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Federal Court Broadens Investment Advisor Definition

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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.”

The court also used SEC guidance to interpret whether Miller was indeed “in the business” of providing advice, as the Advisers Act fails to define the term.

Miller argued that he “did not personally meet with any Carr Miller investors” during the specific time period between 2006 and 2010 when he sold more than 190 investors more than $41.2 million in capital from the promissory notes, the complaint states. “However, this argument fails to account for the relevant conduct,” adding that Miller “has never challenged the District Court’s finding, with which we agree, that his meetings with Carr Miller investors were relevant conduct.”

The court also used SEC guidance to determine Miller was “in the business” of providing securities advice because he held himself out as a person who provides investment advice, and because he was a registered investment advisor representative, which may involve rendering securities advice.

Through Carr Miller, Miller sold investors “Carr Miller Capital promissory notes,” which were securities under the Securities Act of 1933 and the Securities Exchange Act of 1934, but Miller did not register the notes.

The Carr Miller notes promised annual returns of between 7% and 20%, which varied by investor, plus the return of the principal after nine months, the complaint states.

“These promises, of high returns and no risk, were false,” the complaint states, with Miller deceiving his investors in at least three ways.

First, Carr Miller operated, in part, as a Ponzi scheme. Carr Miller spent approximately $11.7 million of its investors’ principal to repay earlier investors. Second, Carr Miller invested in risky business ventures without informing its investors. Carr Miller lost approximately $15.7 million of $22.9 million invested by the firm.

Third, Carr Miller comingled investors’ funds in seventy-five related bank accounts, which Miller then tapped like a “credit card” for Carr Miller overhead and his own expenses. Miller spent lavishly on luxury cars, home furnishings, electronics, vacations and tickets to entertainment and sporting events.

— Check out SEC Charges Ex-NFL Player With Defrauding Former Coaches, Elderly on ThinkAdvisor.


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