United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 16, 2006 Decided February 6, 2007
No. 05-5433
SECURITIES AND EXCHANGE COMMISSION,
APPELLEE
v.
WASHINGTON INVESTMENT NETWORK AND
ROBERT RADANO,
APPELLANTS
Appeal from the United States District Court
for the District of Columbia
(No. 02cv01506)
Russell G. Ryan argued the cause for appellants. With him
on the briefs was Bradley H. Cohen.
Mark R. Pennington, Assistant General Counsel, Securities
& Exchange Commission, argued the cause for appellee. With
him on the brief were Brian G. Cartwright, General Counsel,
and Jacob H. Stillman, Solicitor.
Before: GINSBURG, Chief Judge, and TATEL and BROWN,
Circuit Judges.
Opinion for the Court filed by Circuit Judge BROWN.
2
BROWN, Circuit Judge: Appellants ask us to reverse the
district court’s finding that appellant Washington Investment
Network (“WIN”) violated sections 203(f), 206(1), and 206(2)
of the Investment Advisers Act of 1940 (the “Act”), 15 U.S.C.
§§ 80b-3(f), 80b-6(1), and 80b-6(2), and that appellant Robert
Radano aided and abetted those violations. Appellants also seek
to vacate the district court’s injunction and reverse the
imposition of penalties. Because the district court’s factual
findings are not clearly erroneous, and because we find no error
of law, we uphold the district court’s finding of violations. We
remand the case to the district court so it may craft a more
narrow injunction. Appellants have forfeited their objection to
the imposition of penalties.
I
This case revolves around the business dealings of Steven
Bolla, Robert Radano, and their company, Washington
Investment Network (WIN). WIN was, at relevant times, a
registered investment advisor. Bolla was not actually a legal
owner of WIN—rather, Radano and Bolla’s wife were the
owners—but the evidence indicates Bolla was the principal
figure directing WIN’s activities, and Bolla’s wife played a
relatively minor role. Moreover, ownership of WIN had little
practical significance. WIN had no capital assets; it was
essentially an empty shell Radano and Bolla used to do business
under a corporate name. When money came into WIN, it was
distributed to Bolla, Radano, and others with whom Bolla and
Radano had fee-sharing agreements. According to the Securities
and Exchange Commission (“SEC”), Bolla designated his wife
as co-owner of WIN (rather than himself), because Bolla was
under SEC investigation.
Radano and Bolla’s business involved locating investors
and referring them to Lockwood Financial Services. Lockwood
3
is a third-party administrator serving several well-regarded
money managers. Lockwood acts as the intermediary between
the money managers and investors. Specifically, Lockwood
offers investors a service called a “wrap” account, which allows
several investors to combine their funds to meet the high
minimum-investment requirements of the money managers.
Lockwood administers these accounts, but to attract investors,
it relies primarily on referrals from investment advisers like
WIN.
According to Lockwood’s business model, the investment
adviser determines the individual investor’s specific investment
priorities and directs the investor to the Lockwood money
managers best suited to the investor’s objectives. The investor
then enters into a direct contractual relationship with Lockwood,
and Lockwood begins paying fees to the investment adviser.
Fees are generally calculated as a percentage of the total assets
the investor places in Lockwood’s control, and they are
deducted directly from the investor’s investment account.
Investment advisers are also obligated to remain in regular
contact with the investor and to monitor the investor’s account,
ensuring the investor’s portfolio remains consistent with his or
her investment objectives. Lockwood continues paying
quarterly fees to the investment adviser from the investor’s
account as long as the investor has assets under Lockwood
management.
Bolla and Radano received fees attributable to the assets
each respectively had brought to Lockwood, though it appears
Radano trusted Bolla to make the division. Over the course of
several years, Bolla channeled $30-40 million in assets to
Lockwood, and by the summer of 2000, he was receiving about
$150,000 per year in fees. Radano had brought much less
money to Lockwood, and his fee-sharing arrangements with
third parties were not as favorable to him. Therefore, he
4
received only about $10,000 per year in fees.
Bolla personally handled most of WIN’s financial affairs.
For example, though WIN was listed as the investment adviser
in Lockwood’s records, when Lockwood paid fees to WIN, it
mailed the check to Bolla, and Bolla deposited the fees in an
account under his exclusive control, opened under the name
“Steve M. Bolla DBA Washington Investment Network.” Bolla
would then disburse funds from this personal account to pay
Radano his portion of the fees, with Bolla making the fee-split
determination unilaterally. Bolla used the same account to pay
many of his personal obligations including his mortgage and his
wife’s credit card.
On March 20, 2000, Bolla entered into a settlement with the
SEC in regard to the ongoing investigation, not related to WIN
or Radano; he signed a consent to entry of a judgment against
him. On June 19, 2000, the federal district court entered a
judgment in that unrelated case, enjoining Bolla from violating
certain securities laws. The next day, the SEC issued an order
barring Bolla from the investment advisory business. During the
months leading up to this bar order, Radano knew it was likely
and did nothing to disassociate himself (and WIN) from Bolla.
When the bar order issued in June of 2000, Radano learned
of it almost immediately and contacted Lockwood within a
month or two to report the change in circumstances and to
establish himself as the new recipient of WIN fee payments (for
both his own and Bolla’s clients at WIN). Radano apparently
hoped to take over some (if not all) of Bolla’s lucrative book of
business, but because Lockwood had Bolla listed as the “rep”
for all WIN accounts, it refused to accept Radano as the new
WIN representative without written letters of authorization from
each individual investor. Radano testified this impasse with
Lockwood came as a complete surprise to him. He expected
5
Lockwood to switch the WIN accounts to his name on the basis
of a simple telephone call, and he thought little more was
necessary to disassociate both himself and WIN from Bolla.
Radano got letters of authorization from his own clients, but
he had a much harder time getting letters from Bolla’s clients,
in part because he lacked the necessary contact information.
Eventually he succeeded, at least with some of Bolla’s clients,
and he established himself as the “rep” for WIN accounts.
Because of the delay, Lockwood continued to send WIN’s
quarterly fee payments to Bolla for at least two quarters after the
June 20, 2000 bar order. Bolla did not forward these fee
payments unopened to Radano, thereby distancing himself from
WIN and the investment advisory business; instead, Bolla
continued to manage WIN’s financial affairs, depositing the fee
payments in his personal account, paying WIN’s expenses, and
disbursing a portion of the fees to Radano. In addition, Bolla
refused to transfer control over the bank account to Radano, and
he continued to give investment advice to WIN clients.
During this period, Radano continued to consult Bolla about
WIN’s affairs. For example, Radano sought Bolla’s assistance
in persuading Lockwood to transfer the WIN accounts to
Radano’s control. In addition, when Bolla’s clients continued
to call Bolla seeking investment advice, Bolla contacted Radano
and in some cases gave instructions as to the needs of these
clients. Bolla characterized these contacts as merely a matter of
handing off these calls to Radano, but Bolla also instructed
Radano about the payment of certain WIN expenses,
instructions Radano then followed. Most important, when
Radano began receiving WIN fee payments from Lockwood, he
forwarded a portion of one of the fee payments (roughly $2,700)
to Bolla’s wife. This payment, which Radano made eight
months after the bar order, was exactly fifty percent of the
investment adviser fees attributable to each of several clients
6
during the previous quarter, many of whom were formerly
Bolla’s clients. Radano characterized this payment as an
appropriate payment of investment adviser fees to Bolla’s wife
who was herself an investment advisor, but he conceded she
performed only clerical duties for WIN and had not previously
received fee payments for her services. Bolla did not suggest
the payment was for services his wife had provided; rather, he
asserted it was a reimbursement to him for accumulated
expenses he had incurred over several years, including moving
expenses. Bolla also said the payment was a fair settlement—a
“cleaning up”—of what was owing to him: “I built a
company . . . I think that WIN owed me that.”
During the months after the bar order, Radano was evasive
in some conversations with Bolla’s clients, avoiding specific
descriptions of Bolla’s situation. Radano did not always make
clear the SEC had barred Bolla from the investment advisory
business, instead making vague comments that Bolla “was no
longer with WIN,” “was out of the business,” or was “going to
pursue more of the insurance angle.” When one of these clients
specifically asked about the bar order (having learned of it from
an independent source), Radano downplayed the significance of
the order, saying it related to a bankrupt company in California
and had nothing to do with WIN.
II
The SEC brought this action against Bolla, Bolla’s wife,
Radano, and WIN, asserting Bolla continued to act as an
investment adviser after he was barred from the investment
advisory business and did so in association with WIN and
Radano. Bolla and his wife settled, and the matter proceeded to
a bench trial against WIN and Radano. The SEC asserted WIN
violated sections 203(f), 206(1), and 206(2) of the Act by
allowing Bolla to continue to associate with the firm and failing
7
to disclose Bolla’s bar, and it asserted Radano aided and abetted
those violations. Section 203(f) of the Act prohibits investment
advisers from associating with parties they know to have been
barred from the investment advisory business. 15 U.S.C. § 80b-
3(f). Sections 206(1) and 206(2) prohibit investment advisers
from “defraud[ing] any client or prospective client,” id. § 80b-
6(1), or “engag[ing] in any . . . practice . . . which operates as a
fraud or deceit,” id. § 80b-6(2).
The district court made findings of fact substantially
consistent with the summary of evidence related above;
however, the court expressly found Radano’s testimony lacked
credibility, and the court even found Radano fabricated evidence
in support of his claim he severed ties between WIN and Bolla’s
wife in July 2000. The district court sustained the SEC’s
charges and issued an injunction barring WIN and Radano from
future violations of sections 203(f), 206(1), and 206(2) of the
Act. It also imposed a penalty of $15,000 against Radano and
$50,000 against WIN. SEC v. Bolla, 401 F. Supp. 2d 43, 75
(D.D.C. 2005).
III
A
“In all actions tried upon the facts without a jury . . . [the
trial court’s f]indings of fact, whether based on oral or
documentary evidence, shall not be set aside unless clearly
erroneous, and due regard shall be given to the opportunity of
the trial court to judge of the credibility of the witnesses.” FED.
R. CIV. P. 52(a). To satisfy this standard the district court’s
findings need only be plausible. Anderson v. City of Bessemer
City, 470 U.S. 564, 573-74 (1985). The district court’s
conclusions of law are subject to de novo review. United States
v. Microsoft Corp., 253 F.3d 34, 50-51 (D.C. Cir. 2001). We
8
review the decision to grant an injunction for abuse of
discretion. SEC v. Banner Fund Int’l, 211 F.3d 602, 616 (D.C.
Cir. 2000).
B
Appellants first argue WIN was not an investment adviser
as that term is defined in section 202(a)(11) of the Act. As
relevant here, section 202(a)(11) defines “[i]nvestment adviser”
as “any person who, for compensation, engages in the business
of advising others . . . 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.”
15 U.S.C. § 80b-2(a)(11). Appellants contend WIN acted
primarily as a referral service for Lockwood, receiving what
amounted to a finder’s fee, and they minimize any role WIN
played in giving investment advice. This claim, however, is
refuted by the evidence, including Radano’s own testimony,
which shows WIN had an obligation to advise new clients
regarding various investment options and a continuing
obligation to monitor each client’s investment account. For
example, Radano testified WIN’s continuing duties after a client
had set up an account with Lockwood included “[e]nsuring
that . . . the integrity of the account remained,” “ensur[ing] that
the account . . . was still consistent with risk parameters, goals
and objectives,” and “mak[ing] sure [the account] was on track
and consistent.” Radano further testified the quarterly fee
payments WIN received were in exchange for these ongoing
account monitoring obligations. At his deposition, which the
district court also considered in making its findings, Radano
specified that, if a client’s account ceased to be consistent with
the client’s needs, “[c]hanges would be made in terms of
management, in terms of allocation between stock and bond.”
Moreover, Radano executed WIN’s March 22, 2000 application
9
to the State of Connecticut for an “investment adviser
registration.” In that application, WIN stated it “reviewed
[client statements] monthly for accuracy” and completed client
profiles “annually to allow account objectives to adjust to any
changes in client goals or risk tolerances.” WIN also stated its
fee was “[f]or overall portfolio management, portfolio
allocation, manager selection and personalized account
services.” Finally, WIN described its business as follows:
Applicant offers advice to clients about other outside
unaffil[i]ated investment advisors through a wrap account
program. Applicant develops a detailed investment profile
about each client prior to manager selection. Applicant’s
advice to clients consists of asset allocation and assistance
in the selection of investment managers for account
assets. . . . Applicant monitors all selected investment
managers on an ongoing basis for investment returns, sector
analysis, investment process and investment objectives.
All of this evidence leaves no doubt WIN had an ongoing
obligation to give investment advice and did not merely act as
a referral service.
Because WIN’s business entailed advising clients in
choosing among different investment managers who had distinct
investment styles, and because it also advised clients in regard
to “asset allocation,” we think WIN’s activities easily fall within
the Act’s definition of investment adviser. As the district court
found, WIN’s business of selecting particular investment
managers in lieu of others had the effect of channeling client
funds to particular security investments. Indeed, if this were not
so, then there would have been no point in making
“[c]hanges . . . in terms of management” and “allocation” when
an account ceased to be consistent with a client’s needs. In
short, we cannot say the district court’s factual conclusions were
10
“clearly erroneous,” FED. R. CIV. P. 52(a), and we agree with the
district court that WIN’s service constituted “advising others . . .
as to the advisability of investing in, purchasing, or selling
securities,” 15 U.S.C. § 80b-2(a)(11), making WIN an
investment adviser.
C
Appellants deny WIN violated section 203(f) of the Act. As
noted, that section prohibits investment advisers from
associating with parties they know have been barred from the
investment advisory business. Id. § 80b-3(f). Specifically,
section 203(f) provides: “[I]t shall be unlawful for any
investment adviser to permit [any person as to whom a bar order
is in effect] to become, or remain, a person associated with
him . . . if such investment adviser knew, or in the exercise of
reasonable care, should have known, of such order.” Id.
(emphasis added). Section 202(a)(17) provides in relevant part:
“The term ‘person associated with an investment adviser’ means
any partner, officer, or director of such investment adviser (or
any person performing similar functions), or any person directly
or indirectly controlling or controlled by such investment
adviser, including any employee of such investment
adviser . . . .” Id. § 80b-2(a)(17) (emphasis added).
The record makes clear, as the district court found, that
Bolla continued to manage WIN’s finances after the bar order.
When Bolla received fee checks from Lockwood—checks that
belonged to WIN—he did not forward those checks unopened
to Radano; instead, he deposited the fees in his personal account,
paid WIN’s expenses, and disbursed a portion of the fees to
Radano. He even claimed, according to Radano’s testimony,
that September 30, 2000 (three months after the bar order) was
a “good break point”—a good time, that is, for Radano to take
over the finances at WIN. In addition, Bolla refused to transfer
11
control over WIN’s bank account to Radano, and Bolla
continued to receive inquiries from WIN clients and direct
Radano as to the needs of these clients. Radano, for example,
testified Bolla “was calling me and saying client A, B, C call[,]
client so and so call. . . . He would call me and say . . . Tim[]
Riordan . . . called; Daniel Davon needs [an] IRA distribution,
call him.” Bolla also specifically instructed Radano concerning
the payment of WIN’s obligations in accordance with certain
third-party fee-sharing agreements. At trial, Radano was asked:
“[Y]ou’re still [on November 27, 2000] taking instructions from
[Bolla] on how to subdivide fees?” To which, Radano replied:
“On some level, yes, ma’am, because he’s received . . . this
check directly from Lockwood, so what I’m trying to do is make
sure that the fees are properly processed through the system.”
Similarly, Radano testified about a check he had received from
Bolla after the bar order:
This was a check that was sent out to me so that I could
send a client— . . . I don’t have a direct recollection as to
why [Bolla] sent it to me to send out to other people, but . . .
there’s a . . . deposit into the WIN . . . .
[T]hen I paid out—for whatever reason, he wanted me
to pay out, or requested that I pay someone else out fees at
that time.”
To clarify that response, counsel asked: “[Bolla] directed you to
make payments to third parties?” To which, Radano replied:
“Yes.”
Furthermore, the evidence easily supports the district
court’s finding that the $2,700 payment WIN made to Bolla’s
wife in February 2001 was a division of fees between Radano
and Bolla for the previous quarter, and this division of fees was
made at the direction of Bolla himself. This payment was
exactly fifty percent of the fees attributable to several WIN
12
clients, most of whom were Bolla’s former clients, and Bolla’s
testimony indicated the payment was really to him, and not to
his wife. If the payment were merely a reimbursement of
expenses Bolla incurred before the bar order, as Bolla suggested,
it would probably not constitute “associat[ion]” in violation of
section 203(f), but the evidence supports the district court’s
finding that the payment was actually a division of fees for a
quarter that post-dated the bar order. Moreover, Radano’s
characterization of this payment as a fee payment to Bolla’s wife
has no credibility at all in light of her limited duties at WIN and
the fact that she had never previously received payment.
This evidence makes very clear Bolla continued to be a
“person directly or indirectly controlling” WIN after the bar
order, id. § 80b-2(a)(17), and therefore the district court’s
conclusion that Bolla remained associated with WIN is not
clearly erroneous, FED. R. CIV. P. 52(a).
However, evidence showing Bolla continued his WIN-
related activities after the June 20, 2000 bar order is insufficient,
by itself, to warrant a judgment against WIN and Radano. If, for
example, Bolla stole fee checks that properly belonged to WIN
and disbursed funds from those checks in contravention of
WIN’s wishes and despite WIN’s active efforts to prevent
Bolla’s actions, then WIN could not be held liable for violating
section 203(f), because WIN would not in that case have
“permit[ted]” Bolla to remain associated with WIN. 15 U.S.C.
§ 80b-3(f). WIN would then be a victim of Bolla, not an
associate. Therefore, to establish a violation of section 203(f),
the SEC needed to prove WIN took some affirmative step to
permit Bolla to associate with WIN, or at least that it acquiesced
in Bolla’s ongoing management of WIN finances such that its
passivity can be deemed a violation of section 203(f). The latter
possibility is significant here. Appellants argue the term
“permit” in section 203(f) means “authorize,” which suggests an
13
affirmative giving of permission, as when a regulatory agency
issues a license allowing a private party to engage in a regulated
activity. The SEC rejects this narrow reading of the word
“permit,” interpreting the word to mean, in effect, “acquiesce.”
We think the SEC’s reading of the statute is correct. If Congress
in adopting section 203(f) used the word “permit” to mean
“authorize,” the statute would be so narrow in scope as to be
almost silly. It is hard to imagine an investment adviser ever
actively authorizing a barred individual to take control of the
firm. The much more natural reading of the statute is that it
prohibits investment advisers from standing aside passively
while a barred individual takes control of the firm, and this is the
reading we adopt. In sum, we need to consider whether WIN
acquiesced in Bolla’s continuing control over its finances to a
degree sufficient to hold it liable under section 203(f).
As a corporation, WIN could only act through its officers,
and with the exception of Bolla himself, WIN’s only corporate
officers were Radano and Bolla’s wife. Because Bolla’s wife
did not act in an executive capacity at WIN (as all parties
concede), the focus is on Radano’s actions as managing director
of WIN during the months leading up to and immediately
following the bar order.
Radano testified in essence that he was blind-sided by the
June 20, 2000 bar order, and he immediately took action to sever
ties between WIN and Bolla, but he did not gain full control of
WIN’s finances for several months. Bolla, however, settled with
the SEC in March 2000, and Radano knew of Bolla’s problems
with the SEC long before that settlement. Moreover, Radano
conceded he knew in February of 2000 that Bolla was likely to
be barred soon; he just did not know precisely when the bar
would take effect. Radano further claims that, in his ignorance,
he thought a mere telephone call to Lockwood would cause
Lockwood to change the address on the WIN accounts to
14
Radano’s address, and with that change of address, the
necessary transition would be complete. But even if we assume
Radano was completely ignorant of WIN’s contractual
relationship with Lockwood, Radano could not very well expect
to take over Bolla’s WIN clients with neither a formal
introduction to these clients nor records of their investment
history or objectives, which remained in Bolla’s possession.
Moreover, assuming Radano could convince these clients to
remain with WIN, he could not hope to take over Bolla’s side of
the business without knowledge of Bolla’s fee-sharing
arrangements with third parties. Therefore, even if we accept
Radano’s claim, Radano had no basis for expecting to take over
control of WIN without Bolla’s cooperation. Under these
circumstances, Radano’s casual, “wait and see” approach was
simply inadequate. As soon as Radano knew the bar order was
imminent, Radano, as WIN’s managing director, should have
actively sought Bolla’s cooperation with the transition of Bolla’s
WIN clients to Radano’s oversight, and if that cooperation was
not forthcoming, Radano should have taken steps to protect
WIN and its clients.
Radano’s failure in this regard might be dismissed as mere
managerial incompetence. It rose to the level of a violation of
section 203(f) once the bar order took effect and Radano still
took no steps on behalf of WIN to prevent Bolla’s continuing
control over WIN and its finances. Because Bolla had, prior to
the bar order, held himself out as one of WIN’s managing
directors, WIN needed to take immediate steps to terminate its
relationship with Bolla. Radano’s actions as the managing
director of WIN make clear WIN did not. Radano failed to
notify the SEC that Bolla was insisting on continuing his role as
manager of WIN’s finances despite the bar order. Radano also
did not bring any legal action against Bolla on behalf of WIN,
and in fact, Radano did not even formally protest to Bolla in
writing concerning Bolla’s continuing involvement with WIN.
15
Rather, Radano was complicit in the arrangement, treating it as
part of a necessary transition, and even going so far as to make
a fee payment to Bolla on behalf of WIN.
Finally, Radano did not take formal steps on behalf of WIN
to inform WIN’s clients of the bar order, along with an
explanation of how the bar order might affect their interests and
a neutral discussion of the options these clients might have.
Such a formal notification would likely have caused WIN’s
clients either (1) to terminate their relationship with WIN, or (2)
to execute letters of authorization making Radano their selected
representative at Lockwood. In either case, notification would
have made clear WIN was not complicit in Bolla’s ongoing
involvement with WIN’s financial affairs, and it would have
satisfied WIN’s fiduciary obligations to its clients. Radano
testified he could not contact Bolla’s WIN clients because Bolla
possessed the contact information for these clients. But this
assertion does not excuse Radano’s failure to take immediate
action, as WIN’s managing director, to protect WIN’s interests.
If Bolla was refusing to release WIN’s client files and related
records, then Radano needed to initiate legal proceedings on
WIN’s behalf to obtain those files. By not doing so, he signaled
that WIN was content to allow Bolla to continue in his
traditional role as WIN’s principal. Moreover, even when
Bolla’s former clients contacted Radano, he still did not make
clear the SEC had barred Bolla from the investment advisory
business. Instead, he resorted to dodgy statements that obscured
the truth. WIN’s failure to notify its clients indicates, as the
district court found, that “Radano chose the lure of . . . potential
profit from Bolla’s book of clients over his obligations under
Section 203(f).”
In sum, the district court found Radano took no significant
actions on behalf of WIN to sever ties with Bolla during the
months following the bar order. Radano knew Bolla continued
16
to serve as the contact person for his clients, and he also knew
Bolla continued to manage WIN’s finances. He followed
Bolla’s instructions in regard to the disbursement of WIN’s fees,
and eight months after the bar order, he paid Bolla a portion of
WIN’s fees, at Bolla’s behest. Finally, he failed to inform
WIN’s clients of the bar order. In light of the evidence, these
findings are not “clearly erroneous,” FED. R. CIV. P. 52(a), and
they amply support the district court’s conclusion that WIN
permitted Bolla’s continued association with the firm in
violation of section 203(f).
D
Appellants also deny WIN violated section 206 of the Act.
Section 206 provides in relevant part: “It shall be unlawful for
any investment adviser . . . directly or indirectly—(1) to employ
any device, scheme, or artifice to defraud any client or
prospective client; (2) to engage in any transaction, practice, or
course of business which operates as a fraud or deceit upon any
client or prospective client . . . .” 15 U.S.C. § 80b-6. The
district court found WIN violated both subparagraph (1) and
subparagraph (2) of section 206 when Radano, as a
representative of WIN, spoke to Bolla’s former clients without
disclosing the bar order. In the district court’s view, Radano
hoped to attract these clients to himself, and therefore he did not
want to say anything that would cause these clients to sever their
relationship with WIN. Appellants raise several objections to
the district court’s decision.
First, appellants argue that, with few exceptions, a failure to
disclose cannot constitute a fraud in violation of section 206.
Appellants base this argument on the absence from section 206
of a failure-to-disclose provision that is included in section 17(a)
of the Securities Act of 1933. Id. § 77q(a). Section 17(a) of the
Securities Act has two subparagraphs that are almost identical
17
to the first two subparagraphs of section 206, but section 17(a)
includes a third subparagraph that makes it unlawful “to obtain
money or property by means of . . . any omission to state a
material fact” when omitting the fact is “misleading.” Id.
§ 77q(a)(2) (emphasis added). Appellants argue the absence of
this provision from the Investment Advisers Act suggests the
Act was not intended to cover inadequate disclosure of material
information, but only actual misrepresentations of fact and other
affirmative frauds.
In response, the SEC argues the two statutory schemes
cannot be compared. The Investment Advisers Act concerns
itself with investment advisers, who, as fiduciaries, have a duty
to disclose material information to clients. Because the
Securities Act applies to non-fiduciaries as well as fiduciaries,
it is more specific as regards the implications of failing to
disclose material information.
The SEC also relies on SEC v. Capital Gains Research
Bureau, Inc., 375 U.S. 180 (1963), in which the Supreme Court
made clear the failure to disclose material information can, in at
least some circumstances, provide the basis for a fraud finding
under section 206. Capital Gains considered whether an
investment adviser had a duty to disclose a practice known as
“scalping.” Id. at 181. Scalping occurs when an investment
adviser purchases shares of a security for his own account prior
to recommending the security for longterm investment and then
immediately sells the shares after a rise in the market price
following the recommendation. Id. The Supreme Court held
section 206 requires investment advisers to disclose this
practice. Id. at 181-82. Appellants argue Capital Gains is
distinguishable factually, pointing out that Capital Gains (unlike
the present case) involved multiple securities transactions made
against a background of nondisclosure. Be that as it may, we
think the better reading of section 206 is that it prohibits failures
18
to disclose material information, not just affirmative frauds.
This reading is consistent with the fiduciary status of investment
advisers in relation to their clients, id. at 191-92, 194, and it is
also more likely to fulfill Congress’s general policy of
promoting “full disclosure” in the securities industry, id. at 186.
The district court found Radano, as WIN’s representative,
was evasive in conversations with at least two of WIN’s clients
during the months following the bar order, thereby violating
section 206. Radano did not disclose the bar order to these
clients, choosing instead to offer vague comments about Bolla’s
status and then only after these clients pressed for information.
When one of these clients directly confronted Radano about the
bar order, he downplayed its significance. In this way, the court
found “Radano affirmatively misled [these clients] regarding
Mr. Bolla” and provided these clients “an inaccurate, skewed
version of WIN as an investment entity.” The district court’s
findings in this regard are supported by the clients’ testimony,
which the court found more credible than Radano’s own
testimony, and therefore these findings are not “clearly
erroneous.” FED. R. CIV. P. 52(a).
Moreover, we agree with the district court that WIN’s
evasiveness in these conversations constituted fraudulent
behavior in violation of section 206. In Capital Gains, the
Supreme Court noted that investment advisers, as fiduciaries,
have “an affirmative duty of utmost good faith, and full and fair
disclosure of all material facts, as well as an affirmative
obligation to employ reasonable care to avoid misleading [their]
clients.” 375 U.S. at 194 (citations and internal quotation marks
omitted). Certainly, in WIN’s case, this duty included
disclosing Bolla’s bar from the investment advisory business.
Bolla was not an incidental player in WIN’s business. His
clients at WIN represented WIN’s largest accounts, and his
corresponding share of WIN’s fees dwarfed that of Radano, who
19
was WIN’s only other active investment adviser. Moreover, he
personally managed WIN’s finances, and for many of WIN’s
clients, he was the face of WIN. When such a critical player in
an investment advisory firm is barred from the business on
account of misconduct, the firm has a fiduciary duty to disclose
that fact to its clients, and in particular to clients who previously
dealt exclusively with that individual.
Appellants assert Radano’s communications with WIN’s
clients were not misleading, or if they were, they did not rise to
the level of fraud. The SEC’s evidence, appellants point out,
focused primarily on conversations Radano had with only two
clients. The SEC did not establish either client lost money as a
result of Radano’s evasiveness during these conversations, and
in one of the conversations, the client already knew about the
bar order. Therefore, appellants assert, Radano’s failure to
disclose the bar order could not constitute fraud.
To obtain an injunction under section 206 against fraudulent
conduct, the SEC does not need to prove reliance on the
investment adviser’s misleading statements, nor does the SEC
need to prove injury. Id. at 192-93, 195. Rather, if an
investment adviser is likely to repeat fraudulent conduct and
future injury is reasonably foreseeable, an injunction may issue
as a prophylactic measure without the necessity of waiting until
the injury actually occurs. Id. Hence, we reject appellants’
contention that the failure of the SEC to establish injury requires
reversal here.
Appellants also argue the bar order was a matter of public
record and therefore disclosure of the bar order was
unnecessary. Appellants rely on Kapps v. Torch Offshore, Inc.,
379 F.3d 207, 216 (5th Cir. 2004), in which the Fifth Circuit
found the public availability of information relevant in a failure-
to-disclose case. We agree the public availability of information
20
is a relevant consideration when evaluating a party’s disclosure
obligations under the securities laws, but we do not think this
principle requires reversal here. The existence of the bar order
may have been public information, but it was not information
that was so widely disseminated that an average small investor
could be expected to be aware of it.
Finally, appellants deny Radano acted with the requisite
“intent to deceive, manipulate, or defraud,” SEC v. Steadman,
967 F.2d 636, 641 (D.C. Cir. 1992) (quoting Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 194 n.12 (1976)), when he failed to
disclose the bar order to WIN’s clients, and therefore argue WIN
cannot be held liable for violating section 206(1). Similarly,
appellants deny Radano acted with the negligence required to
make out a violation of section 206(2). See id. at 643. The
district court made an express finding of intent to defraud, as
well as negligence, stating that Radano, in his dealings with
WIN’s clients, “opted to pursue the potential financial gain
resulting from easy transfers of accounts over the hard
acknowledgment that his business partner had been barred from
further practice by the regulating agency.” The court also
rejected appellants’ argument that Radano’s quick action in
informing Lockwood about the bar order established his good
faith. As the court saw it, “Mr. Radano immediately notified
Lockwood of Mr. Bolla’s bar . . . because it was in his economic
interest to separate Mr. Bolla from Lockwood as soon as
possible. In contrast, . . . Mr. Radano was reticent and reserved
[with WIN’s clients] . . . in an effort to maintain their
association with WIN . . . .” In short, the district court found
Radano, driven by self-interest, intentionally breached his
fiduciary obligations and those of WIN, “well aware that he
could potentially increase his salary fifteen-fold” by taking over
Bolla’s accounts.
The district court’s findings are amply supported by the
21
testimony of WIN’s clients, who described their conversations
with Radano and whom the court found to be more credible than
Radano. We also agree with the district court that Radano’s
denial of any intent to be evasive in conversations with WIN’s
clients is highly doubtful in light of his openness and candor in
situations where such candor served his personal interest—to
wit, with Lockwood. The district court’s findings of both intent
and negligence are not “clearly erroneous.” FED. R. CIV. P.
52(a).
E
The district court held Radano liable on an aider and abettor
theory, while holding WIN liable as the principal violator.
Radano argues the court’s findings are insufficient to support
aider and abettor liability, because the court made no express
finding that he had “knowledge of wrongdoing.” See Howard
v. SEC, 376 F.3d 1136, 1142-43 (D.C. Cir. 2004).
To be liable as an aider and abettor under sections 203(f),
206(1), and 206(2), the SEC must prove “knowledge of
wrongdoing,” id., or “a general awareness [on the part of the
alleged aider and abettor] that his role was part of an overall
activity that was improper,” Investors Research Corp. v. SEC,
628 F.2d 168, 178 (D.C. Cir. 1980). With respect to WIN’s
violation of section 203(f), Radano admits he knew of the bar
order, having learned of it almost immediately after it went into
effect. Certainly, then, he knew it was improper for WIN to
continue associating with Bolla, and the district court found
WIN continued to associate with Bolla in several ways,
including: (1) permitting Bolla to control its finances; (2)
complying with Bolla’s instructions regarding payment of its
obligations; (3) paying Bolla a portion of its fees, at Bolla’s
behest; and (4) failing to inform its clients about the bar order.
Moreover, in each instance, WIN acted under Radano’s
22
direction. Though the district court did not make an express
finding that Radano knew the wrongfulness of WIN’s
actions—that is, that they constituted improper association—the
court made such a finding implicitly. We think the record as a
whole indicates Radano, as WIN’s agent, was “general[ly]
aware[] that his role was part of an overall activity that was
improper,” id., and therefore the record adequately supports the
district court’s holding that he aided and abetted WIN’s
violation of section 203(f).
With respect to WIN’s violation of section 206, we think an
express finding that Radano had knowledge of WIN’s
wrongdoing was unnecessary because this question was
subsumed within the question whether WIN acted with the
requisite scienter. As noted, a violation of section 206(1)
requires proof of “intent to deceive, manipulate, or defraud.”
Steadman, 967 F.2d at 641 (quoting Hochfelder, 425 U.S. at 194
n.12). The district court found WIN had acted with such intent
based solely on Radano’s motives as WIN’s managing director.
In a situation like that presented here, where a small firm, acting
solely through the agency of a single individual, has
intentionally deceived, manipulated, or defrauded its clients, the
conclusion is unavoidable that the individual in question has
knowledge of the firm’s wrongdoing.
F
Appellants argue this case did not involve the sort of
repeated violations and likelihood of future violations that
warrant injunctive relief. See Steadman, 967 F.2d at 647-48.
We conclude the record adequately supports the district court’s
finding of a reasonable likelihood of future violations, and the
court therefore acted within the bounds of its discretion in
entering the injunction. Significantly, we are not presented here
with an isolated event or a violation that is technical in nature.
23
Radano’s willingness to enter into a business relationship with
Bolla though he knew the SEC was likely to bar Bolla from the
investment advisory industry, his failure to take decisive action
to distance himself and WIN from Bolla once the bar order
became imminent, his willingness to permit Bolla to continue
his control over WIN’s finances after the bar order took effect,
his payment of fees to Bolla eight months after the bar order,
and his lack of candor in conversations with WIN’s clients
(thereby putting his self-interest over that of the clients), all
strongly suggest a willfulness and a continuing pattern of
fiduciary violations that is likely to be repeated in the future.
Therefore, we uphold the injunction. However, we find the
injunction insufficiently specific.
Rule 65(d) of the Federal Rules of Civil Procedure
provides: “Every order granting an injunction . . . shall be
specific in terms [and] shall describe in reasonable detail, and
not by reference to the complaint or other document, the act or
acts sought to be restrained . . . .” The district court’s injunction
states simply: “Defendants WIN and Radano are enjoined from
future violations of Sections 203(f), 206(1), and 206(2) of the
Advisers Act.” We think this injunction fails to clarify “the act
or acts sought to be restrained,” FED. R. CIV. P. 65(d), and it
might subject defendants to contempt for activities having no
resemblance to the activities that led to the injunction, thereby
being overly broad in its reach. See SEC v. Savoy Indus., Inc.,
665 F.2d 1310, 1318-19 (D.C. Cir. 1981). We therefore remand
the case to the district court to reform the injunction and to
address the question of overbreadth.
G
The SEC’s complaint sought penalties under section 20(d)
of the Securities Act of 1933, 15 U.S.C. § 77t(d), and section
21(d)(3) of the Securities Exchange Act of 1934, id. § 78u(d)(3).
24
Appellants argue the district court erred in awarding penalties
under these provisions. In addition, Radano argues the
Investment Advisers Act does not authorize penalties against an
aider and abettor, but only against “the person who committed
[the] violation.” Id. § 80b-9(e)(1). Appellants did not raise
these issues before the district court, and therefore the issues are
forfeit. See, e.g., Albrecht v. Comm. on Employment Benefits of
the Fed. Reserve Employee Benefits Sys., 357 F.3d 62, 66 (D.C.
Cir. 2004).
IV
We affirm the district court’s judgment finding WIN
violated sections 203(f), 206(1), and 206(2) of the Investment
Advisers Act of 1940 and finding Radano aided and abetted
those violations. We also affirm the imposition of penalties on
WIN and Radano, as set forth in the district court’s judgment.
We remand the case to the district court for it to amend the
injunction to describe more specifically the act or acts sought to
be restrained.
So ordered.