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Investment Adviser’s Ads Subtract Important Information, Court Concurs in SEC Review: ZPR Inv. Mgmt. Inc. v. SEC
Posted on Categories Court Decisions, Securities/Commodities RegulationTags , ,

By Burton W. Wiand

*A court must affirm the SEC’s findings of fact so long as they are “supported by substantial evidence” and may overturn a sanction only upon finding a gross abuse of discretion. **The omission of Global Investment Performance Standards-required information in advertisements is material to investors.

ZPR Inv. Mgmt. Inc. vs. SEC, No. 16-15322 (11th Cir., 6/30/17).

An Investment Adviser’s Ad Omissions

Registered investment adviser ZPR Investment Management, Inc. (“ZPRIM”) and Max Zavanelli, its president and sole shareholder (collectively, “Petitioners”), appeal a final order of the SEC imposing sanctions on them for making material misrepresentations to prospective clients in violation of the Investment Advisers Act of 1940 (the “Advisers Act”).

In the Fall of 2008, ZPRIM published three ads claiming compliance with Global Investment Performance Standards (“GIPS”), which require firms to provide certain information in ads, when, in fact, ZPRIM hid its recent poor performance by omitting required information. It also failed to include required GIPS information in its April and December 2009 newsletters. In 2010, the SEC notified ZPRIM that at least one of the advertisements might have violated Section 206 of the Advisers Act and that it was conducting an investigation. ZPRIM then failed to disclose to Morningstar (a major provider of independent investment research) that it was subject to the pending SEC investigation and once again failed to include the returns required by GIPS guidelines in ads published in spring 2011.

The SEC found that ZPRIM violated sections 206(1), (2), and (4) of the Advisers Act by making false or misleading claims in the fall 2008 and spring 2011 magazine ads, the 2009 newsletters, and the 2011 Morningstar report, and violated sections 206(2) and (4) in the 2010 Morningstar report. The SEC also found Zavanelli liable under sections 206(1) and (2) for the misrepresentations of GIPS compliance and for aiding and abetting ZPRIM, but not for the Morningstar reports.

The Court Affirms the SEC’s Sanctions

The Court, which must affirm the SEC’s findings of fact so long as they are “supported by substantial evidence” and may overturn a sanction only upon finding a gross abuse of discretion, first addresses whether the false or misleading statements were “material” and violated the antifraud provisions of the Advisers Act. Here, omission of the GIPS-required information was material because reasonable investors would find it significant that ZPRIM’s ads did not comply with GIPS, even if ZPRIM later made those disclosures. However, the Court overturns the finding of materiality with respect to the December 2009 newsletter, because it sufficiently disclosed that it was not GIPS compliant.

The Court next finds that the SEC met the scienter requirement of section 206(1) of the Adviser Act with respect to all of the material ads and newsletters. With respect to the Fall 2008 ads, Zavanelli knew that the claims of GIPS compliance were false and still approved them. ZPRIM published the spring 2011 ads without the GIPS compliant information, despite being put on notice by the SEC of the requirements. The April 2009 newsletter issued after the Fall 2008 ads and warnings from a GIPS verification firm. Reasonable care required updating the 2010 Morningstar report once the firm received express notice from the SEC of the pending investigation. And ZPRIM’s operations manager had direct, personal knowledge of the SEC investigation but failed to disclose it in the 2011 Morningstar report.

Finally, the Court affirms the sanctions against Petitioners. The industry bar against Zavanelli is appropriate because of his high degree of scienter and recurrent conduct. So is the cease and desist order against Petitioners, because they violated the Advisors Act and because the order would have a remedial effect on the Petitioners. Finally, the Court finds monetary penalties to be in the public interest, but vacates those relating to the December 2009 Newsletter.

(B. Wiand)

(SLC Ref. No. 2017-32-09)

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