Sec. & Exch. Comm'n v. Ambassador Advisors, LLC
| Decision Date | 20 December 2021 |
| Docket Number | Civil No. 5:20-cv-02274-JMG |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. AMBASSADOR ADVISORS, LLC, et al., Defendants. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
John T. Crutchlow, Michael S. Macko, Christopher Reynolds Kelly, Jennifer Chun Barry, U.S. Securities & Exchange Commission Philadelphia Regional Office, Philadelphia, PA, for Plaintiff.
Donald N. David, Megan Admire, Ashley B. Akapo, Pro Hac Vice, Joel S. Forman, Meghan K. Boland, Akerman LLP, New York, NY, Shawn M. Taylor, Jordan D. Mobley, Akerman LLP, Chicago, IL, Akivia P.A. Bassaragh, Akerman LLP, Miami, FL, for Defendants.
Defendants Bostwick, Kauffman and Young own and operate Defendant Ambassador Advisors, an investment advisory firm. During the period at issue in this suit, their practice focused on investing their clients’ money in mutual funds. For their services, Defendants charged their clients an advisory fee. They also indirectly collected certain referral fees, called "12b-1" fees, from the mutual funds in which they invested their clients’ money.
Plaintiff brought this suit claiming that Defendants breached their fiduciary duties under the Investment Advisers Act of 1940 by maintaining their 12b-1 fee arrangement. Plaintiff also claims that Defendants failed to adopt certain written policies required under SEC Rule 206(4)-7. Defendants deny these claims and argue that they were simply investing their clients’ money just as they told their clients they would. Defendants also argue that they cannot be held liable under the Advisers Act because they conformed their conduct to the SEC's official requirements.
Both parties have moved for summary judgment. For the reasons that follow, the Court denies Defendant's motion and grants Plaintiff's motion only in part.
Defendants are an investment advisory firm ("Ambassador") and three of the firm's owners and executive officers ("Individual Defendants"). Plaintiff's Statement of Undisputed Facts, ECF No. 48-2 ("PSUF"), ¶ 1; Defendants’ Statement of Disputed Facts, ECF No. 62-1 ("DSDF"), ¶ 1. This case centers on Defendants’ business practices between August 15, 2014, and December 31, 2018 (the "relevant period"). PSUF ¶¶ 1, 3; DSDF ¶¶ 1, 3.
During this period, Ambassador managed between 2,600 and 4,300 client accounts, held mostly by individuals, worth a combined total ranging between $270 and $490 million. PSUF ¶ 4; DSDF ¶ 4. Defendants generally had the authority to invest their clients’ money at their own discretion and without seeking specific approval from their clients. PSUF ¶¶ 21–24; DSDF ¶¶ 21–24.
Defendants primarily invested their clients’ money in mutual funds. PSUF ¶¶ 95–96; DSDF ¶¶ 95–96. Most mutual funds offer a variety of "share classes." Defendants’ Statement of Undisputed Facts, ECF No. 42-2 ("DSUF"), ¶ 4; Plaintiff's Statement of Disputed Facts, ECF No. 63-1 ("PSDF"), ¶ 4. Each share class represents the same portfolio of assets and, therefore, has the same underlying value. DSUF ¶ 4; PSDF ¶ 4; PSUF ¶ 66; DSDF ¶ 66. But each share class charges investors different fees in different structures. DSUF ¶ 4; PSDF ¶ 4. For example, Share Class A in Mutual Fund X might charge an upfront fee when an investor purchases the share; Share Class B in the same mutual fund might charge a backend fee only when the investor sells the share; Share Class C might charge recurring fees every year; and Share Class D might charge reduced fees but only be available to certain kinds of preferred investors. PSUF ¶¶ 110–116; DSDF ¶¶ 110–116.
Some mutual funds charge a "12b-1" fee on some of their share classes. DSUF ¶ 4; PSDF ¶ 4. Through 12b-1 fees, mutual funds take a portion of an investor's investment and send it back to the investor's broker as a sort of referral fee. DSUF ¶¶ 4–5; PSDF ¶¶ 4–5. But many mutual funds waive this fee for investors who purchase their shares through an investment adviser. PSUF ¶ 102; DSDF ¶ 102.
During the relevant period, Defendants maintained a practice of investing their clients’ money in 12b-1 fee bearing share classes even when their clients were eligible for non-12b-1 fee bearing share classes. PSUF ¶ 132; DSDF ¶ 132. The mutual funds in which Defendants invested would collect these 12b-1 fees and then distribute the fees to Defendants’ brokers. DSUF ¶¶ 4–5; PSDF ¶¶ 4–5. Defendants had an agreement with one of their brokers, American Portfolios, under which the broker would pass 95% of the 12b-1 fees it received by way of Defendants’ trades back to the Individual Defendants. PSUF ¶ 32; DSDF ¶ 32.
As a result, Defendants received two streams of income from their clients. First, Defendants charged their clients an advisory fee that began at 1.25% of the clients’ assets under management and decreased as clients increased their assets under management. DSUF ¶ 6; PSDF ¶ 6. Second, Defendants received a stream of 12b-1 fees from the mutual funds they had purchased for their clients through American Portfolio's brokerage. PSUF ¶ 32; DSDF ¶ 32. During the relevant period, the Individual Defendants received more than $1 million in revenue through these 12b-1 fees. PSUF ¶ 39; DSDF ¶ 39. Plaintiff alleges that Defendants generated at least $777,443.43 of these fees by investing in 12b-1 share classes when non-12b-1 share classes were available for the same mutual fund. PSUF ¶ 133.
Critically for Plaintiff's first claim, the parties disagree about whether Defendants’ clients were adequately informed that they were effectively paying Defendants additional compensation through 12b-1 fees and that many of these fees could have been avoided.
Defendants also had a written compliance manual that contained all their compliance policies and procedures. PSUF ¶ 248; DSDF ¶ 248. Defendants relied on compliance consultants to ensure the manual contained policies necessary to comply with the Investment Advisers Act and to protect Defendants fiduciary duties. PSUF ¶ 255; DSDF ¶ 255. But Defendants did not ask their compliance consultants to review or update the manual at any point between 2012 and 2018, and no compliance consultants did review or update the manual during that period. PSUF ¶ 256; DSDF ¶ 256. The parties disagree about whether Defendants’ compliance manual contained policies that addressed their duties to disclose conflicts of interest, to pursue their clients’ best interests, and to achieve best execution of their clients’ transactions.
Plaintiff filed this action on May 13, 2020 alleging that Defendants had violated § 206(2) and § 206(4) of the Investment Advisers Act. See Compl. (ECF No. 1). Defendants filed an Answer denying liability and asserting a variety of affirmative defenses. See Answer (ECF No. 12).1 After the close of discovery, both parties moved for summary judgment on all claims. See Defendants’ Motion for Summary Judgment (ECF No. 47); Plaintiff's Motion for Summary Judgment (ECF No. 48). These motions for summary judgment are presently before the Court.
Summary judgment is appropriate when the moving party "shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). A factual dispute is "genuine" when the "evidence is such that a reasonable jury could return a verdict for the nonmoving party." Physicians Healthsource, Inc. v. Cephalon, Inc. , 954 F.3d 615, 618 (3d Cir. 2020). And a fact is material if "it might affect the outcome of the suit under governing law." Id. (quoting Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) ).
The party moving for summary judgment must "identify[ ] those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (internal quotation marks omitted). In response, the nonmoving party must then "designate specific facts showing that there is a genuine issue for trial." Id. at 324, 106 S.Ct. 2548 (internal quotation marks omitted). "The mere existence of a scintilla of evidence in support of the [nonmovant's] position will be insufficient; there must be evidence on which the jury could reasonably find for the [nonmovant]." Daniels v. Sch. Dist. of Phila. , 776 F.3d 181, 192 (3d Cir. 2015) (quoting Anderson , 477 U.S. at 252, 106 S.Ct. 2505 ).
In applying this standard, the court must "construe the evidence in the light most favorable to the non-moving party." Anderson , 477 U.S. at 255, 106 S.Ct. 2505. At the summary judgment stage, the court's role is not to weigh the evidence and determine the ultimate truth of the allegations. Baloga v. Pittston Area Sch. Dist. , 927 F.3d 742, 752 (3d Cir. 2019). Instead, the court's task is to determine whether there remains a genuine issue of fact for trial. Id.
Plaintiff claims that Defendants violated both § 206(2) and § 206(4) of the Advisers Act. See 15 U.S.C. § 80b-6(2), (4). Defendants argue they have met their obligations under both subsections of the statute and that they are entitled to immunity from liability under § 211(d) because they acted in good faith conformity with the SEC's official actions. The Court will first address Plaintiff's claim under § 206(2), then Defendants’ affirmative defense under § 211(d), and then Plaintiff's claim under § 206(4).
To prevail on its claim under § 206(2) of the Advisers Act, Plaintiff must prove that Defendants (1) breached a fiduciary duty they owed their clients under the Advisers Act and (2) did so at least negligently. Sec. & Exch. Comm'n v. Cap. Gains Rsch. Bureau, Inc. , 375 U.S. 180, 191–92, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963) (" Capital Gains "); see also ...
To continue reading
Request your trial