Making a criminal case for investment advisor fraud does not require proof of intent to harm clients, the U.S. Court of Appeals for the Second Circuit held Wednesday.
Interpreting the Investment Advisers Act of 1940, the court spurned the argument made by convicted defendant James Tagliaferri and said intent to harm is not an element of a criminal conviction under the statute.
Tagliaferri was convicted in 2014 by a jury before Southern District Judge Ronnie Abrams of investment advisor fraud, securities fraud, four counts of wire fraud, and six counts of offense in violation of the Travel Act. His convictions were based on his conduct as head of his boutique investment firm, TAG Virgin Islands, which at one point had 155 clients with a total of $252 million invested.
Prosecutors argued that Tagliaferri failed to disclose more than $1.7 million in fees he received in return for investing client assets in a Long Island company that owned and managed racehorses. They said he later indicated to clients that they were not, in fact, investment banking fees but fees for consulting services, and he sent post-receipt invoices to reflect the change and had an employee alter records.
Prosecutors also said he engaged in “cross-trade conduct” — selling one client’s poorly performing assets to another client and then sometimes collecting fees on the trades.
And, they charged, he engaged in “fake note conduct” — investing in a company he first characterized as an equity investment and then later describing it as a loan — and trying to get the company to agree it was a loan while creating fictitious “sub-notes” to deposit in client accounts.
The schemes cost investors some $50 million. At trial, Tagliaferri argued that, while the fees were a conflict of interest and should have been disclosed, each investment was done in the best interests of his clients.
But Abrams refused to give an instruction to the jury that the government needed to show intent to harm, Tagliaferri was convicted in July 2014 and Abrams sentenced him to serve six years in prison.
The appeal in United States v. Tagliaferri was heard by a three-judge panel on March 10.
Tagliaferri was represented by Matthew Brissenden of Garden City, New York. “While we respect the panel’s decision, we’re obviously disappointed with the result,” Brissenden said Wednesday. “In the coming days we will be reviewing the decision carefully and discuss our potential options.”