Opinion ID: 701842
Heading Depth: 3
Heading Rank: 2

Heading: Necessity of Adviser-Client Relationship

Text: 31 Elliott and Melhorn maintain that, even if they were investment advisers, they were not in an adviser-client relationship with any of the customers named in the indictment. They cite not only the lack of a clearly identified investment advisory fee, but also lack of an investment adviser contract as proof that no such relationship existed. In the absence of an adviser-client relationship, they argue that they cannot be convicted under the antifraud provisions of the Investment Advisers Act. The act in relevant part provides: 32 It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly-- 33 (1) to employ any device, scheme, or artifice to defraud any client or prospective client; 34 (2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client ... 35 (4) to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. 36 15 U.S.C. Sec. 80b-6 (emphasis added). Subsections (1) and (2) describe offenses specifically affecting a client or prospective client. In contrast, subsection (4) requires the government to prove only that the defendant was an investment adviser and that the defendant engage[d] in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. Id. Sec. 80b-6(4). Lacking any reference to clients, subsection (4) appears to be a general prohibition against certain conduct by an investment adviser. See United States v. Jordan, 915 F.2d 622, 628 (11th Cir.1990) ( ' [W]here Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposefully in the disparate inclusion or exclusion. '  (quoting Rodriguez v. United States, 480 U.S. 522, 525, 107 S.Ct. 1391, 1393, 94 L.Ed.2d 533 (1987) (per curiam))), cert. denied, 499 U.S. 979, 111 S.Ct. 1629, 113 L.Ed.2d 725 (1991). 37 The legislative history of the Investment Advisers Act does not contradict this reading of section 80b-6. In 1960, Congress amended the Investment Advisers Act by adding subsection (4). Act of Sept. 13, 1960, Pub.L. No. 86-750, Sec. 9, 74 Stat. 885, 887. The Senate Report accompanying the 1960 amendment stated that the purpose of the new subsection was to empower the [SEC] by rule to define and prescribe means reasonably designed to prevent fraudulent practices. S.Rep. No. 1760, 86th Cong., 2d Sess. (1960) (emphasis added), reprinted in 1960 U.S.C.C.A.N. 3502, 3503. 38 Because of the general language of the statutory antifraud provision and the absence of any express rulemaking power in connection with them, it is not clear what fraudulent and deceptive activities are prohibited by this act and as to how far the Commission is limited in this area by common-law concepts of fraud and deceit. These include proof of a (1) false representation of; (2) a material; (3) fact; (4) the defendant must make it to induce reliance; (5) the plaintiff must rely on the false representation; (6) and suffer damage as a consequence. 39 In order to overcome this difficulty, section 9 of the bill would amend [15 U.S.C. Sec. 80b-6] to add a prohibition against engaging in conduct which is fraudulent, deceptive, or manipulative and to authorize the Commission by rules and regulations to define, and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative. 40 Id. (emphasis added), reprinted in 1960 U.S.C.C.A.N. at 3509. Thus, the legislative history of the 1960 amendment also indicates an intent to prohibit fraudulent practices or conduct, without regard to whether the victim is in an adviser-client relationship with the investment adviser. Indeed, Congress's primary concern appeared to be the possible limitations imposed by common-law concepts of fraud and deceit, which require reliance but no other relationship between the plaintiff and the defendant. 9 41 As demonstrated above, both Elliott and Melhorn were investment advisers within the meaning of section 80b-2(a)(11). There is ample evidence in the record to show that they both engaged in acts, practices, or courses of business in violation of section 80b-6(4). Therefore, we conclude that the evidence was sufficient to support Elliott and Melhorn's convictions under the Investment Advisers Act. 10