Case No. 17-1077 | D.C. Cir.
Preview by Samuel E. Meredith, Senior Online Editor
In 2009, Charles Vista, LLC worked with a company named Waste2Energy Holdings, Inc. (“W2E”) on a private debenture offering. W2E’s estimation of its value at the time was based on its belief that it had devised a “gasification” mechanism that made it possible to produce gas using solid waste. Brief for Petitioner at 8, Lorenzo v. SEC, No. 17-1077 (U.S. filed Aug. 20, 2018). The gasification mechanism never came together, and the company’s value accordingly plummeted. Thereafter, W2E updated its filings with the SEC and sent copies of the filings to Charles Vista.
At the time, Francis Lorenzo was Charles Vista’s director. He was aware that W2E updated its filings, but never actually reviewed them. Lorenzo subsequently contacted some possible investors via e-mail and provided false information about W2E. These false statements triggered a set of proceedings in which the SEC alleged that Lorenzo, his company, and his colleagues defrauded investors. One of the allegations against Lorenzo was based on 17 C.F.R. § 240.10b-5 and similar provisions, which make it illegal “[t]o make any untrue statement of material fact” or “employ any device, scheme, or artifice to defraud [investors]” in the course of securities transactions.
Lorenzo responded to the allegations by explaining that he sent the e-mails in question under the direction of his colleagues, and that he was not even fully aware of what the e-mails said because they were “copy and pasted.” Id. at 10. The administrative law judge (“ALJ”) in the initial SEC proceeding believed this portion of Lorenzo’s testimony but nevertheless found that Lorenzo had committed the alleged violations.
When Lorenzo appealed this ruling, the SEC affirmed the ALJ. Lorenzo appealed to the D.C. Circuit. The D.C. Circuit agreed with Lorenzo that he did not actually “make” the false statements but held that Lorenzo’s actions nevertheless violated the relevant provisions.
Before the Court, Lorenzo argues that, according to precedent, “only defendants who make a misstatement may be held primarily liable [for false statements].” Id. at 16. The decision below, Lorenzo contends, “virtually eliminates the distinction between primary and secondary liability.” Id. at 17. The SEC, on the other hand, asserts that “a straightforward interpretation of the statutory and regulatory text” confirms Lorenzo’s liability. Brief for the Respondent at 11, Lorenzo v. SEC, 17-1077 (U.S. filed Oct. 5, 2018).