March 28, 2019

For corporate America, there’s no bogeyman more reliable than the threat of securities class actions. So it’s no surprise that when a challenge to an enforcement action by the Securities and Exchange Commission went to the U.S. Supreme Court, the business lobby emphasized the case’s potential impact on private shareholder suits, arguing that the SEC’s position would expose all kinds of people previously shielded by Supreme Court precedent to liability in shareholder suits.

On Wednesday, the Supreme Court sided with the SEC in Lorenzo v. Securities and Exchange Commission. Does the ruling mean we’re suddenly going to see a spike in shareholder suits that otherwise wouldn’t have been brought?

Probably not, according to the four lawyers I talked to – two securities defense counsel and two plaintiffs’ lawyers. The Lorenzo ruling may allow shareholders’ lawyers to rope in individual defendants under newly available theories. But it’s not going to change the contours of securities class action litigation.

“It’s of limited utility,” said shareholders’ lawyer Laura Posner of Cohen Milstein Sellers & Toll. “I’d be surprised to see more than a handful of cases” citing the decision.

In Wednesday’s ruling, the justices held that investment banker Francis Lorenzo was liable for securities fraud for knowingly emailing false information about a client’s debt offering to potential investors. Lorenzo did not create the false statements he passed along in the emails – he cut and pasted information he’d gotten from his boss. He did not contest at the Supreme Court that he knew he was passing along misinformation from his boss. But Lorenzo argued that under the Supreme Court’s 2011 ruling in Janus Capital Group v. First Derivative Traders, he was not responsible under the Securities and Exchange Act’s prohibition against making untrue statements.

The justices disagreed. The six justices in the majority acknowledged that Lorenzo was not liable under Janus for making false statements. But the Supreme Court said the investment banker could be held to account, under two different anti-fraud provisions, for participating in a fraud scheme and for engaging in deceptive acts.

. . .

Shareholders’ lawyers Posner of Cohen Milstein and Darren Robbins of Robbins Geller Rudman & Dowd agreed that Lorenzo liability theories will be the exception, not the rule. Robbins told me the Supreme Court decision gave teeth to the idea of scheme liability and may embolden shareholders’ lawyers to assert claims against defendants previously considered untouchable abettors. But he pointed out that shareholders will still have to establish that defendants who distributed false information intended to deceive investors – a point Lorenzo conceded at the Supreme Court.

Posner is actually litigating a class action alleging scheme liability and deceptive acts – the rules Lorenzo violated – against Credit Suisse. The law on these theories has been relatively underdeveloped, she said, and investors may, in isolated cases, decide it makes sense after Lorenzo to allege them. Posner predicted, however, that the Supreme Court’s ruling will be more useful to regulators than to securities class action plaintiffs.

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