Amicus Curiae Brief — Francis V. Lorenzo, Petitioner v. Securities and Exchange Commission
Supreme Court briefOct 12, 2018
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No. 17-1077
IN THE
Supreme Court of the United States
————————
FRANCIS V. LORENZO,
Petitioner,
v.
SECURITIES AND EXCHANGE COMMISSION,
Respondent.
————————
On a Writ of Certiorari to the
United States Court of Appeals
for the District of Columbia Circuit
————————
BRIEF OF THE NORTH AMERICAN SECURITIES
ADMINISTRATORS ASSOCIATION, INC., AS
AMICUS CURIAE IN SUPPORT OF RESPONDENT
————————
MICHAEL B. EISENKRAFT*
A. VALERIE MIRKO
LAURA H. POSNER**
ZACHARY T. KNEPPER
COHEN MILSTEIN SELLERS
NORTH AMERICAN
& TOLL PLLC
SECURITIES
88 Pine Street, 14th Floor
ADMINISTRATORS
New York, NY 10005
ASSOCIATION, INC.
750 First Street, N.E.,
(212) 838-7797
meisenkraft@cohenmilstein.com Suite 1140
Washington, DC 20002
ERIC S. BERELOVICH
COHEN MILSTEIN SELLERS * Counsel of Record
& TOLL PLLC
** Bureau Chief, New
Jersey, Bureau of
1100 New York Ave., NW, #500
Securities, 2014 - 2017
Washington, DC 20005
October 12, 2018
i
TABLE OF CONTENTS
Page
STATEMENT OF INTEREST ...................................... 1
SUMMARY OF ARGUMENT ..................................... 3
ARGUMENT ................................................................. 4
I. THE CIRCUIT COURT CORRECTLY HELD
THERE WAS SUBSTANTIAL EVIDENCE TO
SUPPORT THE SEC’S FINDING THAT
PETITIONER ENGAGED IN AN UNLAWFUL
SECURITIES SCHEME. ............................................. 4
A. Insider Trading Is Scheme Liability
Predicated Upon Misrepresentations or
Omissions. ................................................... 8
B. Liability under Rule 10b-5(a) or (c) is
Predicated on Whether the Defendant’s
Conduct was Deceptive or Manipulative . 10
C. Petitioner’s Conduct was Deceptive. ........ 12
D. The Circuit Court’s Opinion Is Consistent
with Central Bank and Janus .................. 14
II. THE COMMISSION WAS CORRECT THAT
PETITIONER WAS A “MAKER” UNDER
JANUS. ........................................................................ 18
III. THE SAME ANALYSIS HEREIN APPLIES
UNDER SECTION 17(A) OF THE SECURITIES
ACT .............................................................................. 26
IV. THE SEC IS NOT ACTING IN BAD FAITH .... 27
ii
V. SIFMA AND THE CHAMBER’S HYPERBOLIC
CLAIMS ARE MERITLESS ..................................... 29
CONCLUSION............................................................ 34
iii
TABLE OF AUTHORITIES
CASES
Page(s)
Amgen Inc. v. Conn. Ret. Plans & Trust
Funds, 568 U.S. 455 (2013) ................................... 5
Affiliated Ute Citizens of Utah v. United
States, 406 U.S. 128 (1972) ............................. 9, 16
In re Banco Bradesco S.A. Sec. Litig.,
277 F. Supp. 3d 600 (S.D.N.Y. 2017) ............ 20, 24
In re Barrick Gold Sec. Litig., No. 13
Civ. 3851(SAS), 2015 WL 3486045
(S.D.N.Y. June 2, 2015) ....................................... 24
Bateman Eichler, Hill Richards, Inc. v.
Berner, 472 U.S. 299 (1985) ................................ 30
Central Bank of Denver v. First
Interstate Bank of Denver, 511 U.S.
164 (1994) .................................................. 7, 14, 15
Chiarella v. United States, 445 U.S. 222
(1980) ............................................................. 6, 7, 8
City of Pontiac Gen. Emps.’ Ret. Sys. v.
Lockheed Martin Corp., 875 F. Supp.
2d 359 (S.D.N.Y. 2012) ........................................ 24
Clark v. Capital Credit & Collection
Servs., 460 F.3d 1162 (9th Cir. 2006) ................. 12
Dirks v. SEC, 463 U.S. 646 (1983) ............................. 8
iv
In re DVI, Inc. Sec. Litig., 639 F.3d 623
(3d Cir. 2011) ......................................................... 5
Ernst & Ernst v. Hochfelder, 425 U.S.
185 (1976) ............................................................ 11
In re Fannie Mae 2008 Sec. Litig., 891
F. Supp. 2d 458 (S.D.N.Y. 2012) .................... 20-21
Finkel v. Stratton Corp., 962 F.2d 169
(2d Cir. 1992) ....................................................... 26
Glickenhaus & Co. v. Household Intern.,
Inc., 787 F.3d 408 (7th Cir. 2015) ....................... 20
In re Global Crossing Ltd. Sec. Litig.,
No. 02 Civ. 910, 2005 WL 1907005
(S.D.N.Y. Aug. 8, 2005) ......................................... 5
Halliburton Co. v. Erica P. John Fund,
134 S. Ct. 2398 (2014) ......................................... 34
In re Harman Int’l Indus., Inc. Sec.
Litig., 791 F.3d 90 (D.C. Cir. 2015) .................... 23
Howard v. Everex Sys., Inc., 228 F.3d
1057 (9th Cir. 2000)............................................. 20
Janus Capital Grp. v. First Derivative
Traders, 564 U.S. 135 (2011) ...................... passim
J.I. Case Co. v. Borak, 377 U.S. 426
(1964) ................................................................... 30
Kokesh v. SEC, — U.S. —, 137 S. Ct.
1635 (2017) .......................................................... 14
v
Livingston v Cablevision Sys. Corp., 966
F. Supp. 2d 208 (E.D.N.Y. 2013) ......................... 20
Lorenzo v. SEC, 872 F.3d 578 (D.C. Cir.
2017) ............................................................ passim
Merrill Lynch, Pierce, Fenner & Smith
Inc. v. Dabit, 547 U.S. 71 (2006) ......................... 33
In re Parmalat Sec. Litig., 376 F. Supp.
2d 472 (S.D.N.Y. 2005) ........................................ 10
Peterson v. Winston & Strawn LLP, 729
F.3d 750 (7th Cir. 2013) ...................................... 20
Regents of the Univ. of Calif. v. Credit
Suisse First Boston (USA), Inc., 482
F.3d 372 (5th Cir. 2007) ...................................... 11
Salman v. United States, — U.S. —,
137 S. Ct. 420 (2016) ........................................... 17
Santa Fe Indus., Inc. v. Green, 430 U.S.
462 (1977) ............................................................ 11
SEC v. Bauer, 723 F.3d 758, 768 (7th
Cir. 2013) ............................................................. 26
SEC v. Big Apple Consulting USA, Inc.,
783 F.3d 786 (11th Cir. 2015) ....................... 15, 27
SEC v. Dorozhko, 574 F.3d 42 (2d Cir.
2009) .................................................................... 11
SEC v. Goldstone, 952 F. Supp. 2d 1060
(D.N.M. 2013) ...................................................... 10
vi
SEC v. Infinity Grp. Co., 212 F.3d 180
(3d Cir. 2000) (Alito, J.) ....................................... 24
SEC v. Knight, 694 Fed. Appx. 853 (2d
Cir. 2017) ............................................................. 27
SEC v. K.W. Brown & Co., 555 F. Supp.
2d 1275 (S.D. Fla. 2007) ................................... 9-10
SEC v. Lek Sec. Corp., 276 F. Supp. 3d
49 (S.D.N.Y. 2017) ............................................... 11
SEC v. Lucent Tech., 610 F. Supp. 2d
342 (D.N.J. 2009) ................................................. 10
SEC v. Monterosso, 756 F.3d 1326 (11th
Cir. 2014) ............................................................. 10
SEC v. Radius Capital Corp., 653 Fed.
Appx. 744 (11th Cir. 2016) .................................. 26
SEC v. Rocklage, 470 F.3d 1 (1st Cir.
2006) ...................................................................... 9
SEC v. Sabrdaran, 252 F. Supp. 3d 866
(N.D. Cal. 2017) ................................................... 17
SEC v. Yun, 327 F.3d 1263 (11th Cir.
2003) ...................................................................... 9
SEC v. Zandford, 535 U.S. 813 (2002) ....................... 5
In re Smith Barney Transfer Agent
Litig., 884 F. Supp. 2d 152 (S.D.N.Y
2012) ........................................................ 19, 20, 21
vii
Stoneridge Inv. Partners, LLC v.
Scientific-Atlanta, Inc., 552 U.S. 148
(2008) ................................................................... 11
Tellabs, Inc. v. Makor Issues & Rights,
Ltd., 551 U.S. 308 (2007) .................................... 30
United States v. Finnerty, 533 F.3d 143
(2d Cir. 2008) ................................................. 11, 12
United States v. O’Hagan, 521 U.S. 642
(1997) ..................................................................... 8
In re VeriFone Holdings, Inc. Sec. Litig.,
704 F.3d 694 (9th Cir. 2012) ............................... 24
Waggoner v. Barclays PLC, 875 F.3d 79
(2d Cir. 2017) ....................................................... 23
STATUTES, PUBLIC LAWS REGULATIONS AND RULE
15 U.S.C. § 77q(a) ............................................. passim
15 U.S.C. § 78j(b) .................................................. 5, 10
17 C.F.R. § 240.10b-5........................................ passim
Private Securities Litigation Reform
Act, Pub. L. No. 104-67, 109 Stat.
737 (1996) ............................................................ 30
Securities Litigation Uniform
Standards Act, Pub. L. No. 105-353,
112 Stat. 3227 (1998) .......................................... 30
U.S. Sup. Ct. Rule 376 ................................................ 1
viii
OTHER AUTHORITIES
THE AMERICAN HERITAGE COLLEGE
DICTIONARY (4th ed. 2004) .................................. 16
Commissioner Robert J. Jackson Jr., Keeping
Shareholders on the Beat: A Call for a
Considered Conversation About Mandatory
Arbitration, CECP CEO Investor Forum,
February 26, 2018, available at
https://www.sec.gov/news/speech/jacksonshareholders-conversation-about-mandatoryarbitration-022618 .............................................. 31
Cornerstone Research, Securities Class
Action Settlements: 2016 Review and
Analysis (2016). ............................................. 31, 32
Exchange Act Release No. 3230 (May
21, 1942) ................................................................ 6
In re Francis V. Lorenzo, SEC Release
No. 34-74836 (Apr. 29, 2015),
available at
https://www.sec.gov/litigation/opinio
ns/2015/33-9762.pdf .............................................. 3
H.R. CONF. REP. NO. 369, 104th Cong.
1st Sess. (Nov. 28, 1995) ..................................... 34
John C. Coffee, Jr., Reforming the
Securities Class Action: An Essay on
Deterrence and its Implementation,
106 COLUM. L. REV. 1534 (2006) ......................... 32
1 LOUIS LOSS ET AL., SECURITIES
REGULATION (5th ed. 2014) ................................... 1
ix
Manage Another Person’s Mail and
Calendar Items, Microsoft,
https://support.office.com/enus/article/manage-another-person-smail-and-calendar-items-afb79d6b2967-43b9-a944-a6b953190af5 ........................... 22
Mary Jo White, Testimony on the Fiscal Year
2017 Budget Request of the U.S.
Securities and Exchange Commission,
United States Senate (2016), available at
https://www.sec.gov/news/testimony/testi
mony-white-budget-request-2017senate.html .......................................................... 31
Matthew P. Wynne, Student Note, Rule 10b5(b) Enforcement Actions in Light of
Janus: Making the Case for Agency
Deference, 81 FORDHAM L. REV. 2111
(2013) ................................................................... 28
Melanie Waddell, SEC Seeks Budget Boost to
Restore Staff, ThinkAdvisor (February 12,
2018), available at
https://www.thinkadvisor.com/2018/02/12/
sec-seeks-budget-boost-to-restorestaff/?slreturn=20180911131549 ........................ 32
NYU Pollack Center for Law and Business &
Cornerstone Research, SEC Enforcement
Activity: Public Companies and
Subsidiaries, (November 14, 2017),
https://www.cornerstone.com/Publication
s/Reports/SEC-Enforcement-ActivityPublic-Companies-and-SubsidiariesMidyear-FY-2018-Update ................................... 31
x
S. REP. NO. 98, 104th Cong. 1st Sess.
(1995) ................................................................... 33
Stephen Choi & Adam Prichard, SEC
Investigations and Securities Class
Actions: An Empirical Comparison, 13 J.
Emp. Legal Stud. 27 (2016) ................................ 33
U.S. Securities and Exchange
Commission, SEC Announces
Enforcement Results for FY 2016,
Press Release, (Oct. 11, 2016) ............................. 32
Yin Wilczek, Extent to Which Janus
Applies to SEC Actions Not Clear,
Official Says, 44 Sec. Reg. & L. Rep.
(BNA) 462 (Mar. 5, 2012) .................................... 28
1
STATEMENT OF INTEREST1
The North American Securities Administrators
Association, Inc. (“NASAA”) is the non-profit
association of state, provincial, and territorial
securities regulators in the United States, Canada
and Mexico. NASAA has 67 members, including the
securities regulators in all 50 states, the District of
Columbia, Puerto Rico, and the U.S. Virgin Islands.
Formed in 1919, NASAA is the oldest international
organization devoted to protecting investors from
fraud and abuse in the offer and sale of securities.
NASAA’s U.S. members are responsible for
regulating transactions under state securities laws,
commonly known as “Blue Sky Laws.” See generally
1 LOUIS LOSS ET AL., SECURITIES REGULATION 55-251
(5th ed. 2014). Our U.S. members’ principal activities
include: registering local securities offerings,
licensing and examining brokers and investment
advisers who sell securities or provide investment
advice, and initiating enforcement actions to combat
fraud and other violations of state securities laws.
One of NASAA’s goals is to foster greater uniformity
across state and federal securities laws, though the
overriding mission of NASAA and its members is to
1 Pursuant to U.S. Sup. Ct. Rule 37.6, counsel for amicus affirms
that no party other than amicus and its counsel authored this
brief, in whole or in any part, and that no person or entity other
than amicus or amicus’s counsel has made a monetary
contribution to the preparation and submission of this brief. The
parties have provided their written consent for the filing of this
amicus brief.
2
protect investors, particularly retail investors, from
fraud and abuse.
NASAA supports the work of its members and
the investing public by, among other things,
promulgating model rules, providing training
opportunities, coordinating multi-state enforcement
actions and examinations, and commenting on
proposed legislation and rulemakings. NASAA also
offers its legal analysis and policy perspective to state
and federal courts as amicus curiae in important
cases involving the interpretation of state and federal
securities laws, securities regulation, and investor
protection. This is one of those cases. NASAA and its
members have an interest in this matter because this
case has important implications for public and private
antifraud actions brought under federal securities
law and, potentially, under state securities laws as
well.
NASAA is submitting this amicus curiae brief
to provide its views on this litigation and to rebut
arguments made by Petitioner and his two amici in
briefs filed August 27, 2018, the Brief of Amici Curiae
Securities Law Professors in Support of Petitioner
(hereinafter, the “Professors’ Brief”) and the Brief of
Amici Curiae Securities Industry and Financial
Markets Association and Chamber of Commerce of the
United States of America Supporting Petitioner
(hereinafter, the “SIFMA/Chamber Brief”).
3
SUMMARY OF ARGUMENT
Petitioner was found liable for making material
misstatements and engaging in a fraudulent scheme in
violation of Section 10(b) of the Securities Exchange Act
of 1934 and SEC Rule 10b-5 thereunder by the U.S.
Securities and Exchange Commission (the “SEC” or
“Commission”). See In re Francis V. Lorenzo, SEC
Release No. 34-74836 (Apr. 29, 2015). A majority of the
judges on a three-judge panel of the Court of Appeals
for the District of Columbia Circuit (the “Circuit
Court”) found substantial evidence to support nearly all
of the Commission’s findings. See Lorenzo v. SEC, 872
F.3d 578 (D.C. Cir. 2017). Arguing that the facts and
law do not support the Circuit Court’s decision,
Petitioner seeks to overturn it. Petitioner is wrong.
The Circuit Court properly found Petitioner
liable for engaging in a fraudulent scheme within the
meaning of Section 10(b) and Rules 10b-5(a) and (c).
Petitioner’s act of knowingly sending two materially
false and misleading emails to effectuate the sale of
securities his brokerage firm was underwriting is
precisely the sort of fraudulent scheme that Congress
intended the securities laws to prevent and punish.
In addition, although not squarely before the
Court, the Commission properly found in its
underlying administrative court decision that
Petitioner was also liable under Rule 10b-5(b) as the
“maker” of the misstatements in his two emails
pursuant to Janus Capital Grp. v. First Derivative
Traders, 564 U.S. 135 (2011). Finally, given the
findings of liability under Rule 10b-5, Petitioner’s
4
liability under Section 17(a) of the Securities Act of
1933 logically follows as well.
In contrast, Petitioner and his amici ask this
Court to significantly limit the scope of liability under
Rules 10b-5(a) and (c). They assert this is necessary
to maintain fidelity with the Court’s relevant
precedents, to achieve consistency between Section
10(b) and Section 17(a), and because the nation’s
securities markets would be imperiled otherwise.
None of these points are valid. The Circuit Court’s
opinion affirming defendant’s culpability under Rules
10b-5(a) and (c) was correct and on all fours with this
Court’s jurisprudence. This is aptly demonstrated by
both the Circuit Court’s opinion and other relevant
precedent cited below. Furthermore, Petitioner’s
purported concern that the securities markets are or
will be harmed by enforcing the securities laws is
baseless. To the contrary; the securities laws, and
Rules 10b-5(a) and (c) in particular, were intended
first and foremost to protect investors and the
securities markets generally from fraud.
ARGUMENT
I. THE CIRCUIT COURT CORRECTLY HELD
THERE WAS SUBSTANTIAL EVIDENCE TO
SUPPORT THE SEC’S FINDING THAT
PETITIONER ENGAGED IN AN UNLAWFUL
SECURITIES SCHEME.
Section 10(b) makes it unlawful “to use or
employ . . . any manipulative or deceptive device or
contrivance” in connection with the purchase or sale
5
of a security. 15 U.S.C. § 78j(b). SEC Rule 10b-5
promulgated thereunder contains three subparagraphs
that diagram broad categories of such manipulative
or deceptive devices: (a) fraudulent schemes or
artifices, (b) fraudulent misrepresentations or
omissions, and (c) fraudulent practices or courses of
business. 17 C.F.R. § 240.10b-5. The Court has long
held that Section 10(b) and Rule 10b-5 “should be
construed not technically and restrictively, but
flexibly to effectuate [their] remedial purposes” of
protecting investors and establishing fair and orderly
markets. SEC v. Zandford, 535 U.S. 813, 819 (2002)
(internal quotations and citations omitted).
Rule 10b-5 claims typically fall into two general
categories: misrepresentation claims, which proceed
under Rule 10b-5(b), and “scheme liability” claims,
which proceed under Rule 10b-5(a) or (c). E.g., In re
DVI, Inc. Sec. Litig., 639 F.3d 623, 643 n.29 (3d Cir.
2011) (“We refer to claims under Rule 10b–5(a) and (c)
as ‘scheme liability claims’ because they make
deceptive conduct actionable, as opposed to Rule 10b–
5(b), which relates to deceptive statements.”),
abrogated on other grounds by Amgen Inc. v. Conn.
Ret. Plans & Trust Funds, 568 U.S. 455 (2013). The
term “scheme liability” is a relatively recent
jurisprudential coinage; the first reported opinion to
use this term was in 2005. See In re Global Crossing
Ltd. Sec. Litig., No. 02 Civ. 910(GEL), 2005 WL
1907005, *2 n.5 (S.D.N.Y. Aug. 8, 2005). This is not
because the concept of “scheme liability” did not
previously exist; Rules 10b-5(a) and (c) have
prohibited fraudulent securities schemes since the
6
rule was enacted in 1942. See Exchange Act Release
No. 3230 (May 21, 1942).
The relevant
jurisprudential question is, thus, to what extent
causes of action pled under Rule 10b-5(a) or (c), such
as the case at bar, are valid.
NASAA member state securities regulators
combat securities fraud on a daily basis. These
securities frauds encompass a dizzying array of bad
behavior – including offering frauds, market
manipulation schemes, insider trading, Ponzi
schemes, theft or conversion, and breach of a fiduciary
or other duty by a securities professional –and often
involve a mélange of fraudulent misrepresentations
and schemes to defraud. For example, a Ponzi
schemer typically perpetuates his scam through
misrepresentations (e.g., false investor reports) and
deceptive schemes (e.g., repaying earlier investors
with deposits from later investors). Most securities
frauds thus cannot be categorized as solely a
misrepresentation or a scheme liability case, but
instead include both false representations and
schemes to defraud. The instant litigation is just such
a case. Petitioner engaged in both a deceptive scheme
to defraud and made misleading statements. Since
Petitioner violated two separate sections of the
securities laws, he should be held accountable under
both sections. The text of Rule 10b-5 makes it clear
that the subsections of the Rule are complementary
and should not be interpreted in a way that works
against Congress’s purpose in enacting Section 10(b),
which was to prohibit securities fraud in any of its
myriad forms. Chiarella v. United States, 445 U.S.
7
222, 234-35 (1980) (“Section 10(b) is aptly described
as a catchall provision, but what it catches must be
fraud.”).
Petitioner and his amici ask this Court to hold
that primary liability under Rule 10b-5(a) or (c) can
never be predicated solely on a misrepresentation or
omission. They argue that frauds predicated on
misstatements should always proceed under Rule
10b-5(b) only, and that this Court should create out of
thin air an addendum to Rule 10b-5(a) and (c) that
limits scheme liability to those schemes that do not
rely on misrepresentations. This is necessary and
appropriate, they claim, so as not to render
meaningless the boundaries on primary liability
under Rule 10b-5(b) this Court set forth in Central
Bank of Denver v. First Interstate Bank of Denver, 511
U.S. 164 (1994) and Janus Capital Group v. First
Derivative Traders, 564 U.S. 135 (2011).
See
Petitioner’s Brief at 17-18; Professors’ Brief at 10-11;
SIFMA/Chamber Brief at 15-17. Petitioner and his
amici are mistaken. It is plain from the language of
Rule 10b-5 that Primary liability can exist under Rule
10b-5(a) or (c)—indeed, such liability has always
existed—for fraudulent schemes predicated upon
material misrepresentations or omissions. What is
more, this conclusion does no damage to this Court’s
decisions in Central Bank, Janus or otherwise.
8
A.
Insider Trading Is Scheme Liability
Predicated Upon Misrepresentations or
Omissions.
That liability can exist under Rule 10b-5(a) or
(c) based purely on a material misrepresentation or
omission is illustrated by this Court’s precedent
regarding insider trading. No statute or SEC rule
expressly prohibits insider trading. Rather, insider
trading is unlawful under Section 10(b) and Rule 10b5 because of the inherent unfairness when one party
takes advantage of material nonpublic information in
violation of a duty of confidentiality owed to another
party. Dirks v. SEC, 463 U.S. 646, 654 (1983). Under
either the so-called classical or misappropriation
theories, insider trading “satisfies § 10(b)’s
requirement that chargeable conduct involve a
‘deceptive device or contrivance’ used ‘in connection
with’ the purchase or sale of securities.” United States
v. O’Hagan, 521 U.S. 642, 653 (1997). The deceptive
device in insider trading is “feigning fidelity to the
source of information.” Id. at 655. See also Dirks, 463
U.S. at 660 (explaining that tippees assume the
disclosure duties of their tippers).
Insider trading liability is tied to Rule 10b-5(a)
and (c), not Rule 10b-5(b), notwithstanding that
insider trading is at root a misrepresentation crime.
See O’Hagan, 521 U.S. at 651 (citing Rule 10b-5(a)
and (c) as the sources of legal liability); Chiarella, 445
U.S. at 225-26 (1980) (same). This is consistent with
the text of Rules 10b-5(a) and (c), which are written
more broadly than paragraph (b). As this Court
9
explained long ago in Affiliated Ute Citizens of Utah
v. United States, 406 U.S. 128 (1972), “the second
subparagraph of [Rule 10b-5] specifies the making of
an untrue statement of a material fact and the
omission to state a material fact. The first and third
subparagraphs are not so restricted.” Id. at 152-53
(emphasis added).
Even in cases in which a defendant
affirmatively lies about his intention not to trade or
otherwise makes a misstatement that would clearly
give rise to a potential Rule 10b-5(b) cause of action,
liability for insider trading is still treated as a
fraudulent scheme for which liability resides in Rule
10b-5(a) or (c). See, e.g., SEC v. Rocklage, 470 F.3d 1
(1st Cir. 2006) (affirming denial of the defendant’s
motion to dismiss insider trading charges under Rule
10b-5(a) and (c) where the tippee had misrepresented
her intention not to tip or trade on the material
nonpublic information); SEC v. Yun, 327 F.3d 1263
(11th Cir. 2003) (same). A defendant’s nondisclosure
of the intention to trade, or his affirmative
misstatements with respect thereto, is thus an
equally deceptive “device, scheme or artifice” under
Rule 10b-5(a) or “act, practice, or course of business”
under Rule 10b-5(c).
Insider trading is not the only type of scheme
liability predicated upon material misrepresentations
or omissions that courts have recognized. Other such
schemes include a broker-dealer or investment
adviser’s selective misallocation of securities trades,
colloquially and colorfully known as “cherry-picking”
(e.g., SEC v. K.W. Brown & Co., 555 F. Supp. 2d 1275
10
(S.D. Fla. 2007), falsification of corporate financial
records (e.g., SEC v. Monterosso, 756 F.3d 1326 (11th
Cir. 2014), and arrangement of sham transactions to
give a false appearance of business operations (e.g., In
re Parmalat Sec. Litig., 376 F. Supp. 2d 472 (S.D.N.Y.
2005).
“Accordingly, scheme liability does not
preclude, outright, claims based upon a scheme to
misrepresent or omit material facts.”
SEC v.
Goldstone, 952 F. Supp. 2d 1060, 1206 (D.N.M. 2013).
B.
Liability under Rule 10b-5(a) or (c) is
Predicated on Whether the Defendant’s
Conduct was Deceptive or Manipulative
The plain text of Rules 10b-5(a) or (c) makes
clear that a fraudulent scheme claim is predicated not
on whether a material misrepresentation or omission
occurred, but rather on whether the defendant’s
conduct was deceptive or manipulative. Indeed, one
district court has called it “nonsensical” that scheme
liability cannot exist where the purpose of the scheme
was to make a misstatement. SEC v. Lucent Tech.,
610 F. Supp. 2d 342, 359 (D.N.J. 2009). The existence
of a deceptive or manipulative act has always been
the sine qua non of liability under Rule 10b-5, and this
notion is rooted in the actual text of Section 10(b): “It
shall be unlawful for any person, directly or
indirectly, . . . to use or employ, in connection with the
purchase or sale of any security . . ., any manipulative
or deceptive device or contrivance . . . .” 15 U.S.C.
§ 78j(b) (emphasis added).
Conduct is manipulative within the meaning of
Section 10(b) and Rule 10b-5 when it improperly
11
affects the market for a security.
The word
manipulative “is virtually a term of art” and “connotes
intentional or willful conduct designed to deceive or
defraud investors by controlling or artificially
affecting the price of securities.” Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 199 (1976). Activities such
as price rigging, wash sales, matched orders, layering,
or spoofing are manipulative because they artificially
affect the normal functioning of the securities
markets. See Santa Fe Indus., Inc. v. Green, 430 U.S.
462, 476 (1977); SEC v. Lek Sec. Corp., 276 F. Supp.
3d 49, 54-56 (S.D.N.Y. 2017).
While the Court has not yet defined deceptive
conduct for purposes of Section 10(b) and Rule 10b-5
(Regents of the Univ. of Calif. v. Credit Suisse First
Boston (USA), Inc., 482 F.3d 372, 389 (5th Cir. 2007)),
it has held that conduct itself can be deceptive – i.e.,
deception does not require that a misrepresentation
or
omission
has
occurred
–
and
that
misrepresentations or omissions can themselves
constitute deceptive acts. Stoneridge Inv. Partners,
LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008).
Lower courts presented with this question
generally pose the following test for deception: Did the
defendant’s conduct give anyone a false impression of
material fact about a security (or could anyone have
reasonably gotten such a false impression)? See, e.g.,
SEC v. Dorozhko, 574 F.3d 42, 50 (2d Cir. 2009)
(“‘deceptive’ covers a wide spectrum of conduct
involving cheating or trading in falsehoods); United
States v. Finnerty, 533 F.3d 143, 148 (2d. Cir. 2008)
12
(deception “entails some act that gives the victim a
false impression”); Clark v. Capital Credit &
Collection Servs., 460 F.3d 1162, 1174 n.10 (9th Cir.
2006) (“Something is deceptive if it tends or has the
power to ‘give a false impression.’”). Deception thus
can be satisfied either in actuality (i.e., one or more
victims really were deceived) or potentially (i.e., a
reasonable person in the victim’s position could have
been deceived). Applying this same test to determine
whether a defendant’s conduct was deceptive or
manipulative pursuant to Rules 10b-5(a) and (c) as
the Circuit Court did here, is not at all unfair or
unreasonable, nor does such a test ensure that the
SEC or a private plaintiff will prevail. For example,
courts in the Second Circuit have taken this approach
in government prosecutions and the government has
still lost. See Finnerty, 533 F.3d at 148-49.
C.
Petitioner’s Conduct was Deceptive.
As the Circuit Court held, the facts at issue
here are sufficient to demonstrate that Petitioner
committed a deceptive act and is liable under Rules
10b-5(a) and (c). The Circuit Court found substantial
evidence in support of the Commission’s conclusions
that Petitioner violated Rule 10b-5(a) and (c) when, at
the request of his boss, Petitioner sent two emails to
potential investors in a debenture offering and
included in his emails the following material
falsehoods, the untruth of which was known to
Petitioner: (i) the issuer had over $10 million in
confirmed assets; (ii) the issuer had purchase orders
and letters of intent for over $43 million in orders; and
13
(iii) Petitioner’s firm had agreed to raise additional
monies to repay any purchasers in the future if
necessary. See 872 F.3d at 581. The Circuit Court
agreed with the Commission that Petitioner took an
“active role in producing and sending the emails
[which] constituted employing a deceptive device, act,
or artifice to defraud.” Id. at 589 (internal citation and
quotations omitted).
With respect to the Petitioner’s deception, his
role as director of investment banking at his
brokerage firm was known to the potential investors
(or at least fully disclosed to them), and Petitioner
also personally vouched for the veracity of the
information in his two emails. Id. at 590. He was not
a ministerial employee, and investors reasonably
expected that he had access to sensitive or even
privileged information about the offering. The Circuit
Court rightly concluded that Petitioner’s conduct
reasonably caused the investors receiving the emails
to have a false impression of material facts about the
debenture offering. Id. at 583-86.
The Circuit Court also found no incongruity
between this result and its separate conclusion that
Petitioner was not liable for making the
misstatements within the meaning of Rule 10b-5(b),
as the Court interpreted that term in Janus. The
Circuit Court reasoned that, depending on the facts
and circumstances of each case, someone in Lorenzo’s
shoes could be potentially liable on a scheme liability
theory, on a misstatement theory, on both theories or
on neither theory: “One can readily imagine persons
whose ministerial acts in connection with false
14
statements would fail to qualify either as ‘making’ the
statements or as ‘employing’ any fraudulent device.
Lorenzo, in our view, is not such a person.” Id at 595.
The Circuit Court’s scheme liability analysis was
entirely correct.2
Investors reasonably expect, and the plain text
of Rule 10b-5 permits, a potential cause of action
against a broker-dealer that sells them a security
pursuant to information it knew was materially false
(or where the broker-dealer was willfully blind or
otherwise reckless with respect thereto). A contrary
result, such as advocated for by Petitioner and in the
SIFMA/Chamber Brief, would give broker-dealers
and other securities professionals a free pass to
knowingly sell securities pursuant to materially false
and misleading information so long as the broker was
not the original creator of the misstatements. This is
precisely the sort of caveat emptor approach that
Congress intended the securities laws to prevent. See
Kokesh v. SEC, — U.S. —, 137 S. Ct. 1635, 1640 n.1
(2017).
D.
The Circuit Court’s Opinion Is
Consistent with Central Bank and Janus.
The gravamen of Petitioner and his amici’s
complaints with the Circuit Court’s opinion is that it
would supposedly render Central Bank and Janus
“meaningless.”
See Petitioner’s Brief at 21;
Professor’s Brief at 3; SIFMA/Chamber Brief at 5.
2 As discussed in Part II below, Petitioner was also a “maker”
under Janus.
15
But Central Bank and Janus are not so feeble. The
Circuit Court’s opinion, together with other decisions
such as SEC v. Big Apple Consulting USA, Inc., 783
F.3d 786 (11th Cir. 2015), more than adequately
explain why holding Petitioner liable on a scheme
liability theory is completely consistent with Central
Bank, Janus and the Court’s other precedents.
Central Bank stands for the proposition that
private litigants cannot bring aiding and abetting
claims under Section 10(b) and Rule 10b-5. See id.,
511 U.S. at 191. After Central Bank, private rights of
action are valid against primary violators only. But
what is the dividing line between primary and
secondary liability? Janus established this boundary
for Rule 10b-5(b) claims: a defendant is primarily
liable for making a material misrepresentation or
omission in violation of Rule 10b-5(b) if the person
had “ultimate authority” over it. Janus, 564 U.S. at
142. The Court has not established a similar bright
line for primary versus secondary liability under Rule
10b-5(a) or (c), though. Instead, Courts currently
evaluate this question on a case-by-case basis based
on the plain text of the rule and Section 10(b).
Rule 10b-5(a) makes it unlawful “to employ any
device, scheme, or artifice to defraud.” 17 C.F.R.
§ 240.10b-5(a) (emphasis added). Rule 10b-5(c) makes
it unlawful “to engage in any act, practice, or course
of business which operates or would operate as a
fraud or deceit upon any person.” 17 C.F.R. § 240.10b5(c) (emphasis added). Like the operative word
“make” in Rule 10b-5(b), the operative words in
16
paragraphs (a) and (c) – “employ” and “engage in” –
are not difficult to define. The dictionary defines
“employ” in this context as “to put to use or service”
and “engage in” as “to involve oneself or become
occupied / participate.” THE AMERICAN HERITAGE
COLLEGE DICTIONARY at 460, 464 (4th ed. 2004).
The Court’s diagramming of the word “make”
in Janus indicates that “employ” or “engage in” are
broader terms.3 This result should not be surprising;
Affiliated Ute said as much forty years ago. See id.,
406 U.S. at 152-53. Janus reasoned that “make” is
akin to “proclaim” or “state.” Id., 564 U.S. at 142. The
act of proclaiming or stating something is linear;
regardless of how a statement is created,
responsibility ultimately rests with some authority.4
Given this, Janus concluded, “the maker of a
statement is the person or entity with ultimate
authority” over it. Id. In contrast, the terms “employ”
or “engage in” are not so delimited. Multiple persons
of independent agency and identity can readily be
said to “employ” or “engage in” some conduct,
statement or activity. Janus’s ultimate authority
standard thus does not transfer to assessing primary
liability under Rule 10b-5(a) or (c).
The Professors’ Brief posits that the dividing
line between primary and secondary scheme liability
should be inferred from the general law of aiding and
3 The term “any” – utilized in both 10b-5(a) and (c), is, of course,
as broad as the English language permits.
4 As discussed in Section II, supra, this authority could be shared
among more than one person.
17
abetting. They reason that because aiding and
abetting requires “substantial assistance” to the
underlying violation, “primary liability must require
more.” Professors’ Brief at 8. This approach does not
work as a universal rule in the real world of securities
frauds. For example, it is a poor rubric for tippertippee insider trading cases. Courts routinely hold
tippers and tippees equally liable for insider trading
even if one of the party’s relative culpability vastly
exceeded the other’s. E.g., SEC v. Sabrdaran, 252 F.
Supp. 3d 866, 897 (N.D. Cal. 2017) (noting that
downstream tippees remote from the underlying
breach of fiduciary duty can be held equally liable).
See also Salman v. United States, — U.S. —, 137 S.
Ct. 420 (2016) (rejecting the notion that a tipper must
receive a pecuniary or similarly valuable benefit from
a tip).
The reasoning in the Professors’ posited
approach also breaks down upon further testing. For
instance, imagine a master/servant situation in which
a controlling party has ultimately responsibility for a
securities fraud, but the controlled party does all the
dirty work. Are they both primary violators? If not,
then which one of them is – the controlling party (by
virtue of his authority) or the controlled party
(because he took all the material steps to perpetrate
the fraud)? Convincing arguments could be made in
any direction. Similarly, imagine three defendants
who conspire to commit a securities fraud and
contribute approximately, but not precisely, equally
to the scheme (e.g., the first conducts approximately
50% of the misconduct, the second 30%, and the third
18
20%). Are all three primary violators? Two of them?
Just one? To say that a primary violator must do
more than merely “substantially assist” in a securities
fraud, in the end, teaches us nothing. Instead of the
Professors’ flawed calculus, a better approach for
assessing primary versus secondary scheme liability
would be to follow the plain text of the statute and
rule, and determine whether each defendant
committed a material manipulative or deceptive act.
As discussed above, this is precisely what federal
courts have been doing for years – and was the
approach taken by the Circuit Court below.
II. THE COMMISSION WAS CORRECT THAT
PETITIONER WAS A “MAKER” UNDER
JANUS.
The Circuit Court concluded Lorenzo was not
liable under Rule 10b-5(b) because it found that,
under the Court’s ruling in Janus, Lorenzo was not
the “maker” of the emails he sent. Although not
squarely before the Court, below we explain why the
Circuit Court was wrong, providing another avenue
for the Court to sustain the Commission’s decision.
Under Rule 10b-5(b), it is unlawful to “make
any untrue statement of a material fact . . . in
connection with the purchase or sale of any security.”
17 C.F.R. § 240.10b-5(b). In Janus, the Court
explained that to “[m]ake” means “to state,” not to
“create.” 564 U.S. at 142-44, 131 S. Ct. 2296. Thus,
“[o]ne ‘makes’ a statement by stating it.” Id. at 142,
131 S. Ct. 2296. “For purposes of Rule 10b-5, the
19
maker of a statement is the person or entity with
ultimate authority over the statement, including its
content and whether and how to communicate it.” Id.
The Court explained:
Without control, a person or entity can
merely suggest what to say, not “make” a
statement in its own right. One who
prepares or publishes a statement on behalf
of another is not its maker. And in the
ordinary case, attribution within a
statement or implicit from surrounding
circumstances is strong evidence that a
statement was made by—and only by—the
party to whom it is attributed. This rule
might best be exemplified by the
relationship between a speechwriter and a
speaker. Even when a speechwriter drafts a
speech, the content is entirely within the
control of the person who delivers it. And it
is the speaker who takes credit—or blame—
for what is ultimately said.
Id. at 142-43, 131 S. Ct. 2296.
After this Court’s decision in Janus, corporate
officers who signed documents containing untrue
statements attempted to avoid Section 10(b) liability
by arguing that their company or board of directors,
rather than the officers themselves, had “ultimate
authority” over the statements, and thus that the
officers did not “make” the statements. See, e.g., In re
Smith Barney Transfer Agent Litig., 884 F. Supp. 2d
152, 163-64 (S.D.N.Y 2012). But this evasive strategy
20
was roundly rejected by courts. See id. (citing cases);
cf. Glickenhaus & Co. v. Household Intern., Inc., 787
F.3d 408, 426-27 (7th Cir. 2015) (granting new trial
on whether corporate officer “made” false statements
in a press release where, among other things, there
was no evidence officer signed press release and his
name did not appear in the press release) (citing
Peterson v. Winston & Strawn LLP, 729 F.3d 750, 752
(7th Cir. 2013) (defendant law firm probably not liable
for contents of a circular it helped prepare because it
“did not sign the document or warrant the truth of its
contents”)); Howard v. Everex Sys., Inc., 228 F.3d
1057, 1061 (9th Cir. 2000) (a corporate official who
“signs a SEC filing containing misrepresentations” is
“mak[ing] a statement so as to be liable as a primary
violator under § 10(b)”).
Even those courts post-Janus that have
adopted the narrowest definition of a “maker”
nevertheless maintain that “officers whose signatures
appear on misleading statements may be liable as the
‘makers’ of those statements.”
Livingston v
Cablevision Sys. Corp., 966 F. Supp. 2d 208, 221
(E.D.N.Y. 2013) (finding Janus abrogated the grouppleading doctrine); see also In re Banco Bradesco S.A.
Sec. Litig., 277 F. Supp. 3d 600, 640-41 (S.D.N.Y.
2017) (finding the group-pleading/group-published
doctrine no longer viable after Janus, and limiting the
“maker” of a statement to those who, for example,
“signed the company’s statement; ratified and
approved the company’s statement; or where the
statement is attributed to the executive” (quoting In
re Fannie Mae 2008 Sec. Litig., 891 F. Supp. 2d 458,
21
473 (S.D.N.Y. 2012))). Thus, “Janus did not change
the longstanding rule that corporate officials are
liable for misstatements to which they give their
imprimatur.” In re Smith Barney, 884 F. Supp. 2d at
164. Indeed, prior to the ruling of the court below, it
appears that courts unanimously have held that a
corporate officer’s signature or similar imprimatur on
a corporate statement renders him a “maker” of the
statement.
Here, substantial evidence supports the
Commission’s finding that Lorenzo had ultimate
authority over the untrue statements in his emails,
and was thus a “maker” of them for purposes of Rule
10b-5(b). Lorenzo, who was the director of investment
banking at a registered broker-dealer, (1) signed off
each email with “Truly, Francis V. Lorenzo,” his title
“Vice President—Investment Banking,” and his
direct phone number; (2) sent the emails from his own
account; (3) invited recipients to “Please call with any
questions”; and (4) testified that he understood that,
by sending the emails, he was “putting his own
reputation on the line.”
This evidence is more than sufficient to show
that Lorenzo possessed ultimately authority over the
emails. First—and dispositive on its own—Lorenzo
signed the emails. Just like a corporate officer who
puts her signature on a corporate statement written
by others, thus adopting the statement as her own,
Lorenzo adopted the emails as his own by signing
them with his name and title and sending them from
his email address. In dismissing the import of this
22
evidence, the Circuit Court reasoned only that this
“sort of signature line . . . can often exist when one
person sends an email that ‘publishes a statement on
behalf of another,’ with the latter person retaining
‘ultimate authority over the statement.’” Lorenzo, 872
F.3d at 588 (quoting Janus, 564 U.S. at 142, 131 S.
Ct. 2296). This reasoning is flawed. As an initial
matter, there is no evidence in the record upon which
the Circuit Court based its observation regarding the
nature of Lorenzo’s signature line, or what the
signature line signified for either Lorenzo or the
recipients of his email.5 To the contrary, had Lorenzo
wanted to make it clear he was “publish[ing] a
statement on behalf of” his bosses, Lorenzo, 872 F.3d
at 588, he would have employed the commonly-used
“sent on behalf of” function commonly used on
Microsoft Outlook and other major email platforms.6
That instead he affixed his own signature to the email
and sent it from his account is dispositive.
The Circuit Court’s reasoning is also flawed
because it relies on language from Janus divorced
from its context. In Janus, the Court held that,
because the defendant was a “legally independent
entity,” it could not be the “maker” of a statement filed
Nor did the Circuit Court explain from whose perspective a
court should determine the significance of the signature: a
reasonable investor, the investor receiving the email, Lorenzo
himself, or Gregg Lorenzo.
5
See Manage Another Person’s Mail and Calendar Items,
Microsoft,
https://support.office.com/en-us/article/manageanother-person-s-mail-and-calendar-items-afb79d6b-296743b9-a944-a6b953190af5.
6
23
with the SEC because it could not legally have the
ultimate authority to file the statement with the SEC.
564 U.S. at 146-47, 131 S. Ct. 2296. Here, by contrast,
there is no legally independent entity at issue;
Lorenzo was a registered broker and director of
investment banking at Charles Vista, LLC, with his
own independent duties to that company and its
investors. He could, and did, make statements that
legally bound his company.
The Circuit Court’s reasoning also appears to
assume that only one individual within an
organization can “make” a statement; that is, the
Circuit Court assumed that if Gregg Lorenzo had
“ultimate authority” over the email statements,
Lorenzo cannot also have “ultimate authority” over
the email statements. But there is no legal principle
that limits Rule 10b-5(b) in such a manner. To the
contrary, both SEC enforcement actions and private
suits under Rule 10b-5(b) hold accountable multiple
senior executives who, for instance, all signed a
company’s SEC filings containing untrue statements
or all participated in an earnings conference call
during which untrue statements were made. See, e.g.,
Waggoner v. Barclays PLC, 875 F.3d 79 (2d Cir. 2017)
(affirming class certification in Section 10(b) action
against Barclays and three of its senior executives
based on misstatements in, among other things, press
releases); In re Harman Int’l Indus., Inc. Sec. Litig.,
791 F.3d 90 (D.C. Cir. 2015) (reversing and
remanding dismissal of Section 10(b) claims against
company and “three of its officers” for false
statements made in the company’s fiscal year 2007
24
Annual Report); In re VeriFone Holdings, Inc. Sec.
Litig., 704 F.3d 694 (9th Cir. 2012) (complaint
adequately stated Section 10(b) claim against
company, its CEO, and its CFO based on
misstatements in SEC filing); SEC v. Infinity Grp.
Co., 212 F.3d 180 (3d Cir. 2000) (Alito, J.) (in Ponzi
scheme case, upholding permanent injunction under
Section 10(b) against company and its two principals).
It is thus clear that, unlike in Janus, which dealt with
a separate corporate entity, “within an organization,
more than one person will have ultimate authority
over a statement . . . .” In re Barrick Gold Sec. Litig.,
No. 13 Civ. 3851(SAS), 2015 WL 3486045, at *2
(S.D.N.Y. June 2, 2015); see also Banco Bradesco, 277
F. Supp. 3d at 639 (“[N]othing in Janus dictates that
only one person may have ultimate authority over a
statement.”); City of Pontiac Gen. Emps.’ Ret. Sys. v.
Lockheed Martin Corp., 875 F. Supp. 2d 359, 374
(S.D.N.Y. 2012) (“It is not inconsistent with Janus
Capital to presume that multiple people in a single
corporation have the joint authority to ‘make’ an SEC
filing, such that a misstatement has more than one
‘maker.’”)
If allowed to stand, the Circuit Court’s implicit
holding that only one individual within an
organization can have “ultimate authority” would
eviscerate Rule 10b-5(b) by allowing culpable
individuals to escape liability. Take the following
scenario: the CEO of a company orders her CFO to
insert new language in the company’s SEC filing,
believing the language to be true. The CFO, knowing
the language to be false, nevertheless inserts the new
25
language, and the CEO and CFO both sign the
document and file it with the SEC. Under the Circuit
Court’s reasoning, neither of these executives would
face liability under Rule 10b-5(b). The CFO could
simply aver that she did not have “ultimate authority”
over the statements because she acted at the direction
of the CEO and copied-and-pasted the language the
CEO provided to her, while the CEO could claim she
lacked scienter. This illogical outcome underscores
that the Circuit Court’s interpretation stretches
Janus’s concept of “ultimate authority” too far.
That Lorenzo’s emails stated he was sending
them “at the request of” his boss does not change this
analysis. In addition to signing and sending the
emails from his account, Lorenzo demonstrated his
ultimate authority over the emails by reassuring
investors that they could call him “with any
questions” regarding the contents of the email or the
nature of the investment. Moreover, because Lorenzo
testified that he understood he was “putting his own
reputation on the line” by sending the emails, there is
strong evidence to support that Lorenzo would “take[]
credit—or blame—for what [was] ultimately said,”
Janus, 564 U.S. at 143, 131 S. Ct. 2296.
In sum, just as a corporate executive is a
“maker” of an untrue statement in a filing he signs,
Lorenzo is a “maker” of the solicitation emails he
chose to sign and send from his email account. It is
thus appropriate to hold him liable under Rule 10b5(b).
26
III.THE SAME ANALYSIS HEREIN APPLIES
UNDER SECTION 17(A) OF THE SECURITIES
ACT.
For the same reasons the Circuit Court upheld
the Commission’s scheme liability findings against
Petitioner, the Circuit Court also affirmed the
Commission’s finding of liability under Section
17(a)(1) of the Securities Act of 1933, 15 U.S.C.
§ 77q(a)(1). See Lorenzo, 872 F.3d at 586. The Circuit
Court was right to do so.
Rule 10b-5 is drafted substantially similarly to
Section 17(a), and courts interpret liability under
these provisions to be substantially similar. SEC v.
Radius Capital Corp., 653 Fed. Appx. 744, 749 (11th
Cir. 2016). There is no reason to depart from this
general principle here. The primary distinction
between liability under Section 10(b) and Rule 10b-5
thereunder and Section 17(a) is that Ҥ 10(b) and Rule
10b-5 applies to acts committed in connection with a
purchase or sale of securities while § 17(a) applies to
acts in connection with an offer or sale of
securities.” SEC v. Bauer, 723 F.3d 758, 768 (7th Cir.
2013) (emphasis in original). This difference is of no
moment here. Also of no consequence here are the
distinctions in how scienter is treated under Section
10(b) and Section 17(a), and that there is no private
right of action under Section 17(a). See Radius
Capital, 653 Fed. Appx. at 749; Finkel v. Stratton
Corp., 962 F.2d 169, 170 (2d Cir. 1992)).
Similarly, for the reasons outlined above in
Part II that Petitioner should be held liable under
27
Rule 10b-5(b) as the “maker” of the misleading emails
he sent to prospective investors, it follows that he
violated Section 17(a)(2) as well. Indeed, Section
17(a)(2) is even broader than Rule 10b-5(b): 17(a)(2)
makes it unlawful to “obtain money or property by
means of” any material misrepresentation or omission
while 10b-5(b) requires the defendant to actually
“make” the misstatement.
Compare 15 U.S.C.
§ 77q(a)(2) with 17 C.F.R. § 240.10b-5(b)(2). Thus, to
the extent a trier of fact were to find Petitioner liable
under Rule 10b-5(b), corresponding liability logically
follows under Section 17(a)(2).7
IV. THE SEC IS NOT ACTING IN BAD FAITH
The
Professors’
Brief
criticizes
the
Commission’s interpretation of the law with respect
to primary versus secondary liability. The Professors’
Brief asserts that the Commission “prefers primary
fraud charges” and sees the limitations imposed by
Janus as “a nuisance to avoid.” See Professors’ Brief
at 6, 9. The Professors’ Brief accuses the Commission
further of seeking to “smudge the line” between
primary and secondary liability as drawn by this
Court. See Professors’ Brief at 7. It is unclear
whether the professors are accusing the Commission
of bad faith in its interpretation of primary versus
secondary liability, but their brief certainly suggests
7 The extent to which Janus even applies to Section 17(a)(2) is
not settled. Compare Big Apple, 783 F.3d at 797 (holding Janus
does not apply to claims under Section 17(a)(2)), with SEC v.
Knight, 694 Fed. Appx. 853, 856 n.1 (2d Cir. 2017) (declining to
reach the question). This issue need not be reached here.
28
as much. To the extent they do hold this view, we
vigorously disagree.
The Commission has never, to our knowledge,
asserted that it is not bound by Janus. If the
Commission really were of a mind to pursue every
legal theory as aggressively as possible, it could have
challenged that Janus’s holding about the scope of
primary liability under Rule 10b-5(b) was
inapplicable to its own enforcement actions. After all,
Janus was a private litigation and the decision
pointedly did not speak to its potential applicability
to governmental actions. See Janus, 564 U.S. at 137
(“This case requires us to determine whether Janus
Capital Management . . . can be held liable in a
private action under [Rule 10b-5].”) At least one SEC
staff member after Janus publicly questioned
whether the decision should apply to the agency’s
actions, see Yin Wilczek, Extent to Which Janus
Applies to SEC Actions Not Clear, Official Says, 44
Sec. Reg. & L. Rep. (BNA) 462 (Mar. 5, 2012), and
reasonable arguments can be made that Janus should
not bind the SEC. See Matthew P. Wynne, Student
Note, Rule 10b-5(b) Enforcement Actions in Light of
Janus: Making the Case for Agency Deference, 81
FORDHAM L. REV. 2111 (2013). Yet the Commission
has never contested this point. Rather, the inherent
logic within Janus and the need for consistency across
public and private litigations appears to have caused
the Commission to forego this potential fight.
29
V. SIFMA AND THE CHAMBER’S HYPERBOLIC
CLAIMS ARE MERITLESS
SIFMA and the Chamber argue that, if the
Circuit Court’s decision is sustained, one would
become liable under Section 10(b) merely by playing
some remote role in the dissemination of a statement.
SIFMA/Chamber Brief at 14. They write further:
Securities industry professionals, in
particular, distribute the statements of
others to their clients by many different
channels and involving varying degrees of
directness, including public and private
websites, individual and mass emails, and
the mailing or physical distribution of
prospectuses. Janus clarified that they do
not accept exposure to Section 10(b) or Rule
10b-5 liability each time they do so.
Id. These concerns are meritless hyperbole.
Securities professionals do not become liable
for merely delivering prospectuses or other corporate
disclosure documents as required by the securities
laws and related rules. Rather, one is liable under
Section 10(b) and Rule 10b-5 only for knowingly or
recklessly distributing false and misleading
information in order to effectuate the sale of a security
(particularly a security the broker-dealer is itself
underwriting).
Moreover, contrary to SIFMA/Chamber’s
supposition that an avalanche of meritless private
litigation will be filed against security market actors
30
if the Circuit Court’s decision is not reversed (see id.
at 24-26), both the Private Securities Litigation
Reform Act (“PSLRA”), Pub. L. No. 104-67, 109 Stat.
737 (1996), and the Securities Litigation Uniform
Standards Act (“SLUSA”), Pub. L. No. 105-353, 112
Stat. 3227 (1998), as well as the Court’s recent
jurisprudence provide significant and ample
protection against such suits. It is telling that neither
petition nor Amicus can point to a single securities
case filed against security market actors for
distributing prospectuses or other routine acts.
It is essential that adequate remedies exist to
protect hardworking investors impacted by fraud.
Private securities litigation is a necessary
supplement to SEC enforcement actions. See Tellabs,
Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313
(2007)(“[The Court] has long recognized that
meritorious private actions to enforce federal
antifraud securities laws are an essential supplement
to criminal prosecutions and civil enforcement actions
brought, respectively, by the Department of Justice
and the Securities and Exchange Commission.”);
Bateman Eichler, Hill Richards, Inc. v. Berner, 472
U.S. 299, 310 (1985); J.I. Case Co. v. Borak, 377 U.S.
426, 432 (1964) (private rights of action under the
securities laws are a “necessary supplement to
Commission action.”). As Commissioner Jackson
explained earlier this year:
“…[T]here are two principal ways we hold
corporate managers to account when they
hurt investors. First, the government can
identify the wrongdoing and bring a case.
31
Second, investors themselves can bring a
lawsuit against the responsible individuals
and companies. Government enforcement is
crucial to the functioning of our securities
markets . . . At the same time, I’m struck
again and again by the sheer audacity of
fraudsters and by the devastating amount of
money investors lose. Almost daily, I am
reminded that [the SEC’s] world-class
enforcement attorneys cannot do it all alone.”8
Indeed, the amount of securities fraud is
simply too great for the SEC and NASAA’s members
to police on their own. According to former SEC Chair
Mary Jo White, “additional funding [for the SEC] is
imperative if we are to continue the agency’s progress
in fulfilling its responsibilities over our increasingly
fast, complex, and growing markets.”9 But
Congressional budget authorizations have not kept
8 Commissioner Robert J. Jackson Jr., Keeping Shareholders on
the Beat: A Call for a Considered Conversation About
Mandatory Arbitration, CECP CEO Investor Forum, February
26, 2018, available at https://www.sec.gov/news/speech/
jackson-shareholders-conversation-about-mandatory-arbitratio
n-022618. See also NYU Pollack Center for Law and Business &
Cornerstone Research, SEC Enforcement Activity: Public
Companies and Subsidiaries, (November 14, 2017),
https://www.cornerstone.com/Publications/Reports/SEC-Enforce
ment-Activity-Public-Companies-and-Subsidiaries-Midyear-FY2018-Update (“[t]he number of new [SEC] actions [against
public-company related defendants] declined 33 percent overall
in FY 2017.”).
Mary Jo White, Testimony on the Fiscal Year 2017 Budget
Request of the U.S. Securities and Exchange Commission
(March 22, 2016), available at www.sec.gov/news/testimony/
testimony-white-sec-fy-2017-budget-request.html.
9
32
pace with the SEC’s needs.10
State securities
regulators face similar budgetary constraints.
Private securities litigation is also the primary
mechanism for compensating harmed investors.
While the funds obtained by federal and state
regulators can in some cases be returned to
identifiable investors, the amounts collected in
governmental actions pale in comparison to the
awards obtained by private litigants themselves. See
John C. Coffee, Jr., Reforming the Securities Class
Action: An Essay on Deterrence and its
Implementation, 106 COLUM. L. REV. 1534, 1542-43
Tables 2 & 3 (2006). (“private enforcement . . .
dwarf[s] public enforcement”). In 2016, roughly sixty
cents of every dollar returned to investors in
corporate-fraud cases came through private, rather
than SEC, settlements.11
10 See Melanie Waddell, SEC Seeks Budget Boost to Restore
Staff, ThinkAdvisor (February 12, 2018), available at
https://www.thinkadvisor.com/2018/02/12/sec-seeks-budgetboost-to-restore-staff/?slreturn=20180911131549 (“The [SEC’s]
annual appropriations has remained essentially flat from 2016
to 2018, at $1.6 billion. However, during the same period,
securities trading has grown by more than $3 trillion, assets
under management by investment advisors has jumped more
than $5 trillion, and there’s been a 17% growth in ETFs and
mutual funds.”).
Compare Cornerstone Research, Securities Class Action
Settlements: 2016 Review and Analysis (2016) (noting that, in
2016, federal courts approved approximately $6 billion in
securities class-action settlements); with U.S. Securities and
Exchange Commission, SEC Announces Enforcement Results
for FY 2016, Press Release, (Oct. 11, 2016) (noting that the SEC
obtained just over $4 billion in disgorgement and penalties in FY
2016).
11
33
Private securities litigation also serves a
significant role in maintaining investor confidence by
enforcing disclosure standards set forth in the
securities laws. As this Court has recognized, “[t]he
magnitude of the federal interest in protecting the
integrity and efficient operation of the market for
nationally traded securities cannot be overstated.”
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit,
547 U.S. 71, 78 (2006). And, scholars have observed
that investor lawsuits are as good, if not better, than
the government in targeting certain securities-law
violations.12
Congress too recognizes the important role
played by private securities litigation in deterring
fraud and compensating victims: “[t]he SEC
enforcement program and the availability of private
rights of action together provide a means for
defrauded investors to recover damages and a
powerful deterrent against violations of the securities
laws.” S. Rep. No. 98, 104th Cong. 1st Sess., at 8
(1995). And Congress recognizes the important role
such actions play in maintaining investor confidence
and ensuring market integrity:
Private
securities
litigation
is
an
indispensable tool with which defrauded
investors can recover their losses without
having to rely upon government action.
Stephen Choi & Adam Prichard, SEC Investigations and
Securities Class Actions: An Empirical Comparison, 13 J. Emp.
Legal Stud. 27 (2016).
12
34
Such private lawsuits promote public and
global confidence in our capital markets and
help to deter wrongdoing and to guarantee
that corporate officers, auditors, directors,
lawyers and others properly perform their
jobs.
H.R. CONF. REP. NO. 369, 104th Cong. 1st Sess.
(1995), at 31 (Nov. 28, 1995).
Even in light of recent limitations placed on
private actions by Congress, the underlying intent of
Congress to allow for these remedies remains.
Congress recognizes the importance of private actions
to the overall functioning of the securities markets.
To the extent there may be any concerns about the
process for which private securities litigations, these
concerns are “more appropriately addressed by
Congress,” not this Court. Halliburton Co. v. Erica P.
John Fund, 134 S. Ct. 2398, 2413 (2014).
CONCLUSION
For all of the foregoing reasons, we respectfully
submit that Petitioner should be held in violation of
Securities Exchange Act of 1934 Section 10(b) and
Rule 10b-5(a), (b), and (c) promulgated thereunder, as
well as Section 17(a)(1), (2) and (3) of the Securities
Act of 1933.
35
Respectfully submitted,
MICHAEL B. EISENKRAFT
Counsel of Record
LAURA H. POSNER
COHEN MILSTEIN SELLERS
& TOLL PLLC
88 Pine Street, 14th Floor
New York, NY 10005
212-838-7797
meisenkraft@cohenmilstein.com
ERIC S. BERELOVICH
COHEN MILSTEIN SELLERS
& TOLL PLLC
1100 New York Ave NW #500,
Washington, DC 20005
A. VALERIE MIRKO
ZACHARY T. KNEPPER
NORTH AMERICAN
SECURITIES ADMINISTRATORS
ASSOCIATION, INC.
750 First Street, NE, Suite 1140
Washington, DC 20002
Dated: October 12, 2018
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.