In re Lorenzo

• Decision Date: 29 September 2017
• Docket Number: No. 15-1202.,15-1202.
• Citation: 872 F.3d 578
• Parties: Francis V. LORENZO, Petitioner v. SECURITIES AND EXCHANGE COMMISSION, Respondent
• Court: U.S. Court of Appeals — District of Columbia Circuit

872 F.3d 578

Francis V. LORENZO, Petitioner

v.SECURITIES AND EXCHANGE COMMISSION, Respondent

No. 15-1202.

United States Court of Appeals, District of Columbia Circuit.

Argued September 15, 2016

Decided September 29, 2017

Robert G. Heim argued the cause for petitioner. With him on the briefs were Stephanie Rapp–Tully and Steven L. Herrick.

Martin V. Totaro, Attorney, Securities and Exchange Commission, argued the cause for respondent. On the brief were Anne K. Small, General Counsel, Michael A. Conley, Solicitor, and Benjamin L. Schiffrin, Senior Litigation Counsel.

Before: Griffith, Kavanaugh, and Srinivasan, Circuit Judges.

Dissenting opinion filed by Circuit Judge Kavanaugh.

Srinivasan, Circuit Judge:

The Securities and Exchange Commission found that Francis Lorenzo sent email messages to investors containing misrepresentations about key features of a securities offering. The Commission determined that Lorenzo's conduct violated various securities-fraud provisions. We uphold the Commission's findings that the statements in Lorenzo's emails were false or misleading and that he possessed the requisite intent.

We cannot sustain, however, the Commission's determination that Lorenzo's conduct violated one of the provisions he was found to have infringed: Rule 10b-5(b). That rule bars the making of materially false statements in connection with the purchase or sale of securities. We conclude that Lorenzo did not "make" the false statements at issue for purposes of Rule 10b-5(b) because Lorenzo's boss, and not Lorenzo himself, retained "ultimate authority" over the statements. Janus Capital Grp., Inc. v. First Derivative Traders , 564 U.S. 135, 142, 131 S.Ct. 2296, 180 L.Ed.2d 166 (2011).

While Lorenzo's boss, and not Lorenzo, thus was the "maker" of the false statements under Rule 10b-5(b), Lorenzo played an active role in perpetrating the fraud by folding the statements into emails he sent directly to investors in his capacity as director of investment banking, and by doing so with an intent to deceive. Lorenzo's conduct therefore infringed the other securities-fraud provisions he was charged with violating. But because the Commission's choice of sanctions to impose against Lorenzo turned in some measure on its misimpression that his conduct violated Rule 10b-5(b), we set aside the sanctions and remand the matter to enable the Commission to reassess the appropriate penalties.

I.

A.

In February 2009, Francis Lorenzo became the director of investment banking at Charles Vista, LLC. Charles Vista was a registered broker-dealer owned by Gregg Lorenzo, no relation to Francis. (For clarity of reference, we will refer to Francis Lorenzo as "Lorenzo" and will use Gregg Lorenzo's first name when referring to him.)

Charles Vista's biggest client, and Lorenzo's only investment-banking client at the time, was a start-up company named Waste2Energy Holdings, Inc. (W2E). W2E claimed to have developed a "gasification" technology that could generate electricity by converting solid waste to gas. W2E's business model relied on the technology's living up to its potential. If it failed to do so, the great majority of W2E's assets—the "intangibles," in balance-sheet lingo—would have to be written off entirely.

W2E's conversion technology never materialized. In September 2009, W2E sought to escape financial ruin by offering up to $15 million in convertible debentures. (Debentures are "debt secured only by the debtor's earning power, not by a lien on any specific asset." BLACK'S LAW DICTIONARY 486 (10th ed. 2014)). Charles Vista would serve as the exclusive placement agent for W2E's debenture offering.

W2E's most recent SEC filing at the time, its June 3, 2009 Form 8–K (used to notify investors of certain specified events), contained no indication of any possible devaluation of the company's intangible assets. Rather, the form stated that W2E's intangibles were worth just over $10 million as of the end of 2008. On September 9, 2009, W2E issued a Private Placement Memorandum as a guidebook for potential investors in the debentures. That guidebook, like the June 2009 Form 8–K, included no mention of any devaluation of the company's intangibles.

Following a lengthy audit, however, W2E changed its public tune. On October 1, 2009, the company filed an amended Form 8–K in which it reported a total "impairment" of its intangible assets because "management made a determination that the value of the assets acquired were of no value." J.A. 703. As of March 31, 2009, W2E now clarified, its gasification technology should have been valued at zero , and its total assets at only $370,552. On the same day it filed its amended Form 8–K, October 1, 2009, W2E also filed a quarterly Form 10-Q in which it valued its total assets at $660,408 as of June 30, 2009.

Later on October 1, Lorenzo's secretary alerted him (via email) about W2E's amended Form 8–K filing. The next day, Lorenzo emailed all Charles Vista brokers links to both of W2E's October 1 filings. On October 5, he received an email from W2E's Chief Financial Officer explaining the reasons for "[t]he accumulated deficit we have reported." Id. at 740. The CFO reiterated that W2E had written off "all of our intangible assets ... of about $11 million" due to "our assessment of the value of what those asset[s] are worth today." Id.

On October 14, Lorenzo separately emailed two potential investors "several key points" about W2E's pending debenture offering. Id. at 794, 796. His emails, however, omitted any mention of the wholesale devaluation of W2E's intangibles. On the contrary, Lorenzo's emails assured both recipients that the offering came with "3 layers of protection: (I) [W2E] has over $10 mm in confirmed assets; (II) [W2E] has purchase orders and LOI's for over $43 mm in orders; (III) Charles Vista has agreed to raise additional monies to repay these Debenture holders (if necessary)." Id. One of Lorenzo's messages said it had been sent "[a]t the request of Gregg Lorenzo," id. at 796, and the other stated it had been sent "[a]t the request of Adam Spero [a broker with Charles Vista] and Gregg Lorenzo," id. at 794. In both messages, Lorenzo urged the recipients to "[p]lease call [him] with any questions." Id. at 794, 796. And he signed both messages with his name and title as "Vice President—Investment Banking." Id.

B.

On February 15, 2013, the Commission commenced cease-and-desist proceedings against Lorenzo, Gregg Lorenzo, and Charles Vista. It charged each with violating three securities-fraud provisions: (i) Section 17(a)(1) of the Securities Act of 1933, 15 U.S.C. § 77q(a)(1) ; (ii) Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j ; and (iii) Securities Exchange Act Rule 10b-5, 17 C.F.R. § 240.10b-5. Gregg Lorenzo and Charles Vista settled the charges against them, but the claims against Lorenzo proceeded to resolution before the agency.

An administrative law judge concluded that Lorenzo had "willfully violated the antifraud provisions of the Securities and Exchange Acts by his material misrepresentations and omissions concerning W2E in the emails." Gregg C. Lorenzo, Francis V. Lorenzo, and Charles Vista, LLC , SEC Release No. 544, 107 SEC Docket 5934, 2013 WL 6858820, at *7 (Dec. 31, 2013). The ALJ deemed "[t]he falsity of the representations in the emails ... staggering" and Lorenzo's mental state with respect to those misstatements at least "reckless." Id. As a result, the ALJ ordered Lorenzo to: (i) cease and desist from violating each securities-fraud provision giving rise to the charges against him; (ii) forever refrain from participating in the securities industry in several enumerated respects; and (iii) pay a civil monetary penalty of $15,000. Id. at *10.

Lorenzo petitioned the Commission for review. Following "an independent review of the record," the full Commission sustained the ALJ's decision, including her "imposition of an industry-wide bar, a cease-and-desist order, and a $15,000 civil penalty." Francis V. Lorenzo , SEC Release No. 9762, 111 SEC Docket 1761, 2015 WL 1927763, at *1 (Apr. 29, 2015) (Lorenzo ). The Commission found that Lorenzo "knew each of [the emails' key statements] was false and/or misleading when he sent them." Id. It concluded that the sanctions were "in the public interest to deter Lorenzo and others in similar positions from committing future violations." Id. at *17. The Commission later denied Lorenzo's motion for reconsideration.

Lorenzo filed a timely petition for review in this court. He challenges only the Commission's imposition of an industry-wide bar and a $15,000 civil penalty, not the cease-and-desist order.

II.

We first consider Lorenzo's challenges to the Commission's findings that the relevant statements in his email messages were false or misleading and were made with the requisite mental state. The three pertinent statements are the three "layers of protection" enumerated in both of Lorenzo's October 14, 2009, email messages to potential investors about the debenture offering. Lorenzo challenges the Commission's determination that two of the three statements were false or misleading, and he also challenges the Commission's conclusion that he possessed the requisite intent with respect to all three of the statements.

With regard to his intent, establishing a violation of Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act, or Exchange Act Rule 10b-5 "requires proof of scienter." Dolphin & Bradbury, Inc. v. SEC , 512 F.3d 634, 639 (D.C. Cir. 2008). That standard in turn requires demonstrating "an intent to deceive, manipulate, or defraud." Id. (quoting SEC v. Steadman , 967 F.2d 636, 641 (D.C. Cir. 1992) ). The scienter requirement can be satisfied by a showing of "[e]xtreme recklessness," which exists when "the danger was so obvious that the actor was aware of it and consciously disregarded it." Id.

The question whether Lorenzo acted with scienter, like the question whether the statements were false or misleading, is a...