November 30, 2018

With Justice Brett Kavanaugh recusing himself from the Lorenzo case involving forwarded misstatements before the U.S. Supreme Court, attorneys say they'll be paying close attention to oral arguments on Monday for any unexpected leanings by the other eight justices.

The Supreme Court might be headed toward a 4-4 ruling in light of Kavanaugh's recusal following his involvement in the D.C. Circuit decision, which affirmed the U.S. Securities and Exchange Commission's finding that investment banker Francis V. Lorenzo was liable for fraud through so-called scheme liability for forwarding his boss' misstatements about an energy investment. Given the potential for a divided court, oral arguments will be especially telling.

. . . 

At issue is whether Lorenzo can be held liable for sending clients emails drafted by his boss that contained false statements.

The D.C. Circuit's majority opinion, from which Kavanaugh dissented, determined Lorenzo does not meet the definition of a "maker" of fraudulent statements as set forth in the Supreme Court's 2011 decision in Janus, which held that the "maker" of a statement is limited to whoever had ultimate authority over the statement.

But the majority said Lorenzo was nonetheless responsible under the concept of scheme liability since he "effectively vouched for the emails' contents and put his reputation on the line by listing his personal phone number and inviting the recipients to ‘call with any questions,’” according to the majority opinion.

Lorenzo has argued the D.C. ruling allows plaintiffs to "sidestep Janus' carefully drawn elements of fraudulent statement claims merely by relabeling the claims — with nothing more — as fraudulent scheme claims."

But Janus was a 5-4 opinion, and the four dissenters remain on the Supreme Court today, which attorneys say could pose a problem for Lorenzo. Those dissenters were Justices Stephen Breyer, Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan.

"I would be surprised to see any of them — particularly in light of the facts at issue — change their minds," said Laura Posner, a partner at Cohen Milstein Sellers & Toll PLLC, which filed an amicus brief supporting the SEC on behalf of North American Securities Administrators Association Inc.

. . . 

To avoid a 4-4 opinion, the justices could also agree to a narrow ruling that wouldn't have many implications beyond this specific case.

If a majority of justices can't reach an agreement, the D.C. Circuit opinion would stand, as would a split among a number of the federal appellate courts. The Second, Eighth and Ninth circuits have found that misstatements alone can't support a fraudulent scheme claim, while the Eleventh and D.C. circuits have found they can, Lorenzo said in his brief.

Of course, the final ruling and its implications won't be clear until the Supreme Court decides the case, likely next year.

The complete article can be accessed here.