Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-05-05433/USCOURTS-caDC-05-05433-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

---

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 16, 2006 Decided February 6, 2007

No. 05-5433

SECURITIES AND EXCHANGE COMMISSION,

APPELLEE

v.

WASHINGTON INVESTMENT NETWORK AND

ROBERT RADANO,

APPELLANTS

Appeal from the United States District Court

for the District of Columbia

(No. 02cv01506)

Russell G. Ryan argued the cause for appellants. With him

on the briefs was Bradley H. Cohen.

Mark R. Pennington, Assistant General Counsel, Securities

& Exchange Commission, argued the cause for appellee. With

him on the brief were Brian G. Cartwright, General Counsel,

and Jacob H. Stillman, Solicitor.

Before: GINSBURG, Chief Judge, and TATEL and BROWN,

Circuit Judges.

Opinion for the Court filed by Circuit Judge BROWN.

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 1 of 24
2

BROWN, Circuit Judge: Appellants ask us to reverse the

district court’s finding that appellant Washington Investment

Network (“WIN”) violated sections 203(f), 206(1), and 206(2)

of the Investment Advisers Act of 1940 (the “Act”), 15 U.S.C.

§§ 80b-3(f), 80b-6(1), and 80b-6(2), and that appellant Robert

Radano aided and abetted those violations. Appellants also seek

to vacate the district court’s injunction and reverse the

imposition of penalties. Because the district court’s factual

findings are not clearly erroneous, and because we find no error

of law, we uphold the district court’s finding of violations. We

remand the case to the district court so it may craft a more

narrow injunction. Appellants have forfeited their objection to

the imposition of penalties.

I

This case revolves around the business dealings of Steven

Bolla, Robert Radano, and their company, Washington

Investment Network (WIN). WIN was, at relevant times, a

registered investment advisor. Bolla was not actually a legal

owner of WIN—rather, Radano and Bolla’s wife were the

owners—but the evidence indicates Bolla was the principal

figure directing WIN’s activities, and Bolla’s wife played a

relatively minor role. Moreover, ownership of WIN had little

practical significance. WIN had no capital assets; it was

essentially an empty shell Radano and Bolla used to do business

under a corporate name. When money came into WIN, it was

distributed to Bolla, Radano, and others with whom Bolla and

Radano had fee-sharing agreements. According to the Securities

and Exchange Commission (“SEC”), Bolla designated his wife

as co-owner of WIN (rather than himself), because Bolla was

under SEC investigation.

Radano and Bolla’s business involved locating investors

and referring them to Lockwood Financial Services. Lockwood

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 2 of 24
3

is a third-party administrator serving several well-regarded

money managers. Lockwood acts as the intermediary between

the money managers and investors. Specifically, Lockwood

offers investors a service called a “wrap” account, which allows

several investors to combine their funds to meet the high

minimum-investment requirements of the money managers.

Lockwood administers these accounts, but to attract investors,

it relies primarily on referrals from investment advisers like

WIN.

According to Lockwood’s business model, the investment

adviser determines the individual investor’s specific investment

priorities and directs the investor to the Lockwood money

managers best suited to the investor’s objectives. The investor

then enters into a direct contractual relationship with Lockwood,

and Lockwood begins paying fees to the investment adviser.

Fees are generally calculated as a percentage of the total assets

the investor places in Lockwood’s control, and they are

deducted directly from the investor’s investment account.

Investment advisers are also obligated to remain in regular

contact with the investor and to monitor the investor’s account,

ensuring the investor’s portfolio remains consistent with his or

her investment objectives. Lockwood continues paying

quarterly fees to the investment adviser from the investor’s

account as long as the investor has assets under Lockwood

management.

Bolla and Radano received fees attributable to the assets

each respectively had brought to Lockwood, though it appears

Radano trusted Bolla to make the division. Over the course of

several years, Bolla channeled $30-40 million in assets to

Lockwood, and by the summer of 2000, he was receiving about

$150,000 per year in fees. Radano had brought much less

money to Lockwood, and his fee-sharing arrangements with

third parties were not as favorable to him. Therefore, he

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 3 of 24
4

received only about $10,000 per year in fees.

Bolla personally handled most of WIN’s financial affairs.

For example, though WIN was listed as the investment adviser

in Lockwood’s records, when Lockwood paid fees to WIN, it

mailed the check to Bolla, and Bolla deposited the fees in an

account under his exclusive control, opened under the name

“Steve M. Bolla DBA Washington Investment Network.” Bolla

would then disburse funds from this personal account to pay

Radano his portion of the fees, with Bolla making the fee-split

determination unilaterally. Bolla used the same account to pay

many of his personal obligations including his mortgage and his

wife’s credit card.

On March 20, 2000, Bolla entered into a settlement with the

SEC in regard to the ongoing investigation, not related to WIN

or Radano; he signed a consent to entry of a judgment against

him. On June 19, 2000, the federal district court entered a

judgment in that unrelated case, enjoining Bolla from violating

certain securities laws. The next day, the SEC issued an order

barring Bolla from the investment advisory business. During the

months leading up to this bar order, Radano knew it was likely

and did nothing to disassociate himself (and WIN) from Bolla.

When the bar order issued in June of 2000, Radano learned

of it almost immediately and contacted Lockwood within a

month or two to report the change in circumstances and to

establish himself as the new recipient of WIN fee payments (for

both his own and Bolla’s clients at WIN). Radano apparently

hoped to take over some (if not all) of Bolla’s lucrative book of

business, but because Lockwood had Bolla listed as the “rep”

for all WIN accounts, it refused to accept Radano as the new

WIN representative without written letters of authorization from

each individual investor. Radano testified this impasse with

Lockwood came as a complete surprise to him. He expected

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 4 of 24
5

Lockwood to switch the WIN accounts to his name on the basis

of a simple telephone call, and he thought little more was

necessary to disassociate both himself and WIN from Bolla.

Radano got letters of authorization from his own clients, but

he had a much harder time getting letters from Bolla’s clients,

in part because he lacked the necessary contact information.

Eventually he succeeded, at least with some of Bolla’s clients,

and he established himself as the “rep” for WIN accounts.

Because of the delay, Lockwood continued to send WIN’s

quarterly fee payments to Bolla for at least two quarters after the

June 20, 2000 bar order. Bolla did not forward these fee

payments unopened to Radano, thereby distancing himself from

WIN and the investment advisory business; instead, Bolla

continued to manage WIN’s financial affairs, depositing the fee

payments in his personal account, paying WIN’s expenses, and

disbursing a portion of the fees to Radano. In addition, Bolla

refused to transfer control over the bank account to Radano, and

he continued to give investment advice to WIN clients.

During this period, Radano continued to consult Bolla about

WIN’s affairs. For example, Radano sought Bolla’s assistance

in persuading Lockwood to transfer the WIN accounts to

Radano’s control. In addition, when Bolla’s clients continued

to call Bolla seeking investment advice, Bolla contacted Radano

and in some cases gave instructions as to the needs of these

clients. Bolla characterized these contacts as merely a matter of

handing off these calls to Radano, but Bolla also instructed

Radano about the payment of certain WIN expenses,

instructions Radano then followed. Most important, when

Radano began receiving WIN fee payments from Lockwood, he

forwarded a portion of one of the fee payments (roughly $2,700)

to Bolla’s wife. This payment, which Radano made eight

months after the bar order, was exactly fifty percent of the

investment adviser fees attributable to each of several clients

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 5 of 24
6

during the previous quarter, many of whom were formerly

Bolla’s clients. Radano characterized this payment as an

appropriate payment of investment adviser fees to Bolla’s wife

who was herself an investment advisor, but he conceded she

performed only clerical duties for WIN and had not previously

received fee payments for her services. Bolla did not suggest

the payment was for services his wife had provided; rather, he

asserted it was a reimbursement to him for accumulated

expenses he had incurred over several years, including moving

expenses. Bolla also said the payment was a fair settlement—a

“cleaning up”—of what was owing to him: “I built a

company . . . I think that WIN owed me that.”

During the months after the bar order, Radano was evasive

in some conversations with Bolla’s clients, avoiding specific

descriptions of Bolla’s situation. Radano did not always make

clear the SEC had barred Bolla from the investment advisory

business, instead making vague comments that Bolla “was no

longer with WIN,” “was out of the business,” or was “going to

pursue more of the insurance angle.” When one of these clients

specifically asked about the bar order (having learned of it from

an independent source), Radano downplayed the significance of

the order, saying it related to a bankrupt company in California

and had nothing to do with WIN.

II

The SEC brought this action against Bolla, Bolla’s wife,

Radano, and WIN, asserting Bolla continued to act as an

investment adviser after he was barred from the investment

advisory business and did so in association with WIN and

Radano. Bolla and his wife settled, and the matter proceeded to

a bench trial against WIN and Radano. The SEC asserted WIN

violated sections 203(f), 206(1), and 206(2) of the Act by

allowing Bolla to continue to associate with the firm and failing

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 6 of 24
7

to disclose Bolla’s bar, and it asserted Radano aided and abetted

those violations. Section 203(f) of the Act prohibits investment

advisers from associating with parties they know to have been

barred from the investment advisory business. 15 U.S.C. § 80b3(f). Sections 206(1) and 206(2) prohibit investment advisers

from “defraud[ing] any client or prospective client,” id. § 80b6(1), or “engag[ing] in any . . . practice . . . which operates as a

fraud or deceit,” id. § 80b-6(2).

The district court made findings of fact substantially

consistent with the summary of evidence related above;

however, the court expressly found Radano’s testimony lacked

credibility, and the court even found Radano fabricated evidence

in support of his claim he severed ties between WIN and Bolla’s

wife in July 2000. The district court sustained the SEC’s

charges and issued an injunction barring WIN and Radano from

future violations of sections 203(f), 206(1), and 206(2) of the

Act. It also imposed a penalty of $15,000 against Radano and

$50,000 against WIN. SEC v. Bolla, 401 F. Supp. 2d 43, 75

(D.D.C. 2005).

III

A

“In all actions tried upon the facts without a jury . . . [the

trial court’s f]indings of fact, whether based on oral or

documentary evidence, shall not be set aside unless clearly

erroneous, and due regard shall be given to the opportunity of

the trial court to judge of the credibility of the witnesses.” FED.

R. CIV. P. 52(a). To satisfy this standard the district court’s

findings need only be plausible. Anderson v. City of Bessemer

City, 470 U.S. 564, 573-74 (1985). The district court’s

conclusions of law are subject to de novo review. United States

v. Microsoft Corp., 253 F.3d 34, 50-51 (D.C. Cir. 2001). We

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 7 of 24
8

review the decision to grant an injunction for abuse of

discretion. SEC v. Banner Fund Int’l, 211 F.3d 602, 616 (D.C.

Cir. 2000).

B

Appellants first argue WIN was not an investment adviser

as that term is defined in section 202(a)(11) of the Act. As

relevant here, section 202(a)(11) defines “[i]nvestment adviser”

as “any person who, for compensation, engages in the business

of advising others . . . as to the value of securities or as to the

advisability of investing in, purchasing, or selling securities, or

who, for compensation and as part of a regular business, issues

or promulgates analyses or reports concerning securities.”

15 U.S.C. § 80b-2(a)(11). Appellants contend WIN acted

primarily as a referral service for Lockwood, receiving what

amounted to a finder’s fee, and they minimize any role WIN

played in giving investment advice. This claim, however, is

refuted by the evidence, including Radano’s own testimony,

which shows WIN had an obligation to advise new clients

regarding various investment options and a continuing

obligation to monitor each client’s investment account. For

example, Radano testified WIN’s continuing duties after a client

had set up an account with Lockwood included “[e]nsuring

that . . . the integrity of the account remained,” “ensur[ing] that

the account . . . was still consistent with risk parameters, goals

and objectives,” and “mak[ing] sure [the account] was on track

and consistent.” Radano further testified the quarterly fee

payments WIN received were in exchange for these ongoing

account monitoring obligations. At his deposition, which the

district court also considered in making its findings, Radano

specified that, if a client’s account ceased to be consistent with

the client’s needs, “[c]hanges would be made in terms of

management, in terms of allocation between stock and bond.”

Moreover, Radano executed WIN’s March 22, 2000 application

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 8 of 24
9

to the State of Connecticut for an “investment adviser

registration.” In that application, WIN stated it “reviewed

[client statements] monthly for accuracy” and completed client

profiles “annually to allow account objectives to adjust to any

changes in client goals or risk tolerances.” WIN also stated its

fee was “[f]or overall portfolio management, portfolio

allocation, manager selection and personalized account

services.” Finally, WIN described its business as follows:

Applicant offers advice to clients about other outside

unaffil[i]ated investment advisors through a wrap account

program. Applicant develops a detailed investment profile

about each client prior to manager selection. Applicant’s

advice to clients consists of asset allocation and assistance

in the selection of investment managers for account

assets. . . . Applicant monitors all selected investment

managers on an ongoing basis for investment returns, sector

analysis, investment process and investment objectives.

All of this evidence leaves no doubt WIN had an ongoing

obligation to give investment advice and did not merely act as

a referral service.

Because WIN’s business entailed advising clients in

choosing among different investment managers who had distinct

investment styles, and because it also advised clients in regard

to “asset allocation,” we think WIN’s activities easily fall within

the Act’s definition of investment adviser. As the district court

found, WIN’s business of selecting particular investment

managers in lieu of others had the effect of channeling client

funds to particular security investments. Indeed, if this were not

so, then there would have been no point in making

“[c]hanges . . . in terms of management” and “allocation” when

an account ceased to be consistent with a client’s needs. In

short, we cannot say the district court’s factual conclusions were

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 9 of 24
10

“clearly erroneous,” FED.R.CIV.P. 52(a), and we agree with the

district court that WIN’s service constituted “advising others . . .

as to the advisability of investing in, purchasing, or selling

securities,” 15 U.S.C. § 80b-2(a)(11), making WIN an

investment adviser.

C

Appellants deny WIN violated section 203(f) of the Act. As

noted, that section prohibits investment advisers from

associating with parties they know have been barred from the

investment advisory business. Id. § 80b-3(f). Specifically,

section 203(f) provides: “[I]t shall be unlawful for any

investment adviser to permit [any person as to whom a bar order

is in effect] to become, or remain, a person associated with

him . . . if such investment adviser knew, or in the exercise of

reasonable care, should have known, of such order.” Id.

(emphasis added). Section 202(a)(17) provides in relevant part:

“The term ‘person associated with an investment adviser’ means

any partner, officer, or director of such investment adviser (or

any person performing similar functions), or any person directly

or indirectly controlling or controlled by such investment

adviser, including any employee of such investment

adviser . . . .” Id. § 80b-2(a)(17) (emphasis added).

The record makes clear, as the district court found, that

Bolla continued to manage WIN’s finances after the bar order.

When Bolla received fee checks from Lockwood—checks that

belonged to WIN—he did not forward those checks unopened

to Radano; instead, he deposited the fees in his personal account,

paid WIN’s expenses, and disbursed a portion of the fees to

Radano. He even claimed, according to Radano’s testimony,

that September 30, 2000 (three months after the bar order) was

a “good break point”—a good time, that is, for Radano to take

over the finances at WIN. In addition, Bolla refused to transfer

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 10 of 24
11

control over WIN’s bank account to Radano, and Bolla

continued to receive inquiries from WIN clients and direct

Radano as to the needs of these clients. Radano, for example,

testified Bolla “was calling me and saying client A, B, C call[,]

client so and so call. . . . He would call me and say . . . Tim[]

Riordan . . . called; Daniel Davon needs [an] IRA distribution,

call him.” Bolla also specifically instructed Radano concerning

the payment of WIN’s obligations in accordance with certain

third-party fee-sharing agreements. At trial, Radano was asked:

“[Y]ou’re still [on November 27, 2000] taking instructions from

[Bolla] on how to subdivide fees?” To which, Radano replied:

“On some level, yes, ma’am, because he’s received . . . this

check directly from Lockwood, so what I’m trying to do is make

sure that the fees are properly processed through the system.”

Similarly, Radano testified about a check he had received from

Bolla after the bar order:

This was a check that was sent out to me so that I could

send a client— . . . I don’t have a direct recollection as to

why [Bolla] sent it to me to send out to other people, but . . .

there’s a . . . deposit into the WIN . . . .

[T]hen I paid out—for whatever reason, he wanted me

to pay out, or requested that I pay someone else out fees at

that time.”

To clarify that response, counsel asked: “[Bolla] directed you to

make payments to third parties?” To which, Radano replied:

“Yes.”

Furthermore, the evidence easily supports the district

court’s finding that the $2,700 payment WIN made to Bolla’s

wife in February 2001 was a division of fees between Radano

and Bolla for the previous quarter, and this division of fees was

made at the direction of Bolla himself. This payment was

exactly fifty percent of the fees attributable to several WIN

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 11 of 24
12

clients, most of whom were Bolla’s former clients, and Bolla’s

testimony indicated the payment was really to him, and not to

his wife. If the payment were merely a reimbursement of

expenses Bolla incurred before the bar order, as Bolla suggested,

it would probably not constitute “associat[ion]” in violation of

section 203(f), but the evidence supports the district court’s

finding that the payment was actually a division of fees for a

quarter that post-dated the bar order. Moreover, Radano’s

characterization of this payment as a fee payment to Bolla’s wife

has no credibility at all in light of her limited duties at WIN and

the fact that she had never previously received payment.

This evidence makes very clear Bolla continued to be a

“person directly or indirectly controlling” WIN after the bar

order, id. § 80b-2(a)(17), and therefore the district court’s

conclusion that Bolla remained associated with WIN is not

clearly erroneous, FED. R. CIV. P. 52(a).

However, evidence showing Bolla continued his WINrelated activities after the June 20, 2000 bar order is insufficient,

by itself, to warrant a judgment against WIN and Radano. If, for

example, Bolla stole fee checks that properly belonged to WIN

and disbursed funds from those checks in contravention of

WIN’s wishes and despite WIN’s active efforts to prevent

Bolla’s actions, then WIN could not be held liable for violating

section 203(f), because WIN would not in that case have

“permit[ted]” Bolla to remain associated with WIN. 15 U.S.C.

§ 80b-3(f). WIN would then be a victim of Bolla, not an

associate. Therefore, to establish a violation of section 203(f),

the SEC needed to prove WIN took some affirmative step to

permit Bolla to associate with WIN, or at least that it acquiesced

in Bolla’s ongoing management of WIN finances such that its

passivity can be deemed a violation of section 203(f). The latter

possibility is significant here. Appellants argue the term

“permit” in section 203(f) means “authorize,” which suggests an

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 12 of 24
13

affirmative giving of permission, as when a regulatory agency

issues a license allowing a private party to engage in a regulated

activity. The SEC rejects this narrow reading of the word

“permit,” interpreting the word to mean, in effect, “acquiesce.”

We think the SEC’s reading of the statute is correct. If Congress

in adopting section 203(f) used the word “permit” to mean

“authorize,” the statute would be so narrow in scope as to be

almost silly. It is hard to imagine an investment adviser ever

actively authorizing a barred individual to take control of the

firm. The much more natural reading of the statute is that it

prohibits investment advisers from standing aside passively

while a barred individual takes control of the firm, and this is the

reading we adopt. In sum, we need to consider whether WIN

acquiesced in Bolla’s continuing control over its finances to a

degree sufficient to hold it liable under section 203(f).

As a corporation, WIN could only act through its officers,

and with the exception of Bolla himself, WIN’s only corporate

officers were Radano and Bolla’s wife. Because Bolla’s wife

did not act in an executive capacity at WIN (as all parties

concede), the focus is on Radano’s actions as managing director

of WIN during the months leading up to and immediately

following the bar order.

Radano testified in essence that he was blind-sided by the

June 20, 2000 bar order, and he immediately took action to sever

ties between WIN and Bolla, but he did not gain full control of

WIN’s finances for several months. Bolla, however, settled with

the SEC in March 2000, and Radano knew of Bolla’s problems

with the SEC long before that settlement. Moreover, Radano

conceded he knew in February of 2000 that Bolla was likely to

be barred soon; he just did not know precisely when the bar

would take effect. Radano further claims that, in his ignorance,

he thought a mere telephone call to Lockwood would cause

Lockwood to change the address on the WIN accounts to

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 13 of 24
14

Radano’s address, and with that change of address, the

necessary transition would be complete. But even if we assume

Radano was completely ignorant of WIN’s contractual

relationship with Lockwood, Radano could not very well expect

to take over Bolla’s WIN clients with neither a formal

introduction to these clients nor records of their investment

history or objectives, which remained in Bolla’s possession.

Moreover, assuming Radano could convince these clients to

remain with WIN, he could not hope to take over Bolla’s side of

the business without knowledge of Bolla’s fee-sharing

arrangements with third parties. Therefore, even if we accept

Radano’s claim, Radano had no basis for expecting to take over

control of WIN without Bolla’s cooperation. Under these

circumstances, Radano’s casual, “wait and see” approach was

simply inadequate. As soon as Radano knew the bar order was

imminent, Radano, as WIN’s managing director, should have

actively sought Bolla’s cooperation with the transition of Bolla’s

WIN clients to Radano’s oversight, and if that cooperation was

not forthcoming, Radano should have taken steps to protect

WIN and its clients.

Radano’s failure in this regard might be dismissed as mere

managerial incompetence. It rose to the level of a violation of

section 203(f) once the bar order took effect and Radano still

took no steps on behalf of WIN to prevent Bolla’s continuing

control over WIN and its finances. Because Bolla had, prior to

the bar order, held himself out as one of WIN’s managing

directors, WIN needed to take immediate steps to terminate its

relationship with Bolla. Radano’s actions as the managing

director of WIN make clear WIN did not. Radano failed to

notify the SEC that Bolla was insisting on continuing his role as

manager of WIN’s finances despite the bar order. Radano also

did not bring any legal action against Bolla on behalf of WIN,

and in fact, Radano did not even formally protest to Bolla in

writing concerning Bolla’s continuing involvement with WIN.

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 14 of 24
15

Rather, Radano was complicit in the arrangement, treating it as

part of a necessary transition, and even going so far as to make

a fee payment to Bolla on behalf of WIN.

Finally, Radano did not take formal steps on behalf of WIN

to inform WIN’s clients of the bar order, along with an

explanation of how the bar order might affect their interests and

a neutral discussion of the options these clients might have.

Such a formal notification would likely have caused WIN’s

clients either (1) to terminate their relationship with WIN, or (2)

to execute letters of authorization making Radano their selected

representative at Lockwood. In either case, notification would

have made clear WIN was not complicit in Bolla’s ongoing

involvement with WIN’s financial affairs, and it would have

satisfied WIN’s fiduciary obligations to its clients. Radano

testified he could not contact Bolla’s WIN clients because Bolla

possessed the contact information for these clients. But this

assertion does not excuse Radano’s failure to take immediate

action, as WIN’s managing director, to protect WIN’s interests.

If Bolla was refusing to release WIN’s client files and related

records, then Radano needed to initiate legal proceedings on

WIN’s behalf to obtain those files. By not doing so, he signaled

that WIN was content to allow Bolla to continue in his

traditional role as WIN’s principal. Moreover, even when

Bolla’s former clients contacted Radano, he still did not make

clear the SEC had barred Bolla from the investment advisory

business. Instead, he resorted to dodgy statements that obscured

the truth. WIN’s failure to notify its clients indicates, as the

district court found, that “Radano chose the lure of . . . potential

profit from Bolla’s book of clients over his obligations under

Section 203(f).”

In sum, the district court found Radano took no significant

actions on behalf of WIN to sever ties with Bolla during the

months following the bar order. Radano knew Bolla continued

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 15 of 24
16

to serve as the contact person for his clients, and he also knew

Bolla continued to manage WIN’s finances. He followed

Bolla’s instructions in regard to the disbursement of WIN’s fees,

and eight months after the bar order, he paid Bolla a portion of

WIN’s fees, at Bolla’s behest. Finally, he failed to inform

WIN’s clients of the bar order. In light of the evidence, these

findings are not “clearly erroneous,” FED. R. CIV. P. 52(a), and

they amply support the district court’s conclusion that WIN

permitted Bolla’s continued association with the firm in

violation of section 203(f).

D

Appellants also deny WIN violated section 206 of the Act.

Section 206 provides in relevant part: “It shall be unlawful for

any investment adviser . . . directly or indirectly—(1) to employ

any device, scheme, or artifice to defraud any client or

prospective client; (2) to engage in any transaction, practice, or

course of business which operates as a fraud or deceit upon any

client or prospective client . . . .” 15 U.S.C. § 80b-6. The

district court found WIN violated both subparagraph (1) and

subparagraph (2) of section 206 when Radano, as a

representative of WIN, spoke to Bolla’s former clients without

disclosing the bar order. In the district court’s view, Radano

hoped to attract these clients to himself, and therefore he did not

want to say anything that would cause these clients to sever their

relationship with WIN. Appellants raise several objections to

the district court’s decision.

First, appellants argue that, with few exceptions, a failure to

disclose cannot constitute a fraud in violation of section 206.

Appellants base this argument on the absence from section 206

of a failure-to-disclose provision that is included in section 17(a)

of the Securities Act of 1933. Id. § 77q(a). Section 17(a) of the

Securities Act has two subparagraphs that are almost identical

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 16 of 24
17

to the first two subparagraphs of section 206, but section 17(a)

includes a third subparagraph that makes it unlawful “to obtain

money or property by means of . . . any omission to state a

material fact” when omitting the fact is “misleading.” Id.

§ 77q(a)(2) (emphasis added). Appellants argue the absence of

this provision from the Investment Advisers Act suggests the

Act was not intended to cover inadequate disclosure of material

information, but only actual misrepresentations of fact and other

affirmative frauds.

In response, the SEC argues the two statutory schemes

cannot be compared. The Investment Advisers Act concerns

itself with investment advisers, who, as fiduciaries, have a duty

to disclose material information to clients. Because the

Securities Act applies to non-fiduciaries as well as fiduciaries,

it is more specific as regards the implications of failing to

disclose material information.

The SEC also relies on SEC v. Capital Gains Research

Bureau, Inc., 375 U.S. 180 (1963), in which the Supreme Court

made clear the failure to disclose material information can, in at

least some circumstances, provide the basis for a fraud finding

under section 206. Capital Gains considered whether an

investment adviser had a duty to disclose a practice known as

“scalping.” Id. at 181. Scalping occurs when an investment

adviser purchases shares of a security for his own account prior

to recommending the security for longterm investment and then

immediately sells the shares after a rise in the market price

following the recommendation. Id. The Supreme Court held

section 206 requires investment advisers to disclose this

practice. Id. at 181-82. Appellants argue Capital Gains is

distinguishable factually, pointing out that Capital Gains (unlike

the present case) involved multiple securities transactions made

against a background of nondisclosure. Be that as it may, we

think the better reading of section 206 is that it prohibits failures

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 17 of 24
18

to disclose material information, not just affirmative frauds.

This reading is consistent with the fiduciary status of investment

advisers in relation to their clients, id. at 191-92, 194, and it is

also more likely to fulfill Congress’s general policy of

promoting “full disclosure” in the securities industry, id. at 186.

The district court found Radano, as WIN’s representative,

was evasive in conversations with at least two of WIN’s clients

during the months following the bar order, thereby violating

section 206. Radano did not disclose the bar order to these

clients, choosing instead to offer vague comments about Bolla’s

status and then only after these clients pressed for information.

When one of these clients directly confronted Radano about the

bar order, he downplayed its significance. In this way, the court

found “Radano affirmatively misled [these clients] regarding

Mr. Bolla” and provided these clients “an inaccurate, skewed

version of WIN as an investment entity.” The district court’s

findings in this regard are supported by the clients’ testimony,

which the court found more credible than Radano’s own

testimony, and therefore these findings are not “clearly

erroneous.” FED. R. CIV. P. 52(a).

Moreover, we agree with the district court that WIN’s

evasiveness in these conversations constituted fraudulent

behavior in violation of section 206. In Capital Gains, the

Supreme Court noted that investment advisers, as fiduciaries,

have “an affirmative duty of utmost good faith, and full and fair

disclosure of all material facts, as well as an affirmative

obligation to employ reasonable care to avoid misleading [their]

clients.” 375 U.S. at 194 (citations and internal quotation marks

omitted). Certainly, in WIN’s case, this duty included

disclosing Bolla’s bar from the investment advisory business.

Bolla was not an incidental player in WIN’s business. His

clients at WIN represented WIN’s largest accounts, and his

corresponding share of WIN’s fees dwarfed that of Radano, who

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 18 of 24
19

was WIN’s only other active investment adviser. Moreover, he

personally managed WIN’s finances, and for many of WIN’s

clients, he was the face of WIN. When such a critical player in

an investment advisory firm is barred from the business on

account of misconduct, the firm has a fiduciary duty to disclose

that fact to its clients, and in particular to clients who previously

dealt exclusively with that individual.

Appellants assert Radano’s communications with WIN’s

clients were not misleading, or if they were, they did not rise to

the level of fraud. The SEC’s evidence, appellants point out,

focused primarily on conversations Radano had with only two

clients. The SEC did not establish either client lost money as a

result of Radano’s evasiveness during these conversations, and

in one of the conversations, the client already knew about the

bar order. Therefore, appellants assert, Radano’s failure to

disclose the bar order could not constitute fraud.

To obtain an injunction under section 206 against fraudulent

conduct, the SEC does not need to prove reliance on the

investment adviser’s misleading statements, nor does the SEC

need to prove injury. Id. at 192-93, 195. Rather, if an

investment adviser is likely to repeat fraudulent conduct and

future injury is reasonably foreseeable, an injunction may issue

as a prophylactic measure without the necessity of waiting until

the injury actually occurs. Id. Hence, we reject appellants’

contention that the failure of the SEC to establish injury requires

reversal here.

Appellants also argue the bar order was a matter of public

record and therefore disclosure of the bar order was

unnecessary. Appellants rely on Kapps v. Torch Offshore, Inc.,

379 F.3d 207, 216 (5th Cir. 2004), in which the Fifth Circuit

found the public availability of information relevant in a failureto-disclose case. We agree the public availability of information

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 19 of 24
20

is a relevant consideration when evaluating a party’s disclosure

obligations under the securities laws, but we do not think this

principle requires reversal here. The existence of the bar order

may have been public information, but it was not information

that was so widely disseminated that an average small investor

could be expected to be aware of it.

Finally, appellants deny Radano acted with the requisite

“intent to deceive, manipulate, or defraud,” SEC v. Steadman,

967 F.2d 636, 641 (D.C. Cir. 1992) (quoting Ernst & Ernst v.

Hochfelder, 425 U.S. 185, 194 n.12 (1976)), when he failed to

disclose the bar order to WIN’s clients, and therefore argue WIN

cannot be held liable for violating section 206(1). Similarly,

appellants deny Radano acted with the negligence required to

make out a violation of section 206(2). See id. at 643. The

district court made an express finding of intent to defraud, as

well as negligence, stating that Radano, in his dealings with

WIN’s clients, “opted to pursue the potential financial gain

resulting from easy transfers of accounts over the hard

acknowledgment that his business partner had been barred from

further practice by the regulating agency.” The court also

rejected appellants’ argument that Radano’s quick action in

informing Lockwood about the bar order established his good

faith. As the court saw it, “Mr. Radano immediately notified

Lockwood of Mr. Bolla’s bar . . . because it was in his economic

interest to separate Mr. Bolla from Lockwood as soon as

possible. In contrast, . . . Mr. Radano was reticent and reserved

[with WIN’s clients] . . . in an effort to maintain their

association with WIN . . . .” In short, the district court found

Radano, driven by self-interest, intentionally breached his

fiduciary obligations and those of WIN, “well aware that he

could potentially increase his salary fifteen-fold” by taking over

Bolla’s accounts.

The district court’s findings are amply supported by the

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 20 of 24
21

testimony of WIN’s clients, who described their conversations

with Radano and whom the court found to be more credible than

Radano. We also agree with the district court that Radano’s

denial of any intent to be evasive in conversations with WIN’s

clients is highly doubtful in light of his openness and candor in

situations where such candor served his personal interest—to

wit, with Lockwood. The district court’s findings of both intent

and negligence are not “clearly erroneous.” FED. R. CIV. P.

52(a).

E

The district court held Radano liable on an aider and abettor

theory, while holding WIN liable as the principal violator.

Radano argues the court’s findings are insufficient to support

aider and abettor liability, because the court made no express

finding that he had “knowledge of wrongdoing.” See Howard

v. SEC, 376 F.3d 1136, 1142-43 (D.C. Cir. 2004).

To be liable as an aider and abettor under sections 203(f),

206(1), and 206(2), the SEC must prove “knowledge of

wrongdoing,” id., or “a general awareness [on the part of the

alleged aider and abettor] that his role was part of an overall

activity that was improper,” Investors Research Corp. v. SEC,

628 F.2d 168, 178 (D.C. Cir. 1980). With respect to WIN’s

violation of section 203(f), Radano admits he knew of the bar

order, having learned of it almost immediately after it went into

effect. Certainly, then, he knew it was improper for WIN to

continue associating with Bolla, and the district court found

WIN continued to associate with Bolla in several ways,

including: (1) permitting Bolla to control its finances; (2)

complying with Bolla’s instructions regarding payment of its

obligations; (3) paying Bolla a portion of its fees, at Bolla’s

behest; and (4) failing to inform its clients about the bar order.

Moreover, in each instance, WIN acted under Radano’s

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 21 of 24
22

direction. Though the district court did not make an express

finding that Radano knew the wrongfulness of WIN’s

actions—that is, that they constituted improper association—the

court made such a finding implicitly. We think the record as a

whole indicates Radano, as WIN’s agent, was “general[ly]

aware[] that his role was part of an overall activity that was

improper,” id., and therefore the record adequately supports the

district court’s holding that he aided and abetted WIN’s

violation of section 203(f).

With respect to WIN’s violation of section 206, we think an

express finding that Radano had knowledge of WIN’s

wrongdoing was unnecessary because this question was

subsumed within the question whether WIN acted with the

requisite scienter. As noted, a violation of section 206(1)

requires proof of “intent to deceive, manipulate, or defraud.”

Steadman, 967 F.2d at 641 (quoting Hochfelder, 425 U.S. at 194

n.12). The district court found WIN had acted with such intent

based solely on Radano’s motives as WIN’s managing director.

In a situation like that presented here, where a small firm, acting

solely through the agency of a single individual, has

intentionally deceived, manipulated, or defrauded its clients, the

conclusion is unavoidable that the individual in question has

knowledge of the firm’s wrongdoing.

F

Appellants argue this case did not involve the sort of

repeated violations and likelihood of future violations that

warrant injunctive relief. See Steadman, 967 F.2d at 647-48.

We conclude the record adequately supports the district court’s

finding of a reasonable likelihood of future violations, and the

court therefore acted within the bounds of its discretion in

entering the injunction. Significantly, we are not presented here

with an isolated event or a violation that is technical in nature.

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 22 of 24
23

Radano’s willingness to enter into a business relationship with

Bolla though he knew the SEC was likely to bar Bolla from the

investment advisory industry, his failure to take decisive action

to distance himself and WIN from Bolla once the bar order

became imminent, his willingness to permit Bolla to continue

his control over WIN’s finances after the bar order took effect,

his payment of fees to Bolla eight months after the bar order,

and his lack of candor in conversations with WIN’s clients

(thereby putting his self-interest over that of the clients), all

strongly suggest a willfulness and a continuing pattern of

fiduciary violations that is likely to be repeated in the future.

Therefore, we uphold the injunction. However, we find the

injunction insufficiently specific.

Rule 65(d) of the Federal Rules of Civil Procedure

provides: “Every order granting an injunction . . . shall be

specific in terms [and] shall describe in reasonable detail, and

not by reference to the complaint or other document, the act or

acts sought to be restrained . . . .” The district court’s injunction

states simply: “Defendants WIN and Radano are enjoined from

future violations of Sections 203(f), 206(1), and 206(2) of the

Advisers Act.” We think this injunction fails to clarify “the act

or acts sought to be restrained,” FED. R. CIV. P. 65(d), and it

might subject defendants to contempt for activities having no

resemblance to the activities that led to the injunction, thereby

being overly broad in its reach. See SEC v. Savoy Indus., Inc.,

665 F.2d 1310, 1318-19 (D.C. Cir. 1981). We therefore remand

the case to the district court to reform the injunction and to

address the question of overbreadth.

G

The SEC’s complaint sought penalties under section 20(d)

of the Securities Act of 1933, 15 U.S.C. § 77t(d), and section

21(d)(3) of the Securities Exchange Act of 1934, id. § 78u(d)(3).

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 23 of 24
24

Appellants argue the district court erred in awarding penalties

under these provisions. In addition, Radano argues the

Investment Advisers Act does not authorize penalties against an

aider and abettor, but only against “the person who committed

[the] violation.” Id. § 80b-9(e)(1). Appellants did not raise

these issues before the district court, and therefore the issues are

forfeit. See, e.g., Albrecht v. Comm. on Employment Benefits of

the Fed. Reserve Employee Benefits Sys., 357 F.3d 62, 66 (D.C.

Cir. 2004).

IV

We affirm the district court’s judgment finding WIN

violated sections 203(f), 206(1), and 206(2) of the Investment

Advisers Act of 1940 and finding Radano aided and abetted

those violations. We also affirm the imposition of penalties on

WIN and Radano, as set forth in the district court’s judgment.

We remand the case to the district court for it to amend the

injunction to describe more specifically the act or acts sought to

be restrained.

So ordered.

USCA Case #05-5433 Document #1021347 Filed: 02/06/2007 Page 24 of 24