*Hon. Betty B. Fletcher, of the Ninth Circuit, sitting by

designation.

United States Court of Appeals

For the First Circuit

No. 02-1640

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff, Appellee,

v.

MARTIN D. FIFE and FAROUK KHAN,

Defendants, Appellants.

DENNIS S. HERULA, MARY LEE CAPALBO (AKA MARY LEE CAPALBO HERULA),

SEAVIEW DEVELOPMENT & HOLDINGS, LTD., MICHAEL CLARKE, ROBERT

WACHTEL, JOHAN HERTZOG, and CHARLES SULLIVAN,

Defendants,

and 

DAVID ULLOM,

Relief-Defendant.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF RHODE ISLAND

[Hon. Mary M. Lisi, U.S. District Judge]

Before

Torruella, Circuit Judge,

B. Fletcher,* Senior Circuit Judge,

and Stahl, Senior Circuit Judge.
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Donald S. Zakarin, Pryor Cashman Sherman & Flynn LLP,

with whom Matthew F. Medeiros, Little, Bulman, Medeiros, & Whitney,

P.C. were on brief, for appellant.

Mark Pennington, with whom Giovanni P. Prezioso, Meyer

Eisenberg, and Eric Summergrad were on brief, for appellees.

November 6, 2002
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B. FLETCHER, Senior Circuit Judge. Defendants-Appellants

Martin D. Fife (“Fife”) and Farouk Khan (“Khan”) appeal the

district court’s order granting a preliminary injunction

prohibiting further violations of securities law and a freeze

against defendants-appellants’ assets and other assets in

defendants-appellants’ possession. They contend that the district

court erred and abused its discretion in finding that the

Securities and Exchange Commission (“SEC”) established a

substantial likelihood of success in proving that defendantsappellants violated the anti-fraud provisions of the federal

securities laws. We have jurisdiction pursuant to 28 U.S.C. §

1292. For the reasons stated below, we affirm the preliminary

injunction and asset freeze against Fife and Khan. 

I. FACTS AND PROCEDURAL BACKGROUND

This case arises from the alleged misappropriation of

investor funds and the alleged fraudulent offering of securities in

connection with an investment program operated by Fife through the

entities Brite Business S.A., Brite Business Corporation and

Seaview Development and Holdings, Ltd. (“Seaview”). 

A. The Investors

During 1999 and 2000, Michael A. Clarke (“Clarke”) raised

approximately $51.75 million from five investors under Brite

Business, S.A. and later through Brite Business Corporation.

Clarke promised extraordinary returns, such as generating a $20
1 The SEC formally initiated an investigation entitled In the

Matter of Brite Business Corporation on December 21, 2001. The

investigation included conducting sworn investigative depositions.

After several of these investigative depositions, the SEC filed the

present case in federal district court. 

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million dollar profit in the first twelve banking days. The five

investors, with the corresponding amounts invested, are: (1)

William Britt, a U.S. citizen who invested through his entity,

Beehive International, LLC ($10 Million); (2) Four Star Financial

Services, LLC, a U.S. entity ($11.75 million); (3) Robert Burr, a

U.S. citizen who invested through his entity, Trigon Capital ($10

million); (4) Rashad Mohamed Mahran Al Bloushi (“Al Bloushi”), an

individual from the United Arab Emirates ($7.5 million); and (5)

Rheaume Holdings, Ltd. (“Rheaume”), a British Virgin Islands entity

($12.5 million). Another investor, Malcolm Monlezun (“Monlezun”),

invested $1 million in November of 2000. 

B. Fife’s Involvement

Fife agreed to manage and invest Brite Business funds, in

return for which he would receive a commission. In the SEC

investigation, Fife testified that his duties were to “administer

the bank accounts that [he] had signatory power over and to develop

a balance sheet enhancement program with leverage[d] funds sent in

to be used for financial projects.”1 Fife’s balance sheet

enhancement program involved pooling investors’ money and then

leveraging the money by purchasing treasury bills in order to

qualify for third world development projects. The profits from the
2 The following deposits were made into the Brite account at

Raymond James: (1) In October 1999, $7.5 million of investor funds

from Al Bloushi; (2) In December 1999, $10 million of investor

funds from Beehive; (3) In March 2000, $7 million of investor funds

from Four Star; (4) In March 2000, $10 million of investor funds

from Trigon; and (5) In March 2000, $12.5 million of investor funds

from Rheaume. 

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investment in the third world development projects would then be

distributed to the investors. Fife claimed that investors would

make returns of between 30 and 100 percent per year. These

returns, however, were not guaranteed because of risks involved.

In October 1999, Fife established a brokerage account at

the Rhode Island branch office of Raymond James Financial Services,

Inc. (“Raymond James”), a securities broker-dealer, in the name of

Brite Corp. Fife was the signatory on the account, and Fife’s

acquaintance, Dennis S. Herula (“Herula”), was the designated

registered representative. Approximately $44.5 million of the

$51.75 million raised for Brite Corp. was deposited into this

account.2

Mary Lee Capalbo (“Capalbo”), an attorney and the wife of

Herula, established a separate brokerage account at Raymond James

entitled the “Mary Lee Capalbo Esq. Special Client Account”

(“Capalbo Account”). Capalbo was the signatory on this account.

Fife transferred $15.5 million from the Brite account at Raymond

James into the Capalbo Account at Raymond James. These transfers

occurred through five transactions between April 2000 and September
3 The date of the transfers with the corresponding amounts are as

follows: (1) March 31, 2000: $5.5 million; (2) April 6, 2000:

$4.5 million; (3) April 14, 2000: $4.5 million; (4) August 4,

2000: $972,318; and (5) September 18, 2000: $11,201. 

4 The following amounts were returned/paid to investors: (1)

Beehive received $10.1 million on its $10 million investment; (2)

Four Star received $7 million of its $7 million investment from the

Brite Account at Raymond James and then an additional $1.5 million

interest payment from the Capalbo account at Raymond James; (3)

Trigon received $10,000,095 on its $10 million investment; (4) Al

Bloushi received $200,000 of his $7.5 million investment from the

Capalbo Account at Raymond James; (5) Rheaume received $4,500 of

its $12.5 million investment; and (6) Monlezun received $125,000 of

his $1 million investment. 

5 According to the Raymond James account statement for Monlezun,

one million dollars was transferred out of that account in November

2000. 

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2000.3 After these transfers, $29 million remained in the Brite

Account at Raymond James under Fife’s supervision. 

Of the $29 million remaining in the Brite account at

Raymond James, $27.3 million was returned to investors.4

Approximately $20.5 million in principal plus promised return

allegedly has been lost. Al Bloushi has received only $200,000 of

his $5 million investment, and Rheaume has received only $4,500

from its $12.5 million investment.5 As of September 18, 2000, all

of the investment money under Fife’s control in the Brite Account

at Raymond James had been transferred out. The money deposited in

the Capalbo Account was used to purchase shares in a money market

mutual fund. An additional investor, Monlezun, invested $1 million

raising the total amount of investor funds in the Capalbo Account
6 This investment was transferred into the Capalbo account at

Raymond James in November 2000. 

7 From January 2000 to September 2001, Fife loaned Khan, on behalf

of Seaview, $195,000. This loan has not been repaid. 

8 In June 2000, Fife paid the Tamini Group $2.245 million for

initial fees for an enhancement program. The program was not

successful, and the money was lost. 

9 In June 2000, Fife loaned Sullivan $350,000 of investors’ money

for personal needs. This loan was not repaid. 

 

10 In August 2000, Fife paid Puffin $2 million for initial fees for

an enhancement program. Puffin was a fraud and the money was lost.

11 In addition, Four Star received an additional $1.5 million

interest payment from the Capalbo Account at Raymond James. 

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at Raymond James to $16.5 million.6 Monlezun received only

$125,000 from his $1 million investment. 

From June 2000 to November 2000, $8 million of Brite

investor funds was paid to various entities including Seaview7,

Tamini8, Sullivan9, Puffin10, Brite, Commonwealth, Four Star11, and

Al Bloushi. Additional transfers in the amount of $8.6 million

were made to the Mary Lee Capalbo “Special Client Account” at

Citizens Bank. 

C. Rheaume Agreement

Brite entered into an agreement in March 2000 with

Rheaume Holdings (“Agreement”). The Agreement stated that “‘Brite’

will attempt to pay benefits on a best efforts basis at a minimum

average over a 90 day period of 10% per week of the amount

invested.” According to the Agreement, the first payment should
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have occurred twelve international banking days from the receipt of

Rheaume’s deposit by Raymond James. 

On May 8, 2000, Fife wrote a letter to Rheaume ensuring

“the safety, security, monitoring and auditing of our client funds

is and always will be my primary function. So without hesitation

I state to you that absolutely your deposit is safe, secure,

unencumbered, will not be invested without your authorization, can

not be moved, or withdrawn without your approval.” With regard to

the enhancement program, Fife stated, “I myself have been

successful for the past six months doing the same placement of

funds.” The letter further represented that there would be “no

risk of loss” and that Rheaume would receive benefits from its

investment in the next two weeks.

Almost immediately after Rheaume’s investment was in

Fife’s control, Fife began transferring funds from the Brite

Account at Raymond James into the Capalbo Account at Raymond James.

These funds were transferred without Rheaume’s knowledge or

authorization. The funds in the Capalbo Account were invested in

securities without Rheaume’s knowledge or authorization, and funds

in the Capalbo Account were thereafter transferred into another

Capalbo Account at Citizen’s Bank without Rheaume’s knowledge or

authorization. Moreover, Fife no longer had direct control over

the investments since he was not a signatory on the accounts. 

In July 2000, Robert Curl (“Curl”), Rheaume’s
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representative, requested a report of the balance in Rheaume’s

account. Fife forwarded letters from Herula to Curl on Raymond

James letterhead reporting Rheaume’s investment plus accrued

interest in the Brite Account at Raymond James. However, these

reports were false since the funds in the Brite Account were nearly

depleted. After several months, Curl requested the return of

Rheaume’s funds. Fife told Curl that the money could not be

returned because Raymond James worried about large sums of cash

coming in and going out of an account in a short period of time.

This statement was false. 

A few months later, Fife suggested to Rheaume that it

transfer its $12.5 million investment plus accrued interest in the

Brite Account at Raymond James to an account at Charles Schwab in

order to facilitate a “swift return.” In December 2000, Fife

advised Curl that the money was transferred to a Capalbo Account at

Charles Schwab. Charles Schwab account statements were forwarded

to Rheaume by Fife. 

Throughout 2001, Fife, Herula, and Capalbo sent Curl

forged Charles Schwab account statements showing upwards of $59

million in the account. Curl was told that Rheaume’s investment

plus accrued interest was now pooled with other investor funds in

the Capalbo Account at Charles Schwab, and these funds would

eventually be transferred to Fife’s trading program at Seaview.
12 In 2001, Rheaume’s money had already been moved at least

twice without authorization. Moreover, there was no activity in

the Capalbo Account at Charles Schwab from January 2001 to April

2001. 

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These funds, however, were never moved to Charles Schwab.12 

After these funds were allegedly placed in the Charles

Schwab account, Curl again requested the return of Rheaume’s funds.

Fife then advised Curl that the National Association of Securities

Dealers (“NASD”) had frozen the account. The NASD, however, never

froze this account. Fife offered to use Rheaume’s money in other

finance deals once the NASD released the money in the Charles

Schwab Account. Fife stated that he would be able to use Rheaume’s

money to generate excellent returns on other project finance deals.

D. Seaview

Khan and Fife were business partners in Seaview. Seaview

was loaned $195,000 of Brite’s investor money from Fife. Seaview’s

start-up costs were obtained from Brite. When Brite dissolved,

Brite’s money was moved into an account at Seaview. Seaview

offered the same type of balance sheet enhancement program that

Fife envisioned for Brite’s investors. 

E. Khan’s Involvement

Khan engages in project financing and project development

work. As Fife’s partner at Seaview, Khan engaged in various tasks

on behalf of the entity. Khan wrote a letter to Herula describing

the “investment program” regarding the leveraging of monies. Once
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leveraged through balance sheet enhancement, the money would be

used towards project finance. Khan signed several letters directed

to potential investors in the balance sheet enhancement program.

The SEC claims that these letters were intentionally aimed to

mislead potential investors. There is no proof that these letters

were mailed; however, a similar proposal was mailed to Al Bloushi,

one of Brite’s investors. 

In December 2001, Khan sent letters to Al Bloushi and his

representative in an attempt to convince Al Bloushi to invest

additional funds in the amount of $100 million dollars in a private

placement project finance program. One letter promised that Al

Bloushi would receive a guaranteed return of 7% per year, without

any risk. In addition, Al Bloushi would receive a reward for

holding the investment for a year and a day. This reward included

a 20% return on the 30th day of the trading cycle and an 80% return

on the investment that was to be paid in four installments of 20%

each. 

In the SEC investigation, Khan testified that he told Al

Bloushi’s representative that if an investment were made, he was

guaranteed a return. This representation was material since

project finance is very risky. If a project finance investment

fails, then the investor receives nothing. Khan testified that

“[t]he risks are high, the rewards are high. There’s a risk/reward

relationship on every, every transaction. There’s tremendous
13 The Defendants include the following individuals: Michael

Clarke, founder of Brite Business, S.A., a British Virgin Islands

Corporation; Charles W. Sullivan, incorporated Brite Business

Corporation in Delaware in 1999; Johan C. Hertzog, represented to

clients that returns on investments would be extraordinary; Robert

M. Wachtel, the U.S. representative of Brite Business, solicited

Brite Business investor Rheaume; Martin Fife, identified himself as

President of Brite Business Corporation and managed investor funds;

Khan; Dennis S. Herula, a registered representative at Raymond

James from August 1999 until January 2001; Seaview Development and

Holdings, Ltd., a private business incorporated by Fife and Khan to

administer balance sheet enhancement programs; and Mary Lee

Capalbo, Herula’s wife, the attorney in control of Brite investor

funds. 

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amount of risks involved: there’s tremendous amount of rewards to

be made. The investor has to be a sophisticated investor.”

Although Khan testified that he informs investors of the risks of

project finance, these risks were not included in the project

proposal sent to Al Bloushi. 

F. Procedural Background

The SEC filed this action alleging that nine defendants,

including appellants Fife and Khan, violated section 10(b) of the

Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and SEC Rule

10b-5 promulgated thereunder, 17 C.F.R. 240.10b-5; section 17(a) of

the Securities Act of 1933, 15 U.S.C. § 77q(a); and, as against

Fife individually, section 206 of the Investment Advisers Act, 15

U.S.C. § 80b; requesting disgorgement of the defendants’ “illgotten gains”; and requesting the imposition of a civil monetary

penalty.13 The SEC requested an ex parte preliminary injunction to

prohibit defendants from further violations of the federal
14 Ullom acquired Brite Business investor funds in return for no

services being performed. 

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securities laws as alleged in the complaint, and an order freezing

defendants’ assets and other assets in defendants’ possession, as

well as $190,000 held by relief defendant David L. Ullom.14 The

district court granted the preliminary injunction and asset freeze

as to defendants Herula, Capalbo, Fife, Khan, and Seaview. The

court found that Fife and Khan were the alter egos of Seaview.

This appeal ensued.

II. STANDARD OF REVIEW

We review the grant or denial of a preliminary injunction

for abuse of discretion; legal issues are reviewed de novo, and

findings of fact are reviewed for clear error. Lanier Prof’l

Servs. v. Ricci, 192 F.3d 1, 3 (1st Cir. 1999). 

III. DISCUSSION

The SEC has authority under the Securities Exchange Act

to bring an action in district court to enjoin individuals from

engaging “in acts or practices constituting a violation of any

provision” of the securities laws. 15 U.S.C. § 78u(d). In Aaron

v. SEC, 446 U.S. 680 (1980), the Supreme Court stated that the

district court shall grant such an injunction “upon a proper

showing.” Id. at 689. The requisite elements of “a proper

showing” include, “at a minimum, proof that a person is engaged in

or is about to engage in a substantive violation of either one of
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the Acts or of the regulations promulgated thereunder.” Id. at

700-01. 

In this circuit, a preliminary injunction may be granted

if the movant shows a likelihood of success on the merits, a risk

of irreparable harm, a favorable balance of equities, and that the

injunction would be in the public interest. Langlois v. Abington

Hous. Auth., 207 F.3d 43, 47 (1st Cir. 2000). The “sine qua non”

of a preliminary injunction analysis is whether the plaintiff is

likely to succeed on the merits of its claim. Weaver v. Henderson,

984 F.2d 11, 12 (1st Cir. 1993). 

In the instant case, the district court applied the

criteria mandated by the Second Circuit in SEC preliminary

injunction actions, see SEC v. Unifund SAL, 910 F.2d 1028, 1036-37

(2nd Cir. 1990), and failed to consider the risk of irreparable

harm. Unlike the Second Circuit, we require consideration of

irreparable harm in actions initiated by the SEC. SEC v. World

Radio Mission, 544 F.2d 535, 541-42 (1st Cir. 1976) (finding that

the district court properly considered the “balance of the harms

which would result from the grant or denial of preliminary relief,”

but failed to pursue plaintiff’s chances of ultimate success); see

also SEC v. Lehman Brothers, Inc., 157 F.3d 2, 9 (1st Cir. 1998)

(finding that there was no obvious harm in allowing appellant

lienholder to maintain the escrow allegedly secured by debtor

through unlawful insider trading). Although the district court
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failed to consider irreparable harm in granting the preliminary

injunction, the essential requirement--finding that the SEC is

likely to succeed on the merits of its claim--was met. Weaver, 984

F.2d at 12; Aaron, 446 U.S. at 700-01. The district court found

that “Fife misrepresented the nature of the investment program, its

overall risk, and the status of funds after they were placed” with

Brite, and that the SEC established that Khan engaged in a course

of business that would operate as a fraud or deceit upon the

purchaser. Moreover, “[t]he district court’s amply supported

finding of the likelihood that future violations would occur would

ordinarily, without more, entitle plaintiff to a preliminary

injunction.” World Radio Mission, 544 F.2d at 541. The district

court here found that the SEC would likely succeed in showing such

future violations because of the nature of Fife and Khan’s

occupations, their claims of ignorance as to the scheme, the

misappropriation of large amounts of investor funds, the recency of

their alleged conduct, and the continuing existence of the accounts

and entities used to perpetrate the alleged scheme in this case.

We may affirm the district court’s grant of a preliminary

injunction and asset freeze on any grounds supported by the record.

Aldridge v. A.T. Cross Corp., 284 F.3d 72, 84 (1st Cir. 2002)

(quoting Greenless v. Almond, 277 F.3d 601, 605 (1st Cir. 2002)).

The record sufficiently establishes "the harm caused plaintiff

without the injunction, in light of the plaintiff's likelihood of
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eventual success on the merits, outweighs the harm the injunction

will cause [appellants]." Vargas-Figueroa v. Saldana, 826 F.2d

160, 162 (1st Cir. 1987) (emphasis in original); accord

Commonwealth of Massachusetts v. Watt, 716 F.2d 946, 953 (1st Cir.

1983); cf. World Radio Mission, 544 F.2d at 541 ("To the extent

that a defendant can show harm, this must be discounted by the

degree that a plaintiff can show likelihood of success.").

Accordingly, we must affirm the preliminary injunction and asset

freeze unless the district court abused its discretion.

A. Requirements and Evidence of Violations of the

 Anti-Fraud Provisions of the Securities Laws

Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a),

in relevant part, provides: 

It shall be unlawful for any person in the offer or sale

of any securities . . . by the use of any means or

instruments of transportation or communication in

interstate commerce or by the use of the mails, directly

or indirectly--

(1) to employ any device, scheme, or artifice to

defraud, or

(2) to obtain money or property by means of any

untrue statement of a material fact or any omission

to state a material fact necessary in order to make

the statements made, in light of the circumstances

under which they were made, not misleading, or 

(3) to engage in any transportation, practice, or

course of business which operates or would operate

as a fraud or deceit upon the purchaser. 

Id. Under section 17(a) of the Securities Act, “[s]pecific

reliance by the investor need not be shown.” United States v.
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Ashdown, 509 F.2d 793, 799 (5th Cir. 1975). Negligence is

sufficient to establish liability under section 17(a)(2). Aaron,

446 U.S. at 695-697. 

Section 10(b) of the Securities Exchange Act, 15 U.S.C.

§ 78j(b), makes it “unlawful for any person, directly or

indirectly, . . . to use . . . any manipulative or deceptive device

or contrivance in contravention of such rules and regulations as

the Commission may prescribe as necessary or appropriate in the

public interest or for the protection of investors.” Id. The SEC

promulgated Rule 10b-5 under the Securities Exchange Act, 15 U.S.C.

§ 78j(b). Pursuant to this rule, it shall be unlawful for any

person: 

(a) To employ any device, scheme, or artifice

to defraud, 

(b) To make any untrue statement of a material

fact or to omit to state a material fact

necessary in order to make the statements

made, in the light of the circumstances under

which they were made, not misleading, or

(c) To engage in any act, practice, or course

of business which operates or would operate as

a fraud or deceit upon any person,

in connection with the purchase or sale of any

security.

17 C.F.R. 240.10b-5. A statement is material if there is a

substantial likelihood that a reasonable investor would consider it

important in deciding whether or not to invest his money in a
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particular security. See Basic v. Levinson, 485 U.S. 224, 231-232

(1988). 

Under section 10(b) and rule 10b-5, the defendants must

act with scienter. Scienter is “a mental state embracing intent to

deceive, manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425

U.S. 185, 193 n.12 (1976). The plaintiff must demonstrate that the

defendants acted with a high degree of recklessness or consciously

intended to defraud. Aldridge, 284 F.3d at 82. Recklessness is “a

highly unreasonable omission, involving not merely simple, or even

inexcusable[] negligence, but an extreme departure from the

standards of ordinary care, and which presents a danger of

misleading buyers or sellers that is either known to the defendant

or is so obvious the actor must have been aware of it.” Greebel v.

FTP Software, 194 F.3d 185, 198 (1st Cir. 1999) (quoting Sundstrand

Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977)).

Fife and Khan assert that they did not act with the

requisite degree of scienter. This argument fails. Fife and Khan

made material representations, either recklessly or with scienter,

with regard to the sale and offer of securities and made misleading

and false statements to investors.

During the two and a half years that Fife controlled the

Raymond James account, he made only two purchases in the Brite

balance sheet enhancement program; both purchases were for treasury

bills, one on margin and the other for cash. Fife lost
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approximately $1.7 million in one of these treasury bill purchases.

Fife did not use investor funds to participate in third world

projects, the underlying premise of the enhancement program.

Further, during Fife’s control of investor funds, $20.5 million of

investor funds were dissipated. 

Although Fife alleges that he never saw any investor

contracts between Brite and its investors, his letter to Rheaume

indicates that he was at least aware of some of the Agreement’s

terms by using some of the contract language in his letter such as

“private placement by invitation for qualified clients” and

“without putting its funds at risk.” At the time the letter was

written, Fife had already transferred and invested Rheaume’s money

without prior authorization. He had not been successful in his

balance sheet enhancement program in the previous six months, and

a very great risk of loss accompanied participation in the balance

sheet enhancement program. Thus, Fife’s statements were material

misrepresentations. 

Since Fife and Khan were partners engaging in balance

sheet enhancement programs, they knew of the risks involved in

participating in these programs, failed to inform investors of

these risks, and positively represented that there was no risk. If

a project did not succeed, the investor would not receive back his

investment or any return on his investment principal. Instead of

advising clients of these risks, they promised high returns. Both
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Fife and Khan contacted Brite investors soliciting additional

opportunities to invest funds without disclosing the high risks

associated with the balance sheet enhancement program. These

misrepresentations and omissions were material because a reasonable

investor would want to know the risks involved in the balance sheet

enhancement program. See Basic, 485 U.S. at 231. Moreover, Fife

repeatedly made false representations to Brite investor, Rheaume,

concerning the management of its investment funds. 

The SEC made a sufficient showing that Fife and Khan made

material misrepresentations in connection with the purchase or sale

of securities in interstate commerce under the balance sheet

enhancement program. In view of defendants’ past conduct, the

defendants’ occupations, and their continued defense that their

past conduct was blameless, we conclude that the SEC made an

adequate showing that repetition of such conduct in the future is

reasonably likely. Therefore, the district court’s grant of a

preliminary injunction as to Fife and Khan under the section 17(a)

of the Securities Act and section 10(b) of the Securities Exchange

Act was not an abuse of discretion. 

B. Requirements and Evidence of Violations of 

 Section 206 of the Investment Advisers Act

Section 202(a)(11) of the Investment Advisers Act defines

the term “Investment adviser” as “any person who, for compensation,

engages in the business of advising others, either directly or

through publications or writings, as to the value of securities or
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as to the advisability of investing in, purchasing, or selling

securities.” 15 U.S.C. § 80b-2 (a)(11). The Investment Advisers

Act prohibits fraud by those who act as investment advisers. 15

U.S.C. § 80b-1. Fife asserts that he is not an Investment Adviser

under the statutory definition and therefore, could not have

violated the act. 

The district court found sufficient evidence to hold that

the SEC met its burden of demonstrating that it is likely to

succeed in proving that Fife violated sections 206(1) and 206(2) of

the Investment Advisers Act. First, Fife advised Curl regarding

Rheaume’s investment. Second, Fife’s fraudulent conduct was in

connection with the offer, purchase, or sale of securities. Fife

made various transfers of Rheaume’s money without prior

authorization, invested money in money market accounts without

prior authorization, and falsely represented the status of

Rheaume’s funds. The Supreme Court concluded that “Congress

intended the Investment Advisers Act of 1940 to be construed like

other securities legislation enacted for the purpose of avoiding

frauds, not technically and restrictively, but flexibly to

effectuate its remedial purposes.” SEC v. Capital Gains Research

Bureau, Inc., 375 U.S. 180, 195 (1963) (internal quotation marks

omitted). Third, although Fife has not yet received compensation,

he understood that he would be compensated for his efforts by a

commission based on a percentage of the profits from the
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investments, if successful, pursuant to a formula to be agreed upon

at a later time. Therefore, the district court did not err in

holding that the SEC set forth a substantial likelihood of success

against Fife under the Investment Advisers Act. 

C. Asset Freeze

The district court found that the order freezing the

defendants’ assets appropriate because of the high risk that any

remaining investment funds or proceeds thereof would be further

depleted without such an order. The record illuminates

misrepresentations and omissions concerning the offer or sale of

securities. Under these circumstances, there is simply no viable

argument that an asset freeze was an abuse of discretion. Rizek v.

SEC, 215 F.3d 157, 163 (1st Cir. 2000). 

IV. CONCLUSION

The asset freeze and preliminary injunction enjoining

Fife and Khan from further violations of section 10(b) of the

Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and section

17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) are

affirmed. The preliminary injunction enjoining Fife from further

violations of section 206 of the Investment Advisers Act of 1940,

15 U.S.C. § 80b is affirmed.