Opinion ID: 781798
Heading Depth: 3
Heading Rank: 2

Heading: Substantial Evidence Supports the Commission's Finding of Scienter.

Text: 24 It is undisputed that scienter is a required element for violations of Securities Act § 17(a)(1), Exchange Act § 10(b) and Rule 10b-5, and Advisers Act § 206(1). Scienter is not required for the other violations of the Advisers Act. The parties do, however, dispute the meaning of scienter; the petitioners suggest that scienter requires specific intent to defraud. 25 In this Circuit, a violation of Exchange Act § 10(b) and Rule 10b-5 may be supported by knowing or reckless conduct, without a showing of willful intent to defraud. Nelson v. Serwold, 576 F.2d 1332, 1337 (9th Cir.1978); see also Howard v. Everex Sys., Inc., 228 F.3d 1057, 1063(9th Cir.2000). A similar showing is required for violations of Securities Act § 17(a)(1). See, e.g., SEC v. Dain Rauscher, Inc., 254 F.3d 852, 856 (9th Cir.2001). We apparently have never considered what constitutes scienter under Advisers Act § 206(1), but because its language is nearly identical to that of Securities Act § 17(a)(1), 6 we now hold that the same definition — knowing or reckless conduct — applies to Advisers Act § 206(1). 26 Citing the testimony of Vernazza, Hall, and Hargrave, the Commission found that each had knowledge of the caps under the SSA and that each had reason to know of the false statements made in the Forms ADV and disclosure statements. 7 The Commission held that the petitioners had a duty to disclose potential conflicts of interest accurately, and that even if the petitioners' failure to disclose was unknowing, it was reckless. The Commission found it implausible that the petitioners were ignorant of this duty, or that the failure to do so was merely an oversight, and therefore determined that the petitioners had the requisite scienter. 27 Petitioners argue that, because there is no direct evidence of their intent to defraud their clients, the Commission's finding of scienter lacks substantial evidence. We are not persuaded. The Commission identified the applicable standard of care correctly and had the requisite evidentiary basis to conclude that the petitioners were in violation. 28 The Commission correctly determined that the petitioners had a duty to disclose any potential conflicts of interest accurately and completely, and to recognize that the SSA created such a potential conflict. Although the Commission's determination of the duty of care is not the kind of formal interpretation that is entitled to Chevron deference, an agency's interpretation may merit some deference whatever its form, given the `specialized experience and broader investigations and information' available to the agency. Mead Corp., 533 U.S. at 234, 121 S.Ct. 2164 (quoting Skidmore v. Swift & Co., 323 U.S. 134, 139, 65 S.Ct. 161, 89 L.Ed. 124 (1944)). In this case, we defer to the Commission's experience and expertise in determining that investment advisers are knowledgeable enough to recognize that an arrangement such as the SSA creates potential conflicts of interest. 8 29 The Commission's determination that the petitioners either knowingly or recklessly violated their duties is supported by substantial evidence. The Commission is entitled to draw inferences from the evidence, including an inference that the petitioners' failure to disclose their potential conflict of interest was not merely an innocent oversight. As the Second Circuit determined in a similar context, the petitioners' arguments 30 misapprehend the nature of our review of an administrative agency's decision. Petitioners essentially argue that this court should draw inferences from the evidence contrary to those drawn by the Commission. In other words, they ask us to supplant the [administrative agency's] reasonable determinations. Cellular Tel. [ Co. v. Town of Oyster Bay ], 166 F.3d [490,] 494 [(2d Cir.1999)]. But based on the record ... we cannot say that the SEC lacked such relevant evidence as a reasonable mind might accept as adequate to support [its] conclusion. Universal Camera Corp. v. NLRB, 340 U.S. 474, 477, 71 S.Ct. 456, 95 L.Ed. 456 (1951) (quoting Consolidated Edison Co. v. NLRB, 305 U.S. 197, 229, 59 S.Ct. 206, 83 L.Ed. 126 (1938)) (internal quotation marks omitted). We thus uphold the SEC's finding of scienter. 31 Valicenti Advisory Servs., Inc. v. SEC, 198 F.3d 62, 65 (2d Cir.1999) (first and fifth alterations in original) (parallel citations omitted). The record supports the Commission's conclusion that the petitioners acted knowingly or recklessly in failing to disclose the required information and affirmatively misstating the nature of their agreement with World. 32