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August 15, 2016 at 10:22 AM
A U.S. federal appeals court Friday broadly defined the term “for compensation” for purposes of determining whether a defendant who defrauded clients should be judged an investment advisor under the Investment Advisers Act of 1940.
In its Friday decision, the U.S. Court of Appeals for the 3rd Circuit found that Everett C. Miller of Carr Miller Capital in New Jersey sold investors more than $41 million “in phony promissory notes and then squandered their money” and was indeed an advisor when he did so.
In his defense, Miller argued that he did not meet the definition of an “investment advisor” for three reasons: (1) He was not “in the business” of providing securities advice; (2) he did not provide securities advice “for compensation” and (3) he was not a registered investment advisor.
But the court ruled against all of his arguments and sentenced him to 10 years in prison. (Investment advisors and broker-dealers can receive tougher sentences than other defendants for fraud and theft.)
Because the Investment Advisers Act does not define “compensation,” the court deferred to SEC guidance, which defines compensation as “any economic benefit, whether in the form of an advisory fee or some other fee relating to the total services rendered, commissions, or some combination of the foregoing.”
The court held that, “although the defendant did not charge a specific fee for investment advice, he took compensation because he stole the principal payments made on promissory notes he sold,” notes Cipperman Compliance Services. “This taking of assets created his ‘economic benefit’ required for a finding that he acted as an investment advisor by providing securities advice ‘for compensation.’”
In this case, the court applies “an expansive definition of ‘for compensation’ to include any economic benefit whether pursuant to an agreement or taken unlawfully,” Cipperman says. “The defendant did not charge an asset-based fee for providing securities advice, the traditional hallmark of ‘for compensation.’”
As to his claim that he was not an RIA with the SEC but an investment advisor representative registered in New Jersey, the court stated: “This argument fails. Registration is not necessary to be an ‘investment advisor’ under the Act.”
Stated the court: “Under the Act some rules apply to registered investment advisors, some to unregistered investment advisors and some to both. For example, the Act prohibits fraud by ‘any’ investment advisor, regardless of registration.”
