Investment Adviser Fraud: Intent To Deceive Required Not Intent To Harm.
United States Court of Appeals for the Second Circuit
United States v. Tagliaferri
15-536
Decided: May 4th, 2016
Investment adviser fraud required only intent to deceive and not intent to harm.
Issue: Whether a criminal conviction premised on a violation of section 206 of the Investment Advisers Act of 1940, 15 U.S.C. 80b-6, requires proof of ‘intent to harm’.
Holding:No. The United States Court of Appeals for the Second Circuit held that they find no error in the District Court’s instructions to the jury that investment adviser fraud required only intent to deceive and not intent to harm.
Section 206 of the Act makes it unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly to engage in certain transactions, including any device, scheme, or artifice to defraud any client or prospective client, any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client, or any act, practice, or course of business which is fraudulent, deceptive, or manipulative, 15 U.S.C. 80b6.3.
The Second Circuit followed the holding of the U.S. Supreme Court, which held that section 206 departs from Common Law and does not require proof of intent to injure and actual injury to clients, SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195 (1963).
Facts: The Government arrested and indicted Tagliaferri charging him with investment adviser fraud, securities fraud, wire fraud, and multiple violations of the Travel Act. At trial, the defense case primarily rested on Tagliaferri’s testimony about how he made his investment decisions and his characterizations of the fees received. He acknowledged that the fees posed a conflict of interest and should have been disclosed to his clients but argued that each investment made was based on his good faith belief that it was in the client’s best interests.
At the charging conference, defense counsel argued to the District Court that section 206 of the Act required proof not only of intent to deceive but also of intent to harm. The Government disagreed, arguing that scienter in the context of securities fraud under section 10(b) of the Securities Exchange Act of 1934 (the 1934 Act) requires only an intent to deceive, not to harm, and the Act is so analogous as to employ the same standard.
The District Court accepted the Governments arguments and made the following charge with respect to intent to defraud: The government must prove beyond a reasonable doubt that the defendant devised or participated in the alleged device, scheme, or artifice to defraud, or engaged in the allegedly fraudulent transaction, practice, or course of business, knowingly, willfully, and with the specific intent to defraud. Knowingly means to act voluntarily and deliberately, rather than mistakenly or inadvertently. Willfully means to act knowingly and purposely, with an intent to do something the law forbids, that is to say, with bad purpose either to disobey or to disregard the law. The defendant need not have known that he was breaking any particular law or any particular statute. A defendant need only have been aware of the generally unlawful nature of his act. Intent to defraud in the context of the securities laws means to act knowingly and with the intent to deceive.
In considering whether or not a defendant acted in good faith, however, the Court instructed that a belief by the defendant, if such belief existed, that ultimately everything would work out so that no investors would lose any money or that particular investments would ultimately be financially advantageous for clients does not necessarily constitute good faith. No amount of honest belief on the part of a defendant that the scheme will ultimately make a profit for the investors will excuse fraudulent actions or false representations by him. The jury convicted Tagliaferri on twelve of the fourteen counts, including the count charging investment adviser fraud.
Legal Analysis: Section 206 of the Act makes it unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly to engage in certain transactions, including any device, scheme, or artifice to defraud any client or prospective client, any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client, or any act, practice, or course of business which is fraudulent, deceptive, or manipulative, 15 U.S.C. 80b6. The Act also authorizes the SEC to enforce its provisions through, inter alia, investigation, issuance of subpoenas, actions for injunctions in federal court, and civil damages actions, ?See id. 80b9. In addition, the Act imposes criminal penalties on anyone who willfully violates its provisions or any SEC rule or regulation promulgated thereunder, Id. 80b17.
Tagliaferri’s principal argument is that, in a criminal prosecution under 80b17, section 206 incorporates the common law requirement that intent to defraud includes both intent to deceive and intent to harm.??See, e.g., United States v. Regent Office Supply Co., 421 F.2d 1174, 118081 (2d Cir. 1970)
Here, defendant argues that his ‘intent to harm’ his clients was a necessary element of the investment adviser charge. Viewing section 206 in context, The Court concluded that intent to harm is not an element of a criminal conviction under its terms. To begin, the only textual distinction between the civil and criminal enforcement mechanisms for section 206 is the Acts requirement that a criminal defendant commit a violation willfully, 80b17. The Supreme Court has observed that while willful is a word of many meanings, its construction often being influenced by its context. When used in a criminal statute, it generally means an act done with a bad purpose,?Screws v. United States, 325 U.S. 91, 101 (1945).
This Court likewise has held in contexts similar to this one that to prove willfulness, the prosecution need only establish a realization on the 12 defendants part that he was doing a wrongful act,?United States v. Dixon, 536 F.2d 1388, 1395 (2d Cir. 1976) (Friendly, J.) accord United States v. Kaiser, 609 F.3d 556, 56770 (2d Cir. 2010).
Considering both the text of the provision and its statutory context, we cannot say that violating section 206 willfully necessarily requires intent to harm one’s clients. An investment adviser can violate this provision by engaging in one of four types of conduct:(1) a device, scheme, or artifice to defraud, (2) a transaction, practice, or course of business which operates as a fraud or deceit, (3) a knowing sale or purchase of a security to or from a client, while acting on the behalf of someone other than the client (including oneself), without disclosing the transaction and obtaining the client’s consent, or (4) an act, practice, or course of business which is fraudulent, deceptive, or manipulative.80b6,?Aaron v. SEC, 446 U.S. 680 (1980.
Examining the text in conjunction with 80b17’s requirement of willfulness does not provide any logical reason why willfully engaging in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client, 80b6(2), or willfully engaging in any act, practice, or course of business, which is fraudulent, deceptive, or manipulative, 80b6(4), requires specific intent to harm. The former is effect focused, not intentfocused, and the latter requires, at minimum, intent to deceive. To violate either provision willfully is to do so with a bad purpose, Screws, 325 U.S. at 101, or with knowledge that such conduct was unlawful, Bryan, 524 U.S. at 191.
Because the wrongfulness of section 206 violations derives from their deceptiveness, proof that the defendant intended to deceive his clients suffices to establish the requisite mens rea for guilt. Accordingly, the Court held that they find no error in the District Courts instructions to the jury that investment adviser fraud required only intent to deceive and not intent to harm.
Accordingly, the United States Court of Appeals for the Second Circuit ?held that they find no error in the District Court’s instructions to the jury that investment adviser fraud required only intent to deceive and not intent to harm.