Opinion ID: 4182911
Heading Depth: 2
Heading Rank: 1

Heading: materiality of zprim’s advertisements

Text: A false or misleading statement by an investment adviser violates the antifraud provisions of the Advisers Act only if the fact misrepresented or omitted is “material.” See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 200–01, 84 S. Ct. 275, 287 (1963); Steadman I, 603 F.2d at 1129–34. An “omitted fact is material if there is a substantial likelihood that a reasonable [investor] would consider it important.” Basic Inc. v. Levinson, 485 U.S. 224, 231, 108 S. Ct. 978, 983 (1988) (quotation omitted). “[T]here must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” Id. at 231–32, 108 S. Ct. at 983 (quotation omitted).
ZPRIM published ads claiming GIPS compliance but omitted the investment return information required by the GIPS advertising guidelines. ZPRIM’s claim of GIPS compliance was therefore false, and petitioners do not say otherwise. Rather, they argue their omission of the GIPS-required information was not material. We conclude to the contrary. Substantial evidence showed that reasonable investors would find it important that ZPRIM’s ads did not actually comply with GIPS even while they claimed compliance. 12 Case: 16-15322 Date Filed: 06/30/2017 Page: 13 of 32 To begin, the evidence showed that the status of being “GIPS compliant” is important to investors. Mr. Zavanelli himself testified that being able to market oneself as GIPS compliant “is very important” for attracting institutional clients. Mr. Bauchle explained that institutional clients “screen[]” for GIPS compliance and will not even consider firms that are not compliant. Given the significance of GIPS compliance as a marker in the industry, reasonable investors would have wanted to know that ZPRIM’s claim of GIPS compliance was false. Beyond the value of the label itself, the false claim of GIPS compliance was also material because it caused prospective clients to wrongly believe the performance results in ZPRIM’s ads adhered to the GIPS advertising guidelines. As the Commission explained, the purpose of the advertising guidelines is to give investors the assurance that any GIPS-compliant firm will present its performance data in a way that is “complete, fair[], and comparable to those of other firms.” The guidelines’ requirements for presenting performance data provide “uniformity and comparability among investment managers.” That meant investors looking at the ZPRIM ads could have believed they were looking at the uniform, standardized set of returns required by GIPS, when in fact ZPRIM was deviating from the standardized presentation and putting its investment performance in a more favorable light. ZPRIM presented its numbers as an “apples-to-apples comparison” with the data posted by other GIPS-compliant firms, when its 13 Case: 16-15322 Date Filed: 06/30/2017 Page: 14 of 32 numbers were not actually comparable. This discrepancy is something a “reasonable [investor] would consider [] important.” Basic, 485 U.S. at 231, 108 S. Ct. at 983 (quotation omitted). For the ads published in fall 2008, the showing of materiality was even stronger. If ZPRIM had listed its investment returns in those ads as required by GIPS, the information would have revealed that ZPRIM was significantly underperforming its benchmark. Certainly, a prospective investor would have wanted to know about those undisclosed, negative results. See SEC v. Merch. Capital, LLC, 483 F.3d 747, 769 (11th Cir. 2007) (holding that defendants made material omissions by marketing interests in their company to investors “without disclosing the poor performance of the interests that had already been sold”). Petitioners argue that ZPRIM’s failure to disclose the GIPS-required information in its ads was not a material omission because the firm provided the information later. Petitioners say ZPRIM sent a fact sheet that disclosed the performance data required by GIPS to every prospective client who responded to a ZPRIM ad. Petitioners also point to data the firm posted on its website. Because ZPRIM eventually gave prospective clients the GIPS-required information, petitioners say that information was “part of the total mix of information provided,” and therefore its omission from the ads was not material. See Basic, 485 U.S. at 231–32, 108 S. Ct. at 983. 14 Case: 16-15322 Date Filed: 06/30/2017 Page: 15 of 32 These after-advertisement disclosures do not carry the day. Materiality is “determined in light of the circumstances existing at the time the alleged misstatement occurred.” Ganino v. Citizens Utils. Co., 228 F.3d 154, 165 (2d Cir. 2000) (emphasis added); see also SEC v. Morgan Keegan & Co., 678 F.3d 1233, 1253 (11th Cir. 2012) (per curiam) (holding that disclosures made “after the alleged oral misrepresentations” do not render the misrepresentations immaterial). Because our inquiry is limited to what investors knew at the time the false statements were made, ZPRIM’s later disclosures cannot negate the materiality of the earlier misrepresentations. 6 See Morgan Keegan, 678 F.3d at 1253. Focusing the materiality inquiry on the time when the misrepresentations were made is especially important where, as here, the context of the false statements is advertising to attract new investors. A later disclosure would not have cured the misrepresentation that already occurred at the advertising stage because, again, many institutional investors “screen[]” for GIPS compliance. ZPRIM’s false claims of GIPS compliance likely resulted in interest from investors 6 It could be argued that ZPRIM’s publishing of the GIPS-required information on its website was not a subsequent disclosure, since the website was available at the same time as the ads. But, even assuming that ZPRIM put the correct information on its website, that would not render immaterial the false claims of GIPS compliance in ZPRIM’s ads. That is because the ads never alerted investors that they needed to look to ZPRIM’s website for the GIPS-required disclosure; neither did the website alert investors that it contained the GIPS-required information omitted from ZPRIM’s ads. See Morgan Keegan, 678 F.3d at 1252 (finding disclosure of accurate information on firm’s website did not render immaterial earlier misrepresentations where there was “no evidence that brokers directed customers” to the information on the web page). 15 Case: 16-15322 Date Filed: 06/30/2017 Page: 16 of 32 who would not otherwise have considered or contacted ZPRIM. As the Commission explained, “[t]he adviser’s false statement has succeeded because it has garnered interest, regardless of whether the adviser later provides enough information for an astute individual to detect its misstatement.” The problems caused by a false ad cannot be cured by passing along corrected information to the very customers the company attracted through the misinformation in the first place. See id. at 1252 (holding that “adequate written disclosures” provided after a false statement did not render the false statement immaterial because the disclosure was “given to customers only upon a customer’s request”). Petitioners also say the First Circuit’s decision in Flannery v. SEC, 810 F.3d 1 (1st Cir. 2015), supports their argument. But the conduct at issue in Flannery was less egregious than the conduct we consider here. In Flannery, the Commission found that an investment firm made a material misrepresentation in a slide presentation to investors in which one slide said that a fund typically was 55% invested in a certain type of security, when the investment was actually around 100%. Id. at 5. The First Circuit reversed. Id. at 15. The court found the record supported only a “thin” showing of materiality because, among other things, (1) “the slide was clearly labeled ‘Typical,’” and (2) the firm had already distributed the correct data to clients six weeks before the presentation with the inaccurate slide. Id. at 10–11. 16 Case: 16-15322 Date Filed: 06/30/2017 Page: 17 of 32 ZPRIM did not label its return information “typical,” which would have cautioned a reasonable investor he should conduct further research. See id. at 11 n.8. ZPRIM claimed it was presenting the actual, complete set of performance returns required by GIPS. By claiming GIPS compliance, ZPRIM falsely signaled to investors there was no need to look any further for the performance data GIPS requires. Also, here the GIPS-required figures were distributed only after ZPRIM made the misrepresentations—not weeks before—and then only to those prospective clients who came forward. As the Flannery court explained, “the mere availability of accurate information” does not “negate[] an inaccurate statement.” Id. And it does not do so here. This record contains substantial evidence to support the Commission’s finding that ZPRIM’s false claim of GIPS compliance in its ads was material.