ZPR Inv. Mgmt. Inc. v. Sec. & Exch. Comm'n
| Decision Date | 30 June 2017 |
| Docket Number | No. 16-15322,16-15322 |
| Citation | 861 F.3d 1239 |
| Parties | ZPR INVESTMENT MANAGEMENT INC., Max E. Zavanelli, Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
Philip J. Snyderburn, K. Michael Swann, Snyderburn Rishoi & Swann, LLP, Maitland, FL, for Petitioners.
Emily T.P. Rosen, Theodore Weiman, U.S. Securities & Exchange Commission, Washington, DC, Amie Berlin, Robert K. Levenson, U.S. Securities & Exchange Commission, Miami, FL, for Respondent.
Before MARTIN, JILL PRYOR, and MELLOY,* Circuit Judges.
Max Zavanelli and his investment firm, ZPR Investment Management, Inc. ("ZPRIM"), are before us seeking review of a final order of the Securities and Exchange Commission ("SEC" or the "Commission").1 The Commission found that Mr. Zavanelli and ZPRIM (the "petitioners") made material misrepresentations to prospective clients in violation of the Investment Advisers Act of 1940 (the "Advisers Act"), 15 U.S.C. § 80b–1. Based on these violations, the Commission imposed monetary and other sanctions. After careful consideration, and with the benefit of oral argument, we grant the petitioners some, but not all, of the relief they seek. We vacate the violations and monetary sanctions related to the newsletter ZPRIM published in December 2009, but we affirm all other violations and sanctions set out in the Commission's order.
In 1994, Mr. Zavanelli founded ZPRIM, an investment firm registered as an "investment adviser" with the SEC. Mr. Zavanelli was ZPRIM's president and sole shareholder. As such, he "had ultimate authority over all aspects of ZPRIM's advisory business, including its advertising." ZPRIM employed Ted Bauchle as its operations manager from 1999 until early 2013. According to Mr. Bauchle, Mr. Zavanelli was ZPRIM's "boss man." Mr. Zavanelli "made all the decisions" and "was difficult to disagree" with "because he was under the impression that the company should be run his way and that he was always correct."
The Global Investment Performance Standards ("GIPS") are "universal, voluntary standards to be used by investment managers for quantifying and presenting investment performance that ensure fair representation, full disclosure, and apples-to-apples comparisons." GIPS has two related components, which are the performance standards and the advertising guidelines. The performance standards establish how a firm should calculate and present its investment performance. As you might have guessed, those firms that comply with the GIPS performance standards may represent themselves as being "GIPS-compliant." It is generally understood that compliance with GIPS "provides a level of credibility" to the firm's performance results and gives prospective clients "a greater level of confidence" in the firm's performance presentations.
Under GIPS, if a firm chooses to advertise that it is GIPS compliant, that firm must also comply with the GIPS advertising guidelines.2 The advertising guidelines require any advertisement claiming GIPS compliance to disclose specific information about the firm's investment returns. Specifically, the firm must provide: "(1) period-to-date composite performance results and (2) either one-, three-, and five-year cumulative annualized composite returns or five years of annual composite returns."
Mr. Zavanelli knew that GIPS compliance was "very important" for marketing to institutional clients and he wanted ZPRIM to have those "bragging rights." To that end, ZPRIM hired a GIPS verification firm, Ashland Partners & Company LLP ("Ashland"), to help bring ZPRIM into compliance. In January, February, and April 2008, ZPRIM placed advertisements in financial magazines claiming it was GIPS compliant. Together with the claim of GIPS compliance, and in keeping with GIPS advertising guidelines, the ads included period-to-date returns and at least five years of annual returns.
In the fall of 2008, ZPRIM published three more magazine ads claiming GIPS compliance. But these ads had no period-to-date performance results, nor did they include either one-, three-, and five-year annualized results or five years of annual results. One effect of leaving out this GIPS-required information was that the ads hid ZPRIM's recent poor performance. Had ZPRIM shown its investment returns over the time periods required by GIPS, the ads would have revealed that the firm's performance lagged behind ZPRIM's benchmark index by as much as ten percentage points. Instead of disclosing the called-for returns with the unflattering information, ZPRIM showed its returns over a longer period of time during which ZPRIM outperformed its benchmark index.
Mr. Bauchle testified that before these ads were published, he told Mr. Zavanelli they didn't meet the GIPS requirements for showing investment return information. But Mr. Zavanelli dismissed Mr. Bauchle's concerns, saying it wasn't necessary to put the information in the ads because ZPRIM would give it to prospective clients before they invested. Mr. Zavanelli "wanted to run those ads," so ZPRIM published them even though they did not comply with the GIPS advertising guidelines. Although Ashland had reviewed and approved ZPRIM's earlier ads, ZPRIM never asked Ashland to review the fall 2008 ads.
Mr. Zavanelli wrote a monthly investment newsletter for ZPRIM that contained information about ZPRIM's performance results. This newsletter went to ZPRIM's clients, dozens of investment consultants, and others in the industry.
In November 2008, Ashland told ZPRIM that if "[GIPS] compliance is being claimed" in ZPRIM's newsletters, the "GIPS Advertising Guidelines need to be followed." Ashland then explained precisely how investment returns should be listed in the newsletters in order to comply with the GIPS advertising guidelines. Nevertheless, ZPRIM sent out newsletters in April and December 2009 that claimed GIPS compliance, yet failed to include the required information.
In contrast to the April 2009 newsletter, the December 2009 newsletter contained several corrective statements. Although it is true the December 2009 newsletter said on one page that "[a]ll numbers are GIPS compliant," the next page contained a number of disclaimers. It said, for example:
In January 2010, the SEC sent ZPRIM a letter. The letter noted that, while ZPRIM's December 2008 advertisement "claimed compliance" with GIPS, "the [SEC's] examination found that it did not comply with GIPS advertising guidelines." The letter told ZPRIM that "[a]s a result, ZPR[IM] may have violated Section 206 of the Advisers Act and Rule 206(4)-1, thereunder."
ZPRIM responded that it "did not intend to mislead with this ad." Beyond that, ZPRIM assured the SEC that "[w]e have changed our ads" going forward to comply with the GIPS advertising guidelines by including the "1–3–5 year annualized returns" as a "[c]orrective action[ ]."
In August 2010, the SEC sent ZPRIM another letter notifying the firm that the SEC was "conducting an investigation" into ZPRIM.
In order to attract institutional clients, ZPRIM regularly gave information about itself to Morningstar, which is a major provider of independent investment research. Using the information it gets from investment firms, Morningstar creates a report about each firm, and investors use these reports to research potential money managers. It was Mr. Bauchle's job to submit ZPRIM's information to Morningstar.
One piece of information included in a Morningstar report is whether or not there are any "[p]ending SEC investigations" of a firm. This is important here because, even though the SEC told ZPRIM in August 2010 that it was investigating the firm, Mr. Bauchle continued to tell Morningstar there were "No" "[p]ending SEC investigations" of ZPRIM. Mr. Bauchle, on behalf of ZPRIM, made this misrepresentation to Morningstar twice: first for the period ending on September 30, 2010, and, again, for the period ending on March 31, 2011.
Despite ZPRIM's assurances to the SEC that it would change its ads to comply with the GIPS advertising guidelines, ZPRIM published three more ads—in February, March, and May 2011—claiming GIPS compliance but failing to include the returns required by the GIPS advertising guidelines. Mr. Zavanelli testified that he conceived of and approved these ads.
The Advisers Act sets "federal fiduciary standards for investment advisers." Santa Fe Indus., Inc. v. Green , 430 U.S. 462, 471 n.11, 97 S.Ct. 1292, 1300 n.11, 51 L.Ed.2d 480 (1977). For our purposes here, we review the antifraud provisions of the Advisers Act—sections 206(1), (2), and (4).3 In order 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. See Steadman v. SEC , 603 F.2d 1126, 1129–34 (5th Cir. 1979) (Steadman I ), aff'd , 450 U.S. 91, 101 S.Ct. 999, 67 L.Ed.2d 69 (1981) ( sections 206(1)–(2));4 SEC v. Steadman , 967 F.2d 636, 643, 647 (D.C. Cir. 1992) (Steadman II ) ( section 206(4)). While the material-misrepresentation element is the same for all three sections, the mental-state element for section 206(1) is different than that for sections 206(2) and (4). See Steadman I , 603 F.2d at 1134 ; Steadman II , 967 F.2d at 647. Section 206(1) requires the SEC to...
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