Argument analysis: Justices appear divided in debate over anti-fraud securities rules
on Dec 3, 2018 at 11:43 pm
The dividing lines were apparent at Monday’s argument in Lorenzo v Securities and Exchange Commission, as several justices seemed to think it self-evident that the conduct of petitioner Francis Lorenzo amounted to a fraudulent scheme under the federal securities laws, while at least one justice, Neil Gorsuch, appeared ready to rule for Lorenzo.
To understand the debate, some background is useful. This case follows from the Supreme Court’s 2011 decision in Janus Capital v First Derivative Traders, which held that only the “maker” of a statement is liable for its falsity. Lorenzo distributed a set of emails to his clients urging them to invest in securities of a particular firm. All agree that the emails included false statements about the firm, but that Lorenzo cannot be charged with “making” those false statements because Lorenzo’s supervisor crafted the text of the statements (which Lorenzo pasted into the emails that he sent). Faced with Janus, the SEC charged Lorenzo with engaging in a fraudulent scheme rather than making a false statement.
Lorenzo’s central argument is that permitting the SEC to charge him tolerates a plain evasion of Janus, leaving Janus a dead letter. For several justices, the biggest problem with that argument is that the Janus court relied on the statutory text that condemns the “making” of a false statement; the Janus court reasoned that a person does not “make” a statement when parroting words produced by another. Because the rules and statutes under which the SEC charged Lorenzo do not include any references to the “making” of statements, the textual analysis of Janus says little about those provisions.
As for those provisions, several of the justices (including Justices Stephen Breyer, Samuel Alito, Elena Kagan and Sonia Sotomayor) suggested that the conduct in which Lorenzo engaged falls squarely within the relevant language. Alito, for example, repeatedly pressed Robert Heim, who represented Lorenzo, to suggest any reason why the alleged conduct did not “fall squarely within the language” of the statute. In the same vein, Kagan asked early on with apparent incredulity if Heim seriously thought that his client had “not engaged in an act which operates as a fraud.” Sotomayor went even further, suggesting that she thought that Lorenzo’s conduct was so plainly condemnable that Heim’s admissions regarding Lorenzo’s state of mind seemed to her to “give away your case.”
The only strongly contrary comments came from Gorsuch, who pressed the view that the only “actus reus” (the classic Latin phrase for wrongful conduct) in the SEC’s charges was the transmission of emails. For Gorsuch, the appeals court’s ruling that Lorenzo did not “make” the false statements contained in the emails meant that he could not be held responsible for deceiving the investors. It was plain, however, that other justices did not share his views. Kagan, for example, stepped in to emphasize that the relevant conduct was the transmission of the false statement, which could not “cause the deception unless it gets to those readers.”
An exchange between Kagan and Heim encapsulated the argument. Kagan explained that Heim’s view made sense only if the justices thought of the various provisions of the anti-fraud statutes as entirely separate and “mutually exclusive” — so that conduct involving misstatements could be sanctioned, if at all, only under the provisions directed specifically at misstatements. Echoing the analysis of the U.S. solicitor general, Kagan suggested that it made more sense to regard the provisions as overlapping, in what she described as a “belt-and-suspenders approach where … we’re going to find every possible way to say this thing in order to make sure that fraudulent acts are covered.”
Alito’s skepticism is a bad sign for Lorenzo, because all four of the dissenters from Janus (Breyer, Justice Ruth Bader Ginsburg, Kagan and Sotomayor) remain on the bench, and none of them showed any inclination to extend Janus to this case. If the government picks up an additional vote from Alito, then Lorenzo will have no chance to prevail. My guess is that we can expect a short and straightforward opinion affirming Lorenzo’s liability.
Editor’s Note: Analysis based on transcript of oral argument.