United States v. Tagliaferri

• Decision Date: 04 May 2016
• Docket Number: Docket No. 15–536.
• Parties: UNITED STATES, Appellee, v. James TAGLIAFERRI, aka Sealed Defendant 1, Defendant–Appellant.
• Court: U.S. Court of Appeals — Second Circuit

820 F.3d 568

UNITED STATES, Appellee

v.James TAGLIAFERRI, aka Sealed Defendant 1, Defendant–Appellant.

Docket No. 15–536.

United States Court of Appeals, Second Circuit.

Argued: March 10, 2016.

Decided: May 4, 2016.

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.

Before: LEVAL, POOLER, and WESLEY, Circuit Judges.

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 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 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, IEAH paid Tagliaferri more than $1.7 million in fees, often calculated as a percentage of the client funds invested in IEAH 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 IEAH, sent post-receipt invoices to IEAH listing financial or consulting services, and asked an IEAH employee to alter IEAH'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 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 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 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 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 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). Accordingly...