D.C. Circuit Vacates SEC’s Lifetime Ban on Broker

(CN) – An investment broker who sent emails to potential investors written by his boss is liable for making false statements, but cannot be banned from the financial industry as the “maker” of those statements, the D.C. Circuit ruled in a 2-1 decision.

In 2015, the Securities and Exchange Commission issued a cease and desist order against broker Francis Lorenzo for knowingly sending emails to potential investors with false information about his firm’s client.

The emails assured investors that the client had over $10 million in confirmed assets, when in fact Lorenzo had just been informed of the wholesale devaluation of the client’s intangible assets.

The SEC ordered Lorenzo to pay a $15,000 penalty and barred him from working in the securities industry for life.

On appeal, the D.C. Circuit affirmed the agency’s finding that Lorenzo made the false statements knowingly, but ruled that Lorenzo cannot be held fully responsible because he sent the emails at the behest of his boss, Gregg Lorenzo (no relation).

“Lorenzo, acting with scienter (i.e., an intent to deceive or defraud, or extreme recklessness to that effect), produced email messages containing three false statements about a pending offering, sent the messages directly to potential investors, and encouraged them to contact him personally with any questions,” Judge Sri Srinivasan said, writing for the panel majority.

However, “voluminous” evidence supports the finding that Gregg Lorenzo wrote the substance of the emails, which Lorenzo copied and pasted into emails to potential investors.

“The Commission operated under the assumption that Lorenzo devised, and had ultimate authority over, the substance of the false statements contained in the email messages he sent to investors. That assumption, as we have concluded, is unsupported by the record evidence,” Srinivasan said.

Therefore, Lorenzo does not qualify as the “maker” of the false statements, the court ruled.

It remanded the case back to the SEC for the agency to reconsider what penalties are appropriate under a correct understanding of the nature of Lorenzo’s misconduct.

Judge Brett Kavanaugh dissented, arguing that the SEC’s entire ruling should be overturned.

“If Lorenzo did not draft the emails, did not think about the contents of the emails, and sent the emails only at the behest of his boss, it is impossible to find that Lorenzo acted ‘willfully,’” Kavanaugh said, accusing the SEC of trying to “end-run the Supreme Court.”

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