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From Securities Regulation Daily, March 30, 2015

SEC hears argument on who ‘made’ false statements in boiler-room emails

By Anne Sherry, J.D.

The Commission today heard two very different opinions as to whether a broker who sent an email containing false statements about an offering was culpable and deserving of a permanent industry bar, or was merely the messenger doing his boss’s bidding. Under Janus, according to the appellant, he did not “make” the statements but only sent out an email that his superior drafted. The SEC countered that the only error in the initial decision was in neglecting to impose a harsher monetary penalty (In the Matter of Francis V. Lorenzo, March 30. 2015).

Background. The appellant, Frank Lorenzo, worked as an investment banker at Charles Vista, LLC, a registered broker-dealer controlled by Gregg Lorenzo (no relation to the appellant). Charles Vista was placement agent for an offering by Waste2Energy Holdings, Inc. (W2E), a startup energy company, of $15 million in convertible debentures. W2E’s technology for converting solid waste into electricity did not work; the company was in terrible financial shape during Frank Lorenzo’s tenure at Charles Vista, and it was placed into bankruptcy in 2012.

On October 14, 2009, as the initial decision recites, Gregg Lorenzo asked Frank Lorenzo to send an email Gregg had drafted relating to the debenture offering. Gregg wanted the email to come from the Investment Banking division. Frank Lorenzo sent two nearly identical emails to two clients that day. The email began, “At the request of Adam Spero and Gregg Lorenzo, the Investment Banking division of Charles Vista has summarized several key points of the Waste2Energy Holdings, Inc. Debenture Offering.” It requested that the recipient read the offering memorandum, including risk factors, and went on to state that the offering had “3 layers of protection.” Frank Lorenzo’s signature line concluded the email, which was sent from his account. One of the two clients eventually invested $15,000 in the offering, resulting in a $150 commission to Frank.

The SEC charged Gregg Lorenzo, Frank Lorenzo, and Charles Vista with antifraud violations, alleging that all of the “3 layers of protection” promised in the emails were false. Gregg Lorenzo and Charles Vista settled. Frank Lorenzo was found liable and was permanently barred from the securities industry; the administrative law judge also imposed a cease-and-desist order and third-tier civil penalty in the amount of the investor’s loss, $15,000.

Lorenzo’s argument. Arguing for the appellant, Robert Heim offered four reasons that the initial decision should be overturned. First, under the Supreme Court’s Janus decision, Frank Lorenzo was not the “maker” of the statements for purposes of Rule 10b-5(b). Second, relying on the SEC’s decision last December in In the Matter of John P. Flannery, there was no evidence of a “course of conduct” nor evidence that the requirements of Section 17(a)(2) were satisfied because Frank Lorenzo did not receive any money or property attributable to the false statements. Third, the initial decision only addressed one of the email’s three statements. Finally, Mr. Heim argued, even if Frank Lorenzo were liable, the permanent industry bar was grossly disproportionate to the conduct at issue constituting one email sent to two people on a single day, over the course of Frank Lorenzo’s 25-year career.

Regarding the Janus argument, Chair Mary Jo White asked whether there was ever any acknowledgement by Gregg Lorenzo that he authored the emails at issue. Mr. Heim responded that the initial decision made the explicit finding that Gregg was the author, and the email itself said that it was being sent at Gregg’s request. Commissioner Michael Piwowar noted that Janus describes a speechwriter-speaker dynamic where even when a speechwriter drafts remarks, the content is still in the control of the speaker. Since Frank Lorenzo pushed send on the emails, wouldn’t he be equivalent to the speaker in this analogy? Mr. Heim said that unlike a speaker who adopts and takes credit for the words written by the speechwriter, this case is different because the email attributed the words to Gregg Lorenzo.

SEC argument. Alex Janghorbani, representing the SEC in the argument, said that the appellant’s Janus argument belies the overwhelming evidence that he purposely and consciously sent the emails from his own account over his own signature line. In fact, Mr. Janghorbani argued, the attribution line on which the appellant relied had the opposite effect: it expressly stated that it was the Investment Banking division, which Frank Lorenzo headed, that had summarized the debenture offering.

Commissioner Piwowar asked whether it was Gregg who had the “ultimate authority” for the statements under Janus. Mr. Janghorbani responded that a number of cases, including the Southern District of New York’s decision in City of Roseville, make it clear that under Janus, a statement can have more than one maker. Frank sent the email under his own signature block, Mr. Janghorbani emphasized.

The SEC attorney also addressed the arguments that under Flannery, a course of conduct was required and the respondent must have received some money or property to be liable under Section 17(a)(2). Frank Lorenzo had a commission arrangement and knew at the time he sent the emails that he would receive a percentage of any investment that resulted, and he did in fact receive a $150 commission, Mr. Janghorbani noted. In addition, Flannery found Section 17(a)(3) liability over two letters, the same number as the emails in this case.

The only error below was the penalty, in Mr. Janghorbani’s view. He stressed that this was not a case in which Frank Lorenzo simply failed to follow up on red flags; he sent emails that he knew to be false, and admitted that under oath. The emails were sent several weeks after W2E filed Forms 10-K and 10-Q disclosing that it was writing down its intangible assets. In order to send a message that such blatant lies should not be tolerated, and especially in a case where disgorgement was not requested, the penalty imposed should be a true third-tier penalty, he urged.

The SEC is taking the matter under advisement.

Attorneys: Robert G. Heim (Meyers & Heim LLP) for Francis Lorenzo. Alex Janghorbani for the SEC Division of Enforcement.

Companies: Waste2Energy Holdings, Inc.; Charles Vista, LLC

MainStory: TopStory FraudManipulation BrokerDealers Enforcement

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