Opinion ID: 781798
Heading Depth: 3
Heading Rank: 1

Heading: Petitioners Made Materially False Statements.

Text: 19 We have no trouble concluding that the petitioners made materially false statements when they claimed not to recommend securities in which they had an ownership or sales interest, not to receive economic benefits in connection with giving advice to clients, and not to recommend securities in which they had a financial interest. It is indisputable that potential conflicts of interest are material facts with respect to clients and the Commission. See, e.g., SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 201, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963) (noting that an investment adviser must fully and fairly reveal[] his personal interests in [his] recommendations to his clients). 20 Two aspects of the SSA created a financial interest for the petitioners to recommend PPF funds to their clients. First, the minimum investment provision created an incentive for the petitioners to convince their clients to invest a total of at least $1,000,000 in PPF funds; otherwise they would not have received any payment under the SSA. When a person's payment is contingent on his or her clients investing a minimum amount of money, that person has a financial interest in recommending the investment until that amount of money has been reached. 21 The second aspect of the SSA, the system of caps, continued to create a financial interest in recommending PPF funds even after the minimum investment provision had been satisfied. We need not decide whether the SSA caps facially created a financial interest because it is obvious that they did so in practice. As noted above, Vernazza indicated that H&V had performed work in excess of the compensation it was entitled to under the caps, and thus the balance was carried forward. At this point, as long as a balance was carried forward, H&V's compensation was wholly dependent on the amount of money invested by its and IMS's clients. When compensation is predicated entirely on the amount of money invested in a fund by a person's clients, that person has a financial interest in recommending that fund. The petitioners had a financial interest in recommending PPF funds, and their representations to the contrary were false statements of material fact. 22 Petitioners argue that the Commission erred by not crediting Vernazza's testimony that he put in substantial work under the SSA and kept records of this work, thus finding that the work performed under the SSA was minimal. As long as a balance was carried forward, however, the amount of work actually performed under the SSA is irrelevant. Petitioners still had a financial interest in recommending World's funds, even if they also needed to, and in fact did, perform other services under the SSA. 5 23