15‐536
United States v. Tagliaferri
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
______________
August Term 2015
(Argued: March 10, 2016 Decided: May 4, 2016)
Docket No. 15‐536
UNITED STATES,
Appellee,
–v.–
JAMES TAGLIAFERRI, aka Sealed Defendant 1,
Defendant‐Appellant.
______________
Before:
LEVAL, POOLER, and WESLEY, Circuit Judges.
Appeal from a judgment of conviction entered by the United States District
Court for the Southern District of New York (Abrams, J.). A jury found James
Tagliaferri guilty of several securities‐related offenses, including criminal
violations of section 206 of the Investment Advisers Act of 1940, 15 U.S.C. § 80b‐
6. On appeal, Tagliaferri argues, inter alia, that the District Court erred in not
instructing the jury that investment adviser fraud requires proof of intent to
harm his clients. We disagree and accordingly AFFIRM the judgment of the
District Court.
_________________
MATTHEW W. BRISSENDEN, Matthew W. Brissenden, P.C., Garden
City, NY, for Defendant‐Appellant.
JASON H. COWLEY, Assistant United States Attorney (Sarah Eddy
McCallum, Assistant United States Attorney, on the brief), for
Preet Bharara, United States Attorney for the Southern District
of New York, New York, NY, for Appellee.
_________________
PER CURIAM:
Defendant‐Appellant James Tagliaferri appeals from a judgment of
conviction in the United States District Court for the Southern District of New
York (Abrams, J.). A jury convicted Tagliaferri on one count of investment
adviser fraud, one count of securities fraud, four counts of wire fraud, and six
counts of offenses in violation of the Travel Act, 18 U.S.C. § 1952.1 On appeal,
Tagliaferri raises a number of challenges to the sufficiency of the evidence and
The jury was unable to reach a verdict on two counts charging wire fraud and a Travel
1
Act violation, and these counts were dismissed on the Government’s motion.
1
certain jury instructions. The Court’s opinion today addresses only one such
challenge: whether a criminal conviction premised on a violation of section 206
of the Investment Advisers Act of 1940 (“the Act”), 15 U.S.C. § 80b‐6, requires
proof of intent to harm. We conclude that it does not. In a summary order filed
herewith, we reject the remainder of Tagliaferri’s arguments with respect to his
Travel Act, securities fraud, and wire fraud convictions. Accordingly, we affirm
the judgment of conviction entered by the District Court.
BACKGROUND
James Tagliaferri founded Taurus Advisory Group in 1983 as a boutique
investment advisory firm located in Stamford, Connecticut. In late 2006, he
relocated the firm to the U.S. Virgin Islands and renamed it “TAG Virgin
Islands,” also called “TAG VI.” At this time, Tagliaferri personally had primary
investment authority over the vast majority of the managed assets of the firm,
which totaled around $252 million among 115 client accounts.
Starting in 2007, Tagliaferri began engaging in three categories of conduct
that formed the bases of his convictions.2 First, in what the Government terms
2 As required when reviewing a motion for judgment of acquittal, we view all evidence
in the light most favorable to the Government and draw all permissible inferences in its
2
the “kickback conduct,” Tagliaferri began investing his clients’ assets with a
Long Island company, International Equine Acquisition Holdings (“IEAH”), that
owned and managed racehorses. In return for these investments, IAEH paid
Tagliaferri more than $1.7 million in fees, often calculated as a percentage of the
client funds invested in IAEH securities. Tagliaferri did not disclose the
existence of these payments to his clients—a nondisclosure both contrary to TAG
VI’s compliance policy and contradictory to a regulatory disclosure statement
filed with the U.S. Securities and Exchange Commission (“SEC”), in which
Tagliaferri denied receiving any economic benefit from non‐clients in connection
with client advice. Later, Tagliaferri attempted to recharacterize these
transactions: He sent letters to his clients disclosing the fees but describing them
as consulting fees for advice rendered to IAEH, sent post‐receipt invoices to
IAEH listing financial or consulting services, and asked an IAEH employee to
alter IAEH’s records to indicate the fees were consulting expenses instead of
investment banking fees. Tagliaferri also engaged in similar fee arrangements
with two brothers, Jason and Jared Galanis, in which he received “referral
fees”—not disclosed to his clients—for investments in companies affiliated with
favor, deferring to the jury’s resolution of the weight of the evidence and credibility of
the witnesses. See United States v. Persico, 645 F.3d 85, 104 (2d Cir. 2011).
3
the brothers and then issued post‐receipt invoices describing the payments as
advising fees.
Second, in what the Government terms the “cross‐trade conduct,”
Tagliaferri purchased securities from one client’s account with another client’s
assets, sometimes generating fees for himself as described above. Tagliaferri
would sometimes sell a client’s poorly performing investments to another client,
without disclosing to either client that they were engaged in a cross‐trade—also a
violation of TAG VI’s compliance policy. In one instance, Tagliaferri told a client
that an overdue note was in escrow and then arranged a series of cross‐trade
transactions to generate the funds to repay the note obligation.
Third, in what the Government terms the “fake note conduct,” Tagliaferri
invested over $5 million in a company called National Digital Medical Archive
(“NMDA”). Despite its initial characterization as an equity investment,
Tagliaferri described it as a loan when clients inquired, later attempting to get
NMDA to agree the investment had been a loan. He then created a number of
fictitious “sub‐notes,” which he deposited into the client accounts,
notwithstanding that there was no loan agreement or master note promising
repayment of the investment. He repeatedly mischaracterized the investments to
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his clients and, eventually, engaged in cross‐trades as described above to pay off
clients who demanded payment on the fictitious sub‐notes.
The Government arrested and indicted Tagliaferri in February 2013 and, in
a superseding indictment the following year, charged him with investment
adviser fraud, securities fraud, wire fraud, and multiple violations of the Travel
Act. At trial, the defense case primarily rested on Tagliaferri’s testimony about
how he made his investment decisions and his characterizations of the fees
received. He acknowledged that the fees posed a conflict of interest and should
have been disclosed to his clients but argued that each investment made was
based on his good faith belief that it was in the clients’ best interests. While also
admitting that the fictitious sub‐notes were improper, he maintained that he had
always “believed that he would be able to work things out so that his clients
would not be harmed.” Appellant Br. 17.
At the charging conference, defense counsel argued to the District Court
that section 206 of the Act required proof not only of “intent to deceive” but also
of “intent to harm.” The Government disagreed, arguing that scienter in the
context of securities fraud under section 10(b) of the Securities Exchange Act of
1934 (“the 1934 Act”) requires only an intent to deceive, not to harm, and the Act
5
is so analogous as to employ the same standard. The District Court accepted the
Government’s arguments and made the following charge with respect to intent
to defraud under the Act:
[T]he government must prove beyond a reasonable
doubt . . . that the defendant devised or participated in
the alleged device, scheme, or artifice to defraud, or
engaged in the allegedly fraudulent transaction,
practice, or course of business, knowingly, willfully,
and with the specific intent to defraud.
“Knowingly” means to act voluntarily and deliberately,
rather than mistakenly or inadvertently.
“Willfully” means to act knowingly and purposely,
with an intent to do something the law forbids, that is to
say, with bad purpose either to disobey or to disregard
the law. The defendant need not have known that he
was breaking any particular law or any particular
statute. A defendant need only have been aware of the
generally unlawful nature of his act. “Intent to defraud”
in the context of the securities laws means to act
knowingly and with the intent to deceive.
. . .
“[G]ood faith,” as I will define that term, on the part of
a defendant is a complete defense to a charge of
investment adviser fraud.
. . .
In considering whether or not a defendant acted in
good faith, however, you are instructed that a belief by
the defendant, if such belief existed, that ultimately
everything would work out so that no investors would
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lose any money or that particular investments would
ultimately be financially advantageous for clients does
not necessarily constitute good faith. No amount of
honest belief on the part of a defendant that the scheme
will ultimately make a profit for the investors will
excuse fraudulent actions or false representations by
him.
J.A. 283–86. During deliberations, the jury requested clarification on what the
phrase “with the specific intent to defraud” meant in the context of investment
adviser and securities fraud. J.A. 362. The judge responded by directing their
attention to the language of the jury charge that, in the context of investment
adviser fraud, specific intent to defraud “means to act knowingly and with intent
to deceive.” J.A. 357.
Ultimately, the jury convicted Tagliaferri on twelve of the fourteen counts,
including the count charging investment adviser fraud. Under the applicable
sentencing guidelines, Tagliaferri faced a recommended sentence of 210 to 262
months’ incarceration; the District Court entered a judgment sentencing him to
seventy‐two months.
DISCUSSION
Section 206 of the Act makes it “unlawful for any investment adviser, by
use of the mails or any means or instrumentality of interstate commerce, directly
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or indirectly” to engage in certain transactions, including “any device, scheme, or
artifice to defraud any client or prospective client,” “any transaction, practice, or
course of business which operates as a fraud or deceit upon any client or
prospective client,” or “any act, practice, or course of business which is
fraudulent, deceptive, or manipulative.” 15 U.S.C. § 80b‐6.3 The Act also
authorizes the SEC to enforce its provisions through, inter alia, investigation,
issuance of subpoenas, actions for injunctions in federal court, and civil damages
actions. See id. § 80b‐9. In addition, the Act imposes criminal penalties on
anyone who “willfully violates” its provisions or any SEC rule or regulation
promulgated thereunder. Id. § 80b‐17.
Tagliaferri’s principal argument is that, in a criminal prosecution under
§ 80b‐17, section 206 incorporates the common law requirement that intent to
defraud includes both intent to deceive and intent to harm. See, e.g., United States
v. Regent Office Supply Co., 421 F.2d 1174, 1180–81 (2d Cir. 1970) (holding in the
context of wire fraud that intent to defraud requires intent to harm).
3 The Act defines an investment adviser as “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,” with certain exceptions not
relevant here. 15 U.S.C. § 80b‐2(a)(11).
8
Accordingly, he argues, the District Court erred in declining to instruct the jury
that Tagliaferri’s intent to harm his clients was a necessary element of the
investment adviser charge. We are unpersuaded.4
In the context of the SEC’s authority to seek a preliminary injunction for
conduct violating the Act, see § 80b‐9(d), the Supreme Court has held that section
206 departs from common law and does not “require proof of intent to injure and
actual injury to clients.” SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180,
195 (1963). To require such proof would, the Court held, “defeat the manifest
purpose” of the Act: “a congressional recognition of the delicate fiduciary nature
of an investment advisory relationship, as well as a congressional intent to
eliminate, or at least to expose, all conflicts of interest which might incline [an]
investment adviser—consciously or unconsciously—to render advice which was
not disinterested.” Id. at 191–92 (footnote and internal quotation marks omitted).
The Court relied on not only the legislative history of the Act but also the
4 “To secure reversal based on a flawed jury instruction, a defendant must demonstrate
both error and ensuing prejudice.” United States v. Quinones, 511 F.3d 289, 313 (2d Cir.
2007). Where, as here, an objection to a jury instruction is properly preserved, we
review the instruction de novo but will reverse only “‘where the charge, viewed as a
whole, either failed to inform the jury adequately of the law or misled the jury about the
correct legal rule.’” United States v. Binday, 804 F.3d 558, 580–81 (2d Cir. 2015) (quoting
United States v. White, 552 F.3d 240, 246 (2d Cir. 2009)).
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development of common‐law fraud itself to impose obligations on fiduciaries,
like investment advisers, to act in “utmost good faith, and full and fair disclosure
of all material facts.” Id. at 194 (internal quotation marks omitted). Finally, the
Court concluded by noting that the Act, “like other securities legislation enacted
for the purpose of avoiding frauds,” should be construed “not technically and
restrictively, but flexibly to effectuate its remedial purposes.” Id. at 195 (internal
quotation marks omitted).
In an effort to distinguish Capital Gains, Tagliaferri relies on the Court’s
observation that the SEC injunction action was neither “a damages suit between
parties to an arm’s‐length transaction” nor “a criminal proceeding for ‘willfully’
violating the Act” and that “[o]ther considerations may be relevant in such
proceedings.” Id. at 192 & n.40 (quoting § 80b‐17). In doing so, the Court cited to
FCC v. American Broadcasting Co., 347 U.S. 284, 296 (1954), in which it applied the
rule that “penal statutes are to be construed strictly” to a statute that formed the
basis of both civil enforcement actions and criminal prosecutions. Accordingly,
Tagliaferri argues, the scope of section 206 in equitable civil enforcement actions,
like injunctions under § 80b‐9(d), reaches more broadly than it does in criminal
prosecutions under § 80b‐17. Although this argument is not altogether without
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force, it goes too far. That “penal statutes are to be construed strictly” may well
bar the criminal application of ambiguous statutory terms to facts they do not
clearly cover. But this proposition does not imply that a statute providing for
criminal enforcement of a civil liability must add an additional essential element.
We must therefore consider not only Capital Gains but also other relevant
precedents. Viewing section 206 in context, we conclude that intent to harm is
not an element of a criminal conviction under its terms.
To begin, the only textual distinction between the civil and criminal
enforcement mechanisms for section 206 is the Act’s requirement that a criminal
defendant commit a violation “willfully.” § 80b‐17. The Supreme Court has
observed that while “‘willful’ is a word of many meanings, its construction often
being influenced by its context. . . . [W]hen used in a criminal statute, it generally
means an act done with a bad purpose.” Screws v. United States, 325 U.S. 91, 101
(1945) (internal quotation marks omitted); see also Bryan v. United States, 524 U.S.
184, 191 (1998) (holding that “willfully” requires only “that the defendant acted
with knowledge that his conduct was unlawful.” (internal quotation marks
omitted)). Our Court likewise has held in contexts similar to this one that to
prove willfulness, “the prosecution need only establish a realization on the
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defendant’s part that he was doing a wrongful act.” United States v. Dixon, 536
F.2d 1388, 1395 (2d Cir. 1976) (Friendly, J.) (internal quotation marks omitted);
accord United States v. Kaiser, 609 F.3d 556, 567–70 (2d Cir. 2010).
Considering both the text of the provision and its statutory context, we
cannot say that violating section 206 “willfully” necessarily requires intent to
harm one’s clients. An investment adviser can violate this provision by engaging
in one of four types of conduct: (1) a “device, scheme, or artifice to defraud,” (2)
a “transaction, practice, or course of business which operates as a fraud or
deceit,” (3) a knowing sale or purchase of a security to or from a client, while
acting on the behalf of someone other than the client (including oneself), without
disclosing the transaction and obtaining the client’s consent, or (4) an “act,
practice, or course of business which is fraudulent, deceptive, or manipulative.”
§ 80b‐6. In Aaron v. SEC, 446 U.S. 680 (1980), the Supreme Court evaluated
section 17(a) of the Securities Exchange Act of 1933 (“the 1933 Act”), which is
similarly divided into three subsections. The Court concluded that the language
“‘any device, scheme, or artifice to defraud’ [in the first subsection] plainly
evince[d] an intent on the part of Congress to proscribe only knowing or
intentional misconduct.” Id. at 696 (quoting 15 U.S.C. § 77q(a)(1)). The other two
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subsections—which prohibited obtaining money or property “‘by means of any
untrue statement of a material fact or any omission to state a material fact’” and
engaging “‘in any transaction, practice, or course of business which operates or
would operate as a fraud or deceit,’” respectively—contained no indication that
any intent was required. See id. at 696–97 (quoting § 77q(a)(2)–(3)).
Applying a similar textual analysis here, it is clear that, at minimum,
subsections (2) and (4) do not incorporate the full requirements of fraudulent
intent at common law. Section 206(2) is almost identical to section 17(a)(3) of the
1933 Act. The Aaron Court recognized that the language “‘operates or would
operate as a fraud or deceit’ quite plainly focuses upon the effect of particular
conduct on members of the investing public, rather than upon the culpability of
the person responsible.” 446 U.S. at 697 (emphasis in original). In reaching this
interpretation, the Aaron Court in fact noted that Capital Gains had construed
section 206(2)’s similar language as meaning that a showing of “deliberate
dishonesty” was not required. Id. (citing Capital Gains, 375 U.S. at 200).
Similarly, section 206(4) prohibits not merely transactions that are “fraudulent”
but also those that are “deceptive” or “manipulative.” § 80b‐6(4). In the context
of other securities laws, the language “fraudulent, deceptive, or manipulative”
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has been construed to reach conduct motivated by either intent to defraud or
intent to deceive. See Schreiber v. Burlington N., Inc., 472 U.S. 1, 12 (1985); see also
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976) (“[‘Manipulative’] connotes
intentional or willful conduct designed to deceive or defraud investors by
controlling or artificially affecting the price of securities.” (emphasis added)).
Thus, the reach of section 206(4) extends to practices motivated by intent to
deceive, even if not intent to defraud.
Examining the text in conjunction with § 80b‐17’s requirement of
willfulness does not provide any logical reason why willfully “engag[ing] in any
transaction, practice, or course of business which operates as a fraud or deceit
upon any client or prospective client,” § 80b‐6(2), or willfully “engag[ing] in any
act, practice, or course of business, which is fraudulent, deceptive, or
manipulative,” § 80b‐6(4), requires specific intent to harm. The former is effect‐
focused, not intent‐focused, and the latter requires, at minimum, intent to
deceive. To violate either provision “willfully” is to do so “with a bad purpose,”
Screws, 325 U.S. at 101, or “with knowledge that [such] conduct was unlawful,”
Bryan, 524 U.S. at 191. As Capital Gains explained, the Act was designed not only
14
to capture conduct that was fraud but also to capture conduct that “operates as a
fraud.” 375 U.S. at 191 (emphasis added).5
This conclusion is consistent with both our Circuit’s prior holdings and the
Supreme Court’s explanation of section 206. For example, our Circuit has
already applied Capital Gains’s reasoning outside the context of equitable
injunctions to a civil enforcement action for money damages. See SEC v. DiBella,
587 F.3d 553, 567 (2d Cir. 2009) (concluding that “the government need not show
intent to make out a [section 206(2)] violation.”). In doing so, we relied in some
part on the Supreme Court’s further explanation of Capital Gains in Aaron. There,
the Supreme Court pointed out that, notwithstanding Capital Gains’ distinction
between equitable and legal fraud, “the language in question in Capital Gains,
‘any practice which operates as a fraud or deceit,’ focuses not on the intent of the
investment adviser, but rather on the effect of a particular practice.” Aaron, 446
U.S. at 694 (alterations omitted) (quoting Capital Gains, 375 U.S. at 195). Further,
“insofar as Capital Gains involved a statutory provision regulating the special
fiduciary relationship between an investment adviser and his client, the Court
5 Likewise, section 206(3), while requiring knowledge, prohibits certain transactions
made without disclosure and obtaining consent—no part of which requires intent to
harm. See § 80b‐6(3).
15
there was dealing with a situation in which intent to defraud would not have
been required even in a common‐law action for money damages.” Id.; see also id.
at 693 (characterizing Capital Gains as holding it unnecessary, “in a suit against a
fiduciary such as an investment adviser, to establish all the elements of fraud that
would be required in a suit against a party to an arm’s‐length transaction”).
Aaron ultimately concluded that scienter was an element of section 10(b) of the
1934 Act but not section 206, precisely because the latter had legislative history,
statutory text, and the context of a fiduciary relationship cutting against
requiring intent. See id. at 694–95. As we have just recently made clear that
section 10(b) does not require intent to harm, see United States v. Litvak, 808 F.3d
160, 178–79 (2d Cir. 2015), it would be inconsistent with Aaron’s discussion to
conclude that section 206 did.
To summarize, section 206 prohibits not only common‐law fraud by
investment advisers but also “any practice which operates as a fraud or deceit.”
Capital Gains, 375 U.S. at 192. In the special context of a fiduciary relationship
and given the Supreme Court’s repeated language in both Capital Gains and
Aaron regarding Congress’s intent to reach more than common‐law fraud
between arms‐length parties, it would be inconsistent with the text of section 206
16
and the congressional purpose motivating it to require specific intent to harm.
Instead, the willfulness mental state required by § 80b‐17 ensures that criminal
penalties are limited to cases in which the Government is able to prove that, at
minimum, “the defendant acted with knowledge that his conduct was
unlawful.” Bryan, 524 U.S. at 191.6 Because the wrongfulness of section 206
violations derives from their deceptiveness, proof that the defendant intended to
deceive his clients suffices to establish the requisite mens rea for guilt.
Accordingly, we find no error in the District Court’s instructions to the jury that
investment adviser fraud required only intent to deceive and not intent to harm.
6 Tagliaferri asserts, under such an interpretation, his conviction is in violation of due
process because the statute would be unconstitutionally vague. We reject this
contention easily. A statute is unconstitutionally vague if it “fails to provide a person of
ordinary intelligence fair notice of what is prohibited, or is so standardless that it
authorizes or encourages seriously discriminatory enforcement.” Holder v.
Humanitarian Law Project, 561 U.S. 1, 18 (2010) (internal quotation marks omitted). The
statute, as interpreted by the Supreme Court in Capital Gains and by us today,
criminalizes intentionally deceptive acts or practices by a specific category of
individuals—i.e., investment advisers as defined by the Act, see § 80b‐2(a)(11)—who due
to their fiduciary relationships and participation in a highly regulated industry are fully
on notice that deceptive conduct is unlawful. The law provides the necessary “explicit
standards” that make it “reasonably clear at the relevant time that the defendant’s
conduct was criminal,” though of course it “need not achieve meticulous specificity,
which would come at the cost of flexibility and reasonable breadth.ʺ Mannix v. Phillips,
619 F.3d 187, 197 (2d Cir. 2010) (internal quotation marks omitted); see also United States
v. Persky, 520 F.2d 283, 287 (2d Cir. 1975) (rejecting vagueness challenge to section 10(b)
because “[n]o honest and reasonable citizen could have difficulty in understanding the
meaning” of the terms used, notwithstanding the fact that “[a]ll these terms . . . call for
interpretation in accordance to the facts of a given case.”).
17
CONCLUSION
For the reasons stated above, we AFFIRM the judgment of the District
Court.
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