United States Court of Appeals, District of Columbia Circuit
Francis V. Lorenzo, Petitioner
Securities and Exchange Commission, Respondent
September 15, 2016
Petition for Review of an Order of the Securities &
G. Heim argued the cause for petitioner. With him on the
briefs were Stephanie Rapp-Tully and Steven L. Herrick.
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.
SRINIVASAN CIRCUIT JUDGE.
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.
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 (2011).
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.
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.)
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.
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.
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
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.
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."
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.
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.
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.
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.
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
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
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.
question whether Lorenzo acted with scienter, like the
question whether the statements were false or misleading, is
a question of fact. Id. at 639. The Commission's
"factual findings are conclusive if supported by
substantial evidence." Seghers v. SEC, 548 F.3d
129, 132 (D.C. Cir. 2008). Although "[s]ubstantial
evidence is more than a mere scintilla, " Kornman v.
SEC, 592 F.3d 173, 184 (D.C. Cir. 2010), we have
repeatedly described the standard as a "very
deferential" one, e.g., Siegel v. SEC,
592 F.3d 147, 155 (D.C. Cir. 2010); Dolphin &
Bradbury, 512 F.3d at 639; Nat'l Ass'n of
Sec. Dealers v. SEC, 801 F.2d 1415, 1419 (D.C. Cir.
1986). Applying that standard here, we conclude that the
Commission's findings as to falsity and scienter are
supported by substantial evidence with regard to each of the
three pertinent statements in Lorenzo's emails.
first of the three statements at issue advised potential
investors that the "Company has over $10 mm in confirmed
assets." J.A. 794, 796. Lorenzo does not directly
dispute the falsity of that statement. Nor could he: by the
time Lorenzo sent the October 14, 2009, email messages
containing that statement, W2E had entirely written off its
intangibles and disclosed that its remaining assets were
worth far less than $1 million. And Lorenzo himself testified
that W2E "would be lucky to get a million" for its
intangibles after they had been marked down. Id. at
the question of scienter, Lorenzo contends that, when he sent
the emails, he held a good-faith belief that W2E had over $10
million in confirmed assets. The Commission concluded
otherwise, and its finding of scienter is supported by
Lorenzo's chief duties involved conducting due diligence
on his clients, including reviewing their financial
statements and public SEC filings. During the relevant time,
W2E was Lorenzo's sole investment-banking client. He knew
that W2E's financial situation was "horrible from
the beginning" and that its gas-conversion technology
had not worked as planned. Id. at 124. He also knew
that he stood to gain seven to nine percent of any funds he
raised from the debenture offering.
record shows that, when Lorenzo viewed W2E's June 2009
Form 8-K, he disbelieved the Form's valuation of the
company's intangible assets at $10 million. He agreed
that the intangibles were a "dead asset" that would
be "hugely discounted, " id. at 127-28,
and that W2E would be "lucky [to] get a million dollars
for that asset, " id. at 128-29. He also
thought it significant that the $10 million valuation had not
been audited, because without such scrutiny, "there is
way too much risk for investors." Id. at 126.
He acknowledged that he had warned Gregg Lorenzo as early as
April 2009 to refrain from collateralizing a debenture
offering with W2E's intangibles, because those assets
"provided no protection" to investors. Id.
at 159. Lorenzo understood that, if a default occurred,
"clients would not be able to recoup their money based
on a liquidation of this asset." Id. He instead
viewed the debenture offering as a "toxic convertible
debt spiral." Lorenzo, 2015 WL 1927763, at *5.
concerning Lorenzo's state of mind can also be gleaned
from his actions in helping prepare Charles Vista's
Private Placement Memorandum for the debenture offering. On
August 26, 2009, he asked W2E's principals to value the
company's intangibles at $10 million in the upcoming
Memorandum. He received no response. He broached the subject
again on September 1, this time leaving the intangibles'
value blank, because he "w[asn't] sure what [it] was
worth anymore." J.A. 135, 739. The final Memorandum
assigned no concrete value to W2E's intangibles; it
instead divulged that the company had experienced
"significant operating losses" and did "not
expect to be profitable for at least the foreseeable
future." Lorenzo, 2015 WL 1927763, at *3.
October 1 SEC filings, W2E publicly disclosed the wholesale
write-off of its intangibles. It did so in a tri-column chart
entitled "Goodwill and Technology, " and it
followed that numerical presentation with a textual
explanation for the mark-down. Lorenzo acknowledged that he
read the amended Form 8-K on October 1 (although, according
to him, "[p]robably not as closely as I should
have"). J.A. 140. And he received an email from
W2E's CFO on October 5 succinctly contextualizing the
massive devaluation of W2E's intangible assets.
evidence therefore supports concluding that, at least by
October 5, Lorenzo knew that W2E's intangibles were
valueless. He gave testimony on the issue as follows:
"Q. So it is fair to say . . . that on October 5,
200, you were aware that the $10 million asset had been
written off by [W2E]. Correct? A. Okay. I will agree to that.
That's correct. Q. That is a fair statement? A.
Yes." Id. at 151. That admission is difficult
to reconcile with Lorenzo's statement that he
"unintentional[ly] miss[ed]" the import of the
October 5 email. Id. at 148. The Commission
justifiably credited his more inculpatory rendition of
events, especially in light of his broader, scienter-related
concession: "Q. [D]id you know that those statements
were inaccurate and misleading? A. Yes. Q. You knew at the
time? A. At the time? I can't sit here and say that I
didn't know." Id. at 158.
to the Commission, "[t]hat Lorenzo could have looked at
[W2E's] filings, which was his job, and missed what was
one of the most pertinent facts in them-the valuation of the
company's assets-is either untrue or extreme
recklessness." Lorenzo, 2015 WL 1927763, at *9.
The Commission considered it "at least extremely
reckless" for Lorenzo to have sent email messages
claiming that W2E had over $10 million in
"confirmed" assets, given his "longstanding
concern about the legitimacy" of those assets.
Id. We perceive no basis for setting aside the
Commission's conclusions as unsupported by substantial
resisting that conclusion, Lorenzo relies in part on a $14
million valuation of W2E's assets in a W2E research
report emailed by Charles Vista's Chief Compliance
Officer to the firm's brokers on the same day Lorenzo
sent his pertinent emails (October 14, 2009). The Commission
sensibly reasoned that "the mere fact that, for whatever
unknown reason, a compliance officer sent an inaccurate
research report internally to the firm's brokers is
neither analogous to, nor an excuse for, Lorenzo's
knowingly sending misleading emails to prospective
investors." Id. at *9 n.23.
second contested statement is the assertion in Lorenzo's
emails that "[t]he Company has purchase orders and
LOI's for over $43 mm in orders." J.A. 794, 796. He
maintains that the Commission erred in deeming that statement
false or misleading. He notes that, at one point, Charles
Vista did in fact receive a $43 million letter of intent from
a potential customer in the Caribbean, and that W2E's CEO
"put a lot of confidence" in such letters.
Id. at 160. But as the Commission rightly notes, the
Caribbean letter did not obligate its drafter to do anything,
and the transaction proceeded no further. By the time Lorenzo
sent his emails on October 14, 2009, W2E had no outstanding
purchase orders. Lorenzo's emails nonetheless assured the
recipients that W2E had over $43 million in "purchase
orders and LOI's." The Commission thus was
fully justified in finding that statement false or
misleading. See Lorenzo, 2015 WL 1927763, at *6.
also disputes the Commission's finding of scienter
concerning the extent of W2E's anticipated cash flow.
Asked whether he knew at the time that the $43 million figure
was misleading, Lorenzo testified as follows: "I
can't say that with a hundred percent because they did
have LOI's for 43 million." J.A. 160. As his other
testimony revealed, however, Lorenzo understood that
W2E's sole letter of intent was "non-binding, "
a mere potentiality that the company "hoped would
materialize." Id. at 162. And by September
2009, he "didn't think that the 43 million LOI was
ever going to turn into purchases." Id. at 164.
Lorenzo testified repeatedly to that effect. See id.
at 163-64 ("Q. And by September 2009 you didn't
think it was ever going to come through, right? A. . . . That
is correct."); id. at 164 ("Q. So sometime
in September you lost confidence that this 43 million was
ever going to happen? A. Yes.").
clear implication of the statement in Lorenzo's email
messages was that W2E anticipated a $43 million influx of
capital from past and future orders. Yet the record reveals
grave doubts on Lorenzo's part that "$43 mm in
orders" (or any orders) would actually occur.
Substantial evidence therefore supports the Commission's
finding of scienter as to that statement.
third statement at issue is the assertion in Lorenzo's
email messages that "Charles Vista has agreed to raise
additional monies to repay these Debenture holders (if
necessary)." Id. at 794, 796. Lorenzo disputes
the Commission's conclusion that the statement was false
or misleading. He contends that Gregg Lorenzo could have made
such an agreement for Charles Vista, had done so on prior
occasions for debenture holders, and had allegedly met with
additional brokers about raising funds for W2E. The
Commission permissibly regarded those assertions as
"establish[ing] only the theoretical possibility that
Charles Vista could have raised additional money to repay
investors, not that it had agreed to do so (as Lorenzo's
emails claimed)." Lorenzo, 2015 WL 1927763, at
regard to scienter, Lorenzo observes that the Commission
included no specific citations to the record in support of
its finding. It is true that, although the Commission quoted
the evidentiary record at length, it did not cite the
particular page numbers on which certain arguments and
quotations appeared. But we "uphold a decision of less
than ideal clarity if the agency's path may reasonably be
discerned." Motor Vehicle Mfrs. Ass'n v. State
Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)
(quoting Bowman Transp., Inc. v. Arkansas-Best Freight
Sys., 419 U.S. 281, 286 (1974)). That standard is
readily satisfied here.
allowed, at least in hindsight, that "you can interpret
this [statement] as being misleading." J.A. 167.
Moreover, according to his own testimony, at the time he sent
the emails, he did not believe Charles Vista could raise
enough money to repay debenture holders. For instance, he
testified that, as of October 2009, "it is accurate to
say that Charles Vista would not have the buying power or the
resources to properly fund [W2E] in order to repay the
debentures." Id. at 172. Given Lorenzo's
knowledge that Charles Vista could not have repaid debenture
holders, the Commission could certainly conclude that Lorenzo
believed that no such agreement existed. As a result,