Securities Regulation Daily Intent to harm not required to sustain adviser’s fraud conviction
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Wednesday, May 4, 2016

Intent to harm not required to sustain adviser’s fraud conviction

By Amy Leisinger, J.D.

A Second Circuit panel affirmed a judgment finding an investment adviser guilty of several securities-related offenses, including criminal violations of Advisers Act Section 206. The panel found that the district court did not err in declining to instruct the jury that adviser fraud requires proof of intent to harm clients. The focus of a criminal charge under this provision is on the willfulness of the violation, not on whether the defendant actually thought the conduct would harm investors, according to the panel. The court rejected the defendant’s other arguments for reversal in a separate summary order (U.S. v. Tagliaferri, May 4, 2016,per curiam).

Criminal charges. In 2007, the government found that the adviser: (1) received kickbacks for investing his clients’ assets with certain companies without disclosing the payments to his clients or to the SEC; (2) engaged in cross-trades between client accounts not permitted under the firm’s policy, sometimes generating fees for himself; and (3) creating fake notes to justify an investment termed as a loan and using cross-trades to cover the notes as necessary.

The government arrested and indicted the investment adviser in February 2013, and, at trial, the defense case rested on the adviser’s testimony that each investment made was made based on good faith and in his clients’ best interests and that he “believed that he would be able to work things out so that his clients would not be harmed.” The court declined to include jury instructions referencing proof of “intent to harm” above and beyond “intent to deceive.” The jury convicted the adviser of one count of investment adviser fraud, one count of securities fraud, and several counts of wire fraud and violations of the Travel Act, and the district court sentenced him to 72 months.

No intent to harm required. On appeal, the adviser challenged the sufficiency of the evidence and certain jury instructions, including the one failing to denote proof of intent to harm. The Advisers Act allows for criminal penalties against anyone who “willfully violates” its provisions or any SEC rule, the panel noted, and the U.S. Supreme Court has held that Section 206 does not require proof of intent to injure or actual injury. The adviser is correct that penal statutes should be strictly construed, the panel found, but this does not imply that criminal enforcement should involve an additional element. The court found that, to demonstrate willfulness, the prosecution only needs to show a realization by the defendant that he was doing something wrong and that the district court did not err in presenting instructions that investment adviser fraud required only intent to deceive.

Other arguments. In a separate summary order, the appellate panel addressed the remainder of the adviser’s arguments and found no reversible error. The panel found that the evidence-sufficiency and jurisdiction challenges to his Travel Act convictions were forfeited below and that, in any case, the district court’s findings do not show any plain error. The panel also rejected the adviser’s challenge to the instruction that the jury could find intent to harm for wire fraud purposes on a theory that he provided fraudulent information that deprived investors of the “right to control” their money. This theory was not unconstitutionally vague and did not involve a constructive amendment to the indictment, the court concluded.

The case is No. 15-536.

Attorneys: Jason H. Cowley, Assistant U.S. Attorney, for the United States. Matthew W. Brissenden (Matthew W. Brissenden, P.C.) for James Tagliaferri.

Companies: TAG Virgin Islands

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