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

Heading: Applicability of the Investment Advisers Act of 1940

Text: 15 Elliott and Melhorn contend that the evidence was insufficient to support their convictions for investment adviser fraud. They argue that a defendant and his alleged victim must be in an adviser-client relationship before the antifraud provisions of the Investment Adviser Act can apply. The standard of review for assessing the sufficiency of evidence is whether any reasonable inference of the evidence, considered in the light most favorable to the government, is sufficient to allow a jury to find guilt beyond a reasonable doubt. United States v. Bush, 28 F.3d 1084, 1087 (11th Cir.1994). 16
17 We first decide the threshold issue of whether Elliott and Melhorn qualify as investment advisers for the purposes of the Investment Advisers Act. This is a question of first impression in this circuit. 6 Under section 80b-2(a)(11) an investment adviser is 18 any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities; but does not include ... (C) any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor ...; or (F) such other persons not within the intent of this paragraph, as the Commission may designate by rules and regulations or order. 19 15 U.S.C. Sec. 80b-2(a)(11) (emphasis added). 20 The SEC has published an interpretive release to clarify its position on the applicability of the Investment Advisor Act to financial planners, pensions consultants, and other financial service providers. The SEC advises: 21 Whether a person providing financially related services of the type discussed in this release is an investment adviser within the meaning of the Advisers Act depends upon all the relevant facts and circumstances.... A determination as to whether a person providing financial planning, pension consulting, or other integrated advisory services is an investment adviser will depend upon whether such person: (1) Provides advice, or issues reports or analyses, regarding securities; (2) is in the business of providing such services; and (3) provides such services for compensation. 22 Applicability of the Investment Advisers Act to Financial Planners, Pension Consultants, and Other Persons Who Provide Investment Advisory Services as a Component of Other Financial Services, Investment Advisers Act Release No. IA-1092, 52 Fed.Reg. 38400, 38401-02 (Oct. 8, 1987) [hereinafter SEC Release] (emphasis added). 23 Elliott and Melhorn clearly have provided investment advice to their customers, both by advising them in their choice among Elliott Enterprise investment vehicles and by controlling the investments underlying those investment vehicles. See Abrahamson v. Fleschner, 568 F.2d 862, 871 (2d Cir.1977) (These provisions [of the Investment Advisers Act] reflect the fact that many investment advisers 'advise' their customers by exercising control over what purchases and sales are made with their clients' funds.), cert. denied, 436 U.S. 905, 98 S.Ct. 2236, 56 L.Ed.2d 403, and cert. denied, 436 U.S. 913, 98 S.Ct. 2253, 56 L.Ed.2d 414 (1978). The only remaining questions, therefore, are whether Elliott and Melhorn were in the business of advising others and whether they did so for compensation. 15 U.S.C. Sec. 80b-2(a)(11). In defining the business standard for investment advisers, the SEC Release notes: 24 The giving of advice need not constitute the principal business activity or any particular portion of the business activities of a person in order for the person to be an investment adviser under section [80b-2(a)(11) ]. The giving of advice need only be done on such a basis that it constitutes a business activity occurring with some regularity.... 25 Whether a person giving advice about securities for compensation would be in the business of doing so, depends upon all relevant facts and circumstances. The staff considers a person to be in the business of providing advice if the person: (i) Holds himself out as an investment adviser or as one who provides investment advice, (ii) receives any separate or additional compensation that represents a clearly definable charge for providing advice about securities, regardless of whether the compensation is separate from or included within any overall compensation, or receives transaction-based compensation if the client implements ... the investment advice, or (iii) on anything other than rare, isolated and non-periodic instances, provides specific investment advice. 26 SEC Release at 38402 (emphasis added). 27 We note initially that, [a]lthough [an] SEC release is entitled to great weight, it is not dispositive. SEC v. Continental Commodities Corp., 497 F.2d 516, 525 (5th Cir.1974). Nevertheless, we are persuaded that both Elliott and Melhorn are in the business of advising others because they satisfy all three of the disjunctive factors given by the SEC. From 1975 to 1987, Elliott was registered with the SEC as an investment adviser. 7 In letters and brochures, Elliott and Melhorn held Elliott out to the public as a registered investment adviser. Both also received transaction-based compensation whenever a customer implemented their advice by purchasing an Elliott Enterprises investment product: Melhorn received a commission, and Elliott received the investment principal, which he commingled with his personal funds. The record additionally indicates that Elliott and Melhorn provided investment advice on more than rare, isolated occasions. Both regularly gave advice regarding the safety and appropriateness of specific Elliott Enterprises investment vehicles based upon the personal circumstances of individual investors. Additionally, they were responsible for selecting, purchasing, and selling the underlying investments for Elliott Enterprises. See Abrahamson, 568 F.2d at 870-71. Thus, Elliott and Melhorn were in the business of advising others. 28 Elliott and Melhorn argue that they were not compensated for providing advice because their customers did not pay a discrete fee specifically earmarked as payment for investment advice. They contend that the customers named in the indictment came to Elliott Enterprises, not for investment advice, but to invest in Elliott Enterprises. In other words, Elliott and Melhorn analogize their situation to that of the defendant in Wang v. Gordon, 715 F.2d 1187, 1192-93 (7th Cir.1983), who received his commission for selling an apartment building, not for providing investment advice. See supra note 6. 29 This analogy is flawed, however, because investment advice in this case constitutes a significant component of the product sold. Customers investing with Elliott Enterprises first relied on Elliott and Melhorn to assist them in choosing individually tailored investment vehicles, such as tax-exempt repurchase agreements, stock income agreements, or collateral loan agreements. After each customer chose an investment vehicle, Elliott and Melhorn continued to advise him by managing the underlying investments. The ongoing investment advice and management provided by Elliott and Melhorn were primary, rather than incidental, reasons for investing in Elliott Enterprises. 30 Although Elliott and Melhorn did not receive a separate investment adviser's fee, they did receive compensation for providing investment advice. 8 Because Elliott and Melhorn were also in the business of advising others, they qualify as investment advisers under section 80b-2(a)(11). Consequently, the antifraud provisions of the Investment Advisers Act are applicable to them.
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