Second Circuit: Intent to Harm Is Not Required for Criminal Conviction Under Investment Advisers Act
The U.S. Court of Appeals for the Second Circuit yesterday affirmed the fraud conviction of a registered investment adviser and held that proof of intent to harm is not an element of a criminal conviction under section 206 of the Investment Advisers Act of 1940, 15 U.S.C. §80b-6 (“IAA”). The court’s decision in U.S. v. Tagliaferri, No. 15-536 (2d Cir. May 4, 2016), distinguished between willfulness – the defendant’s knowledge that his or her conduct was unlawful – and intent to harm the victim of the crime.
The defendant investment adviser had been convicted of investment-adviser fraud, securities fraud, multiple counts of wire fraud, and multiple counts of violating the Travel Act in connection with a multi-year multi-million-dollar scheme to defraud his advisory clients. The jury concluded that the adviser had (a) accepted undisclosed compensation in exchange for causing his clients to invest in certain securities, (b) used client funds for illegitimate purposes, and (c) caused false and fictitious securities instruments to be placed in client accounts.
The adviser had testified during trial about his investment decisions and his characterizations of the fees he had received. While acknowledging that the fees had posed a conflict of interest and should have been disclosed to his clients, he argued that each investment had been based on his “good faith belief that it was in the clients’ best interests.”
The defense sought a jury charge requiring not only “intent to deceive” but also “intent to harm.” The prosecution, in turn, argued that section 206 of the IAA employs the same standard as scienter under section 10(b) of the Securities Exchange Act of 1934, which requires only intent to deceive, not intent to harm. The District Court agreed with the prosecution and excluded “intent to harm” from the jury charge.
The Second Circuit affirmed the District Court’s ruling. The appellate court cited the Supreme Court’s decision in SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963), which had held that section 206 deviates from common law fraud and does not (i) require proof of intent to injure and (ii) actual injury to clients. The Capital Gains decision held that requiring such proof would destroy the Congressional intent behind the IAA: Congress’s respect for the special fiduciary relationship between investment advisers and their clients, and Congress’s intent to prevent all conflicts of interest that might encourage an investment adviser to provide advice that is not disinterested.
The Second Circuit also turned to the Supreme Court’s decision in Aaron v. SEC, 446 U.S. 680 (1980), which had examined section 17(a) of the Securities Act of 1933, an anti-fraud statute, and had concluded that section 17(a) does not require fraudulent intent.
The Second Circuit therefore concluded that, “[b]ecause the wrongfulness of section 206 violations derives from [the investment adviser’s] deceptiveness, proof that the defendant intended to deceive his clients suffices to establish the requisite mens rea for guilt.” Accordingly, the court found no error in the District Court’s jury instructions, which had required only intent to deceive and not intent to harm.