Opinion ID: 186545
Heading Depth: 2
Heading Rank: 3

Heading: Release and Compensation

Text: 46 For business development companies, Section 57(k)(1) of the Investment Company Act of 1940 makes it unlawful for any agent[] to accept from any source any compensation (other than a regular salary or wages . . .) for the purchase or sale of any property on behalf of his employer, except in the course of such person's business as an underwriter or broker. 15 U.S.C. § 80a-56(k)(1). The SEC found that Calandrella violated this provision by accepting the release of Stanz's legal claims as compensation in return for the Fund's purchase of Stanz's stock interest in Premier. The SEC also found Calandrella in violation of Rule 10b-5 for not reporting the release to the Rockies Fund's board of directors. 47 The SEC dismissed Calandrella's claims that the release was worthless to him. It concluded that the waiver benefited Calandrella by ensuring that he would not be liable to Stanz. Though not disputing that Stanz's legal claims lacked merit, the SEC stated that no lawsuit's outcome can be infallibly predicted. The Fund's outside counsel, however, testified that he examined Stanz's potential claims and found them meritless. 48 Unquestionably, some legal claims are facially hollow. To fulfill its evidentiary obligations, the SEC must do more than globally declare that even frivolous lawsuits might succeed. The SEC's findings must be specific to the issue before it — does this particular release have value? The SEC made no specific findings as to Stanz's claim yet paid no heed to the Fund's evidence. The SEC's generalizations, not drawn from the record, do not constitute substantial evidence for the SEC's finding that the release had value for Calandrella. 49 Having determined that the SEC's finding of a Section 57(k)(1) violation lacks substantial evidence, we also decide that the corresponding Section 10(b) and Rule 10b-5 violations lack substantial evidence. Those findings stem entirely from the determination that the waiver was compensation and accordingly are unsupported.