.” The Court found those acts “disseminated false or misleading statements to potential investors” with the intent to defraud and thus violated sub-sections (a) and (c) of Rule 10b-5 that prohibits any “scheme” or “act, practice or course of business which operates or would operate as a fraud or deceit” in connection with the sale of a security.

back to top