By Elena Eyber, J.D.
The Supreme Court has denied certiorari for a petition asking the Court to decide: 1) absent proof of fraud or deception, does the First Amendment protect a securities market participant from being punished and enjoined by the government for intentionally or recklessly making untrue statements or omissions of material fact while criticizing a publicly traded corporation; and 2) absent proof of fraud or deception, do untrue statements or omissions of material fact, even if made intentionally or recklessly, constitute a “manipulative or deceptive device or contrivance” punishable under the Exchange Act Section 10(b) and SEC Rule 10b-5? (Lemelson v. SEC, cert denied December 11, 2023).
Enforcement actions. The SEC charged the petitioner, a hedge fund adviser and his investment advisory firm, with scheming to drive down the price of a pharmaceutical company's stock. In May 2014, the petitioner took a short position in the pharmaceutical company on behalf of a hedge fund he advised and partly owned. According to the SEC, after establishing his short position, the petitioner made a series of false statements intended to lower the stock price and increase the value of his position. By October 2014, he had covered his short position and generated $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 the petitioner’s statements were not entitled to First Amendment protection because they were not opinions, but rather facts contradicted by the pharmaceutical company’s SEC filings.
The petition. The petitioner argued the petition should be granted because the decision conflicts with this Court’s established First Amendment precedent in three distinct ways: 1) even false statements of fact are protected by the “breathing space” the First Amendment requires; 2) abridgements of free speech demand clear and convincing proof of falsity and intent and rigorous appellate scrutiny; and 3) Lemelson’s speech fell outside any “fraud” exception to the First Amendment. Next, the petitioner argued the federal securities regulation needs this Court’s First Amendment guidance. Further, the petitioner argued the Exchange Act Section 10(b) and SEC Rule 10b-5 do not reach nonfraudulent false statements. Lastly, the petitioner argued this case presents the Court with an ideal vehicle to address whether and to what extent the SEC may lawfully penalize and silence speech that analyzes and challenges the disclosures, financial health, and financial prospects of publicly traded corporations.
The SEC’s opposition. The SEC debunked the petitioner’s claims that the First Amendment protected his false statements from liability under the Exchange Act Section 10(b) and Rule 10b-5. The SEC contended the petition should be denied because the short-seller’s First Amendment claims in the petition were completely different from his First Amendment claims on appeal. Therefore, the SEC argued, because these new claims were never decided by the First Circuit, the Supreme Court would be reviewing them de novo, which is inappropriate.
Read the Docket. This case, and others before the Court, may be referenced in the latest version of the Supreme Court Docket, a regular feature of Securities Regulation Daily. Issued opinions, granted petitions, pending petitions, and denied petitions are listed separately, along with a summary of the questions presented and the current status of each appeal.
The case is No. 22-98.