Opinion ID: 4182911
Heading Depth: 3
Heading Rank: 3

Heading: ZPRIM Began Claiming It Was GIPS Compliant

Text: Mr. Zavanelli knew that GIPS compliance was “very important” for marketing to institutional clients and he wanted ZPRIM to have those “bragging rights.” To that end, ZPRIM hired a GIPS verification firm, Ashland Partners & Company LLP (“Ashland”), to help bring ZPRIM into compliance. In January, February, and April 2008, ZPRIM placed advertisements in financial magazines claiming it was GIPS compliant. Together with the claim of GIPS compliance, and in keeping with GIPS advertising guidelines, the ads included period-to-date returns and at least five years of annual returns. 4. In Fall 2008, ZPRIM Published Ads Omitting Information Required Under GIPS In the fall of 2008, ZPRIM published three more magazine ads claiming GIPS compliance. But these ads had no period-to-date performance results, nor did they include either one-, three-, and five-year annualized results or five years of annual results. One effect of leaving out this GIPS-required information was that the ads hid ZPRIM’s recent poor performance. Had ZPRIM shown its investment returns over the time periods required by GIPS, the ads would have revealed that 4 Case: 16-15322 Date Filed: 06/30/2017 Page: 5 of 32 the firm’s performance lagged behind ZPRIM’s benchmark index by as much as ten percentage points. Instead of disclosing the called-for returns with the unflattering information, ZPRIM showed its returns over a longer period of time during which ZPRIM outperformed its benchmark index. Mr. Bauchle testified that before these ads were published, he told Mr. Zavanelli they didn’t meet the GIPS requirements for showing investment return information. But Mr. Zavanelli dismissed Mr. Bauchle’s concerns, saying it wasn’t necessary to put the information in the ads because ZPRIM would give it to prospective clients before they invested. Mr. Zavanelli “wanted to run those ads,” so ZPRIM published them even though they did not comply with the GIPS advertising guidelines. Although Ashland had reviewed and approved ZPRIM’s earlier ads, ZPRIM never asked Ashland to review the fall 2008 ads. 5. ZPRIM Published Newsletters Omitting Information Required Under GIPS Mr. Zavanelli wrote a monthly investment newsletter for ZPRIM that contained information about ZPRIM’s performance results. This newsletter went to ZPRIM’s clients, dozens of investment consultants, and others in the industry. In November 2008, Ashland told ZPRIM that if “[GIPS] compliance is being claimed” in ZPRIM’s newsletters, the “GIPS Advertising Guidelines need to be followed.” Ashland then explained precisely how investment returns should be listed in the newsletters in order to comply with the GIPS advertising guidelines. 5 Case: 16-15322 Date Filed: 06/30/2017 Page: 6 of 32 Nevertheless, ZPRIM sent out newsletters in April and December 2009 that claimed GIPS compliance, yet failed to include the required information. In contrast to the April 2009 newsletter, the December 2009 newsletter contained several corrective statements. Although it is true the December 2009 newsletter said on one page that “[a]ll numbers are GIPS compliant,” the next page contained a number of disclaimers. It said, for example: “The investment report you are reading is not GIPS compliant. It was never intended to be nor can it be. . . . Our report remains not GIPS compliant.” 6. The SEC Notified ZPRIM of False Claim of GIPS Compliance In January 2010, the SEC sent ZPRIM a letter. The letter noted that, while ZPRIM’s December 2008 advertisement “claimed compliance” with GIPS, “the [SEC’s] examination found that it did not comply with GIPS advertising guidelines.” The letter told ZPRIM that “[a]s a result, ZPR[IM] may have violated Section 206 of the Advisers Act and Rule 206(4)-1, thereunder.” ZPRIM responded that it “did not intend to mislead with this ad.” Beyond that, ZPRIM assured the SEC that “[w]e have changed our ads” going forward to comply with the GIPS advertising guidelines by including the “1-3-5 year annualized returns” as a “[c]orrective action[].” In August 2010, the SEC sent ZPRIM another letter notifying the firm that the SEC was “conducting an investigation” into ZPRIM. 6 Case: 16-15322 Date Filed: 06/30/2017 Page: 7 of 32 7. ZPRIM Represented in Two Morningstar Reports that It Was Not Under Investigation In order to attract institutional clients, ZPRIM regularly gave information about itself to Morningstar, which is a major provider of independent investment research. Using the information it gets from investment firms, Morningstar creates a report about each firm, and investors use these reports to research potential money managers. It was Mr. Bauchle’s job to submit ZPRIM’s information to Morningstar. One piece of information included in a Morningstar report is whether or not there are any “[p]ending SEC investigations” of a firm. This is important here because, even though the SEC told ZPRIM in August 2010 that it was investigating the firm, Mr. Bauchle continued to tell Morningstar there were “No” “[p]ending SEC investigations” of ZPRIM. Mr. Bauchle, on behalf of ZPRIM, made this misrepresentation to Morningstar twice: first for the period ending on September 30, 2010, and, again, for the period ending on March 31, 2011. 8. In Spring 2011, ZPRIM Published Additional Ads Omitting Information Required Under GIPS Despite ZPRIM’s assurances to the SEC that it would change its ads to comply with the GIPS advertising guidelines, ZPRIM published three more ads— in February, March, and May 2011—claiming GIPS compliance but failing to 7 Case: 16-15322 Date Filed: 06/30/2017 Page: 8 of 32 include the returns required by the GIPS advertising guidelines. Mr. Zavanelli testified that he conceived of and approved these ads.