By Anne Sherry, J.D.
A petition for certiorari questions whether, absent fraud or deception, statements criticizing a public company are sheltered by the First Amendment. The SEC successfully charged the petitioner, a priest who is also a hedge fund adviser, with conducting a short-and-distort scheme by making false statements intended to shake investor confidence in a company he had shorted. The petitioner now appeals the First Circuit’s affirmance given that the jury did not find a “device, scheme, or artifice to defraud” (Lemelson v. SEC, July 31, 2023).
Action below. The Commission charged hedge fund adviser Gregory Lemelson and his investment advisory firm, Lemelson Capital Management, with scheming to drive down the price of a pharmaceutical company's stock. In May 2014, Lemelson took a short position in Ligand Pharmaceuticals Inc. on behalf of a hedge fund he advised and partly owned. According to the SEC, after establishing his short position, Lemelson made a series of false statements intended to lower Ligand’s stock price and increase the value of his position. By October 2014, Lemelson had covered his short position and generated approximately $1.3 million in illegal profits.
The jury returned a verdict in favor of the SEC, and the Massachusetts district court ordered a civil penalty and five-year injunction. On appeal, the First Circuit determined that Lemelson’s statements were not entitled to First Amendment protection because they were not opinions, but rather facts that were contradicted by a company’s SEC filings.
Lemelson sees the matter differently. In his view, he issued detailed short-seller reports in which he fully disclosed his short position and disclaimed the report’s accuracy while also explaining why Ligand’s stock had no intrinsic value. In response to the criticism, Ligand successfully lobbied the SEC to investigate and prosecute the matter. Despite rejecting the SEC’s fraud allegations, the jury found that one sentence and two sentence fragments constituted “untrue” statements or omissions of material fact made “intentionally or recklessly.” On this basis, the district court held Lemelson liable under the Exchange Act.
Petition. In the petition for certiorari, Lemelson asks whether, absent proof of fraud or deception, the First Amendment protects a securities market participant from enforcement action for intentionally or recklessly making untrue statements or omissions of material fact while criticizing a public corporation. The petition also asks if, again absent proof of fraud or deception, untrue statements or omissions of material fact constitute a “manipulative or deceptive device or contrivance” under the Exchange Act.
First Amendment argument. Lemelson argues that the First Circuit decision conflicts with Supreme Court precedent on the First Amendment in three ways.
First, the petition argues that even factual misstatements are protected by the First Amendment, and that this protection “is especially critical when the government cherry-picks for prosecution and punishment a few isolated factual statements from a voluminous trove of opinionated and otherwise factually accurate commentary on a matter of public interest.”
Second, abridgements of free speech require clear and convincing evidence of falsity and intentionality. The First Circuit evaded this requirement by deferring so strongly to the jury verdict in the case. Finally, Lemelson’s speech fell outside any fraud exception to First Amendment protection because the jury specifically found that Lemelson’s statements did not operate as a fraud, and the jury instructions excused the SEC from having to prove several elements of a common-law fraud claim.
According to Lemelson, federal securities regulation particularly needs the Court’s guidance because the SEC is “largely in the business of regulating speech.” The Supreme Court has not addressed the interplay between securities regulation and free speech in nearly four decades, and this case presents an overdue opportunity to do so again.
Securities law argument. Furthermore, the petition maintains that Exchange Act Section 10(b) and Rule 10b-5 do not reach false statements that are not fraudulent. On its face, Section 10(b) prohibits “manipulative or deceptive devices or contrivances”—whereas Securities Act Section 17(a) does prohibit obtaining money or property by means of false statements or omissions. This difference is an indication that Congress meant the Exchange Act provision to prohibit conduct and not speech. Although Rule 10b-5 does make it unlawful to make false statements or omissions, the rule cannot expand liability for conduct that is not prohibited by the enabling statute.
Lemelson characterizes this case as the flip side of Lorenzo v. SEC (U.S. 2019), where the Court held that someone who did not “make” an untrue statement could still be penalized for disseminating it as part of a fraudulent scheme. Here, the SEC proved only the “making” of the untrue statement and not the fraudulent scheme.
The case is No. 23-98.