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San Diego Securities Fraud: Disseminating a Statement That You Know is False is Fraud Says SCOTUS

San Diego companies and those involved in the offer and sale of securities know that making false statements will create potential legal risk — both the risk of civil and criminal liability. Making a false statement or making a material omission is fraud. This is true whether you are offering and selling securities via the traditional method that requires registration or if you are using an exemption under Regulation D. While disclosures and filings are less voluminous under Rule 504 and 506, if you make a false statement as part of a private offering, that false statement will expose you and your company to risk. This is one of the many reasons to retain an experienced San Diego corporate attorney to help draft and review your private placement memorandum.

With respect to the distinction between making and disseminating false statements, the U.S. Supreme Court just recently issued a 6-to-2 opinion providing legal guidance for practitioners. See Lorenzo v. Securities and Exchange Commission, Case No. 17-1077 (US Supreme Court March 27, 2019). In that case, the target of an investigation by the Securities and Exchange Commission (“SEC”) was Francis Lorenzo. He was the director of investment at a brokerage house. At issue were two emails that Lorenzo sent out to prospective investors. His emails stated that the company being promoted had “confirmed assets” of $10 million. This specific information was provided to Lorenzo by his boss and the specific words used by Lorenzo were cut-and-pasted from an email received from the boss. However, the statement was false. The company in question had only $400,000 in “confirmed assets.” Importantly, Lorenzo was fully aware that the company did not have $10 million in “confirmed assets.”

When investigated by the SEC, Lorenzo sought to avoid liability by arguing that he was not the original source of the statement. In legal parlance, Lorenzo argued that he was not the “maker” of the false statement. Under earlier Supreme Court cases, civil, administrative, and criminal liability could be avoided if the person in question was not the maker, but was merely transmitting a false statement made by another.

Lorenzo did not succeed with this argument. Two facts were fatal: He had actual knowledge of the falsity of the statement and he actively cut and paste what he knew was false information in an email and then transmitted the email. In other words, he was in a position to know the correct information and he took active steps beyond being a mere conduit.

Some have argued that this result is a departure from the earlier Supreme Court decisions, particularly Janus Capital Group, Inc. v. First Derivative Traders, 564 U. S. 135 (2011). However, it is unclear that Lorenzo will significantly undercut Janus since Lorenzo dealt with a different subsection of section 10 of the Securities Act of 1933. Janus involved subsection (b) which prohibits the making of a false statement; Lorenzo involved subsections (a) and (c) which prohibits any act or schemes or devices — such as disseminating an email “which operates or would operate as a fraud or deceit.” There is much nuance in the case, but the legal lesson is clear: making or disseminating a false statement with respect to a securities offering or sale will result in adverse legal action.

Contact San Diego Corporate Law

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides legal services related to business law, private securities offerings/sales, the sale/purchase of a business, and for mergers and acquisitions. Mr. Leonard has been named a “Rising Star” by for four years running. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.

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