Securities – Advisers Act

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Where the Securities and Exchange Commission brought suit alleging violations of Sections 206(1) and 206(2) of the Investment Advisers Act, a grant of summary judgment in favor of the SEC and an order requiring disgorgement in an amount exceeding $22 million should be affirmed based on evidence that statements in the appellants’ marketing materials were material misrepresentations made with a culpable mental state.

“In 2017, the Securities and Exchange Commission (‘SEC’) brought suit against investment advisers Louis Navellier (‘Navellier’) and Navellier & Associates, Inc. (‘NAI’) (collectively, ‘Appellants’), alleging violations of sections 206(1) and 206(2) of the Investment Advisers Act (‘Advisers Act’), 15 U.S.C. §80b-6(1)-(2). After the United States District Court for the District of Massachusetts granted summary judgment in favor of the SEC and, inter alia, ordered disgorgement in an amount exceeding $22 million, Appellants appealed. …

“Section 206(1) of the Advisers Act makes it unlawful for an investment adviser ‘to employ any device, scheme, or artifice to defraud any client or prospective client.’ 15 U.S.C. §80b-6(1). Section 206(2) prohibits an investment adviser from ‘engag[ing] 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(2). To establish a violation, ‘each of these sections requires the SEC to show the investment adviser made a material misrepresentation with a culpable mental state.’ …

“Appellants do not dispute that their Vireo AlphaSector marketing materials stated that the AlphaSector strategy had an inception date of April 1, 2001, that the strategy was an ‘active’ one, and that the strategy’s returns were not back-tested. Appellants, however, contend that the SEC did not prove that these statements were false. …

“Here, the undisputed facts establish that the relevant statements were false and therefore misrepresentations within the scope of section 206. …

“For the foregoing reasons, we conclude that there remains no genuine dispute of material fact as to whether the relevant statements were misrepresentations within the scope of sections 206(1) and 206(2) of the Advisers Act. …

“Next, Appellants argue that either the relevant statements were not material or that materiality is a question for the jury that cannot be resolved on a motion for summary judgment. …

“Because Appellants’ omissions ‘are “so obviously important to an investor[] that reasonable minds cannot differ on the question of materiality” … the ultimate issue of materiality [is] appropriately resolved [here] “as a matter of law” by summary judgment.’ …

“While the misrepresentation and materiality elements are the same for sections 206(1) and 206(2) of the Advisers Act, the requisite mental state differs. … Section 206(1) ‘requires the SEC to show the adviser acted with scienter.’ … Section 206(2), on the other hand, ‘require[s] no showing of scienter, and a showing of negligence is sufficient.’ …

“As to scienter, Appellants argue that summary judgment was improper because a reasonable jury could find that they did not intend to defraud current or prospective clients. This argument fails. …

“As per our analysis of the misrepresentation and materiality requirements, Appellants’ omissions were not only material but an extreme departure from the standards of ordinary care. … The record thus establishes that Appellants acted with a high degree of recklessness, thus acting with scienter. …

“For the foregoing reasons, we conclude that there remains no genuine dispute of material fact as to any element of the alleged violations of sections 206(1) and 206(2) of the Advisers Act. We thus affirm the district court’s grant of summary judgment in favor of the SEC as to Counts I and II. …

“We now consider Appellants’ challenges to the district court’s disgorgement order. …

“Appellants first argue that disgorgement was not an available equitable remedy because NAI’s Vireo AlphaSector clients suffered no pecuniary harm. …

“Appellants’ argument that disgorgement was not an available equitable remedy here because NAI’s Vireo AlphaSector clients did not suffer pecuniary harm mischaracterizes the nature and purpose of disgorgement. …

“We thus conclude that, ‘in the circumstances of this case, the equitable remedy of disgorgement was available in principle.’ …

“For the foregoing reasons, we find no abuse of discretion in the district court’s disgorgement order, and affirm the district court’s amended final judgment.”

Securities and Exchange Commission v. Navellier & Associates, Inc., et al. (Lawyers Weekly No. 01-137-24) (45 pages) (Gelpí, J.) Appealed from a decision by Casper, J., in the U.S. District Court for the District of Massachusetts. Samuel Kornhauser for the appellants; Paul G. Álvarez, with whom Megan Barbero and Daniel Staroselsky were on brief, for the appellee (Docket Nos. 20-1581, 21-1857, 22-1733 and 23-1509) (July 16, 2024).

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