securities litigation

Lorenzo v. SEC

Issues

Can a defendant who sent emails containing misstatements to potential investors be held liable under a fraudulent-scheme claim where the evidence showed that the defendant merely forwarded the emails at the direction of another?

Court below

United States Court of Appeals for the D.C. Circuit

This case asks the Supreme Court to determine the scope of Janus Capital Group, Inc. v. First Derivative Traders, as well as the extent of liability for securities professionals who play a supportive role in fraudulent-scheme claims. Francis Lorenzo contends that the Supreme Court should apply a narrow definition of primary liability to Rule 10b-5 securities actions. Lorenzo argues that he is not culpable for securities fraud under Rules 10b-5(a) and (c) because, in forwarding emails that were written by his superior, he did nothing more than provide “substantial assistance” to those who defrauded investors with misleading financial statements. The Securities and Exchange Commission (“SEC”) counters that Lorenzo played a primary role in advancing the fraud because he signed the emails as the director of investment banking, and he told the potential investors to contact him for information about the financial health of his brokerage firm’s clients. This case will determine the ease with which the SEC can bring claims against securities professionals accused of fraud.

Questions as Framed for the Court by the Parties

Whether a misstatement claim that does not meet the elements set forth in Janus Capital Group, Inc. v. First Derivative Traders can be repackaged and pursued as a fraudulent-scheme claim.

In 2009, Francis Lorenzo (“Lorenzo”) was appointed director of investment banking for Charles Vista, LLC (“Charles Vista”), a brokerage firm in New York City. Lorenzo v. Securities and Exchange Commission at 3. Lorenzo oversaw the account of Charles Vista’s largest client, a startup company called Waste2Energy Holdings, Inc. (“W2E”).

Written by

isyed

yzhu

Edited by

cwouters

Additional Resources

Greg Stohr, Supreme Court Will Consider Narrowing Securities-Fraud Laws, Bloomberg (June 18, 2018).
Peter J. Henning, Are False Statements Enough to Prove Fraud?, The New York Times (July 3, 2018).

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Merrill Lynch, Pierce, Fenner & Smith, Inc.v. Dabit

Issues

Whether, as the seventh circuit held earlier this month and in direct conflict with the decision below, SLUSA preempts state law class action claims based upon allegedly fraudulent statements or omissions brought solely on behalf of persons who were induced thereby to hold or retain (and not purchase or sell) securities?

Court below

United States Court of Appeals for the Second Circuit

The Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) preempts state law class action suits that allege misrepresentation “in connection with the purchase or sale” of securities. In a state class action suit against Merrill Lynch for issuing biased recommendations of certain stocks, Respondent Dabit attempted to escape the preemption of SLUSA by filing a holder suit — alleging that he held and refrained from selling stocks based on Merrill Lynch’s misrepresentations, expressly avoiding any references to purchases or sales of stocks. The court must resolve a conflict between the Second Circuit’s decision in this case, holding that such holder claims are not preempted by SLUSA and can be brought in state courts, and a recent seventh circuit decision that held otherwise. This case will be closely watched by the corporate community, as allowing holder suits in state court would allow a new class of plaintiffs to sue corporations and also expose corporations to litigation in the more unpredictable and less experienced (with respect to securities class actions) state courts.

Questions as Framed for the Court by the Parties

In 2000, New York Attorney General Eliot Spitzer (“Spitzer”) investigated Merrill Lynch, a global financial services firm, for allegedly issuing biased investment recommendations and illegitimately hyping up stocks to obtain business. Dabit v. Merrill Lynch, 395 F.3d 25, 28 (2d cir. 2005), cert. Granted, 126 S.Ct.