Common Sense Prevails: SCOTUS Broadens Primary Liability for Fraudulent Schemes

For quite some time, the courts have struggled with the concept of primary liability for a lying liar and secondary liability for a liar who passes on the lie knowing that it was a lie. Scotus, in the Lorenzo decision has now said that is a distinction without a difference.

It is not a secondary issue of aiding and abetting, it is a primary issue where the agent, employee, officer or representative of the liar is equally liable for the dissemination of a lie if they know it is a lie.

BUT you still need to prove intent to lie along with the other elements of fraud. A lie is not actionable if the recipient knew it was untrue or should have known or did not rely upon it. If the lie is not material then it is presumed to belie upon which nobody relied.

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see https://www.morganlewis.com/pubs/supreme-court-adopts-broad-interpretation-of-primary-liability-in-sec-antifraud-case

See Lorenzo v. Securities and Exchange Commission

The interesting part of this decision is that it is parallel to false securitization claims where various lawyers, servicers and others say things that are lies to mislead the recipient of such information into thinking that the trust has assets that everyone who knows, knows that the trust doesn’t have those assets (i.e., loans).

Justice Breyer writes:

Petitioner Francis Lorenzo, while the director of investment banking at an SEC-registered brokerage firm, sent two e-mails to prospective investors. The content of those e-mails, which Lorenzo’s boss supplied, described a potential investment in a company with “confirmed assets” of $10 million. In fact, Lorenzo knew that the company had recently disclosed that its total assets were worth less than $400,000.

Some quotes from an article (see link above) on this highly important decision:

In a decision beneficial to the US Securities and Exchange Commission, the US Supreme Court has affirmed that those persons who disseminate statements containing material misrepresentations or omissions are primarily liable for such misstatements even if they did not directly make them.Private securities litigants will likely rely on Lorenzo v. SEC to assert claims against secondary actors—including bankers, lawyers, and accountants—who disseminate statements made by others that they allegedly know are materially misleading, and the Commission is now clear to charge such persons as primary violators without demonstrating that the person who actually made the statement also violated federal securities laws.
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the Court endorsed the SEC’s approach to scheme liability against those who distribute materially misleading statements with scienter, regardless of whether they are actually the maker of the statements. By holding that a nonmaker can still violate Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, it is expected that private securities litigants will rely on Lorenzo to assert claims against secondary actors who, with scienter, disseminate alleged misstatements made by others. Lorenzo may also further embolden the Commission to allege primary violations against “gatekeepers” and others who did not make the alleged misstatements, but are nonetheless alleged to have been involved in their dissemination.
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At the request of his supervisor, Lorenzo, an investment banker, sent two emails that he did not draft to prospective investors. Lorenzo’s supervisor provided the content of the two emails, which Lorenzo merely copy and pasted into his own emails. Lorenzo then transmitted the emails and included his signature block with a note that he could be contacted with any questions, but also stated in each email that he had sent it at the request of his supervisor. Although Lorenzo did not draft the content of the emails, the Commission found he acted with intent to defraud because he knew some of the content was false or misleading when he sent them.
*
Before Lorenzo, the Janus and Central Bank decisions seemed to impose strict limits on claims brought by private plaintiffs. The Supreme Court’s new decision affirms that those who disseminate misstatements can commit a primary violation of Rule 10b-5, rather than just a secondary aiding and abetting violation, for which there is no private right of action. Accordingly, Lorenzo may curtail the effect of Janus and Central Bank, and could be interpreted to mean that a secondary actor (e.g., banker, lawyer, accountant) may, under similar facts, be held primarily liable under a scheme liability theory.[19]
*
It will therefore be left to lower courts to determine how far Lorenzo—which on its face appears to limit primary liability to “those who disseminate false statements with intent to defraud”—will stretch primary liability in private actions, if at all. Indeed, plaintiffs will still be required to plead with particularity that the “nonmaker” had such an intent.

5 Responses

  1. The intent is found in the USPTO patents and algorithms. Dissect the reasoning for patents. NEW ideas/inventions. Traditional mortgages are not new. Securitization / rehypothecation with intended foreclosure scheme gave the banks grounds for patented procedures.

    Fraud detection was built into underwriting software, which allowed the program to obtain patent. It was intentionally relaxed.

  2. corruptionpedia2
    I have stated this from day one in my comments…. How can there ever be a time limit , get out of jail free card on fraud? Do you have legal findings to that effect? I lost my house through bank fraud about 8 years ago. Still feeling the effects from the loss.

  3. Trump doesn’t want it Hammertime.

  4. Now will the whistleblowers come out?

  5. Awesome, I am sure this decision will apply to real estate brokers and agents who SELL fraudulent foreclosures on behalf of FAKE Sellers – not-existing Trusts and their “Boards of Directors” to new buyers.

    Bear to repeat, fraud upon the Court STILL makes any judgement void, thus about 40 million foreclosures are fully reversible in ANY Court and at ANY time; and their new owners are in possession of stolen property which is a felony in most states

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