Disseminating false statements: online platforms and the Lorenzo case

Online securities platforms should be paying attention to the Lorenzo case, which the Supreme Court decided last month concerning the scope of Rule 10b-5 fraud liability.

The case involved a broker who sent out a couple of emails at the direction of his boss. The boss created the content of the emails and approved them. All Mr. Lorenzo did, in effect, was add his name and press send. But he knew that there were misstatements in those emails.

It’s already clear that anyone who makes a false statement (and there’s another Supreme Court case that explains what it means to “make” a statement that online platforms should be aware of) is liable under the anti-fraud rules of federal securities law. But now it’s equally clear that even if you don’t make the statement but only disseminate it, you are also liable. This could come in the form of sending out an email, posting the statements online, sending out tweets or other social-media linking to the statements, etc.

Lawyers will say “Yeah, but you need scienter,” and yes, you do need scienter, or bad intent, to establish a claim under the rule that Lorenzo is interpreting. So yes, the person who knew of the false statements but still disseminated would have the required bad intent. But that “bad intent” can include reckless conduct when the person should have known of the false statement as well.

So here’s how this might work out. Arya is a marketing person at Braavos Crowdfunding. Arya is given some copy to include in an email that describes Second Sons Dispute Outsourcing, Inc. The copy comes from the company itself and refers to the Second Sons as “undefeated.” Arya says to herself “I’m sure that’s not right, didn’t their leader get eaten by a dragon last year?” But she’s on deadline and she can’t be bothered to check, so she sends it out anyway. Arya, and her employer, Braavos Crowdfunding, are likely going to be liable for dissemination of that misstatement. They may be able to point to statements in emails and on Braavos’ website that state that Braavos is merely passing on information from the issuer, but will that work? Uncertain.

In any case, the sure method to prevent this type of liability is to actually confirm that the statements being disseminated are true.

Join CrowdCheck

More Blogs