Valicenti Advisory Services, Inc. And Vincent R. Valicenti v. Securities and Exchange Commission

Citation: 198 F.3d 62Docket: 1999

Court: Court of Appeals for the Second Circuit; February 23, 2000; Federal Appellate Court

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Valicenti Advisory Services, Inc. (VAS) and its owner, Vincent R. Valicenti, were found by the Securities and Exchange Commission (SEC) to have willfully violated several anti-fraud provisions of the Investment Advisers Act. The SEC's investigation, initiated in December 1993, revealed that VAS distributed misleading marketing materials that included a chart misrepresenting VAS's investment performance from 1987 to 1991. Key findings included that the chart misled investors by suggesting it represented all discretionary accounts with a balanced objective, while it actually reflected only a selected subset. The SEC determined that the 1991 rate of return reported was significantly inflated due to selective account inclusion and exclusion criteria, notably omitting accounts valued under $100,000, which comprised a substantial portion of VAS's accounts during that period. Furthermore, Valicenti directed the exclusion of accounts with negative returns and included others not meeting the "balanced" criteria. The SEC concluded that these actions demonstrated a deliberate intent to defraud investors. The court affirmed the SEC's findings and sanctions against the petitioners.

Valicenti distributed a marketing document that included a misleading bar graph, which misrepresented VAS's performance compared to other investment advisers by using non-comparable data. The SEC found that both Valicenti and VAS violated multiple provisions of the Investment Advisers Act (IAA) and corresponding SEC rules. As a result, they received sanctions including a censure, a cease and desist order, and fines of $50,000 for VAS and $25,000 for Valicenti. Additionally, they were mandated to send copies of the SEC’s opinion and order to all current clients of VAS and prospective clients the following year. 

Valicenti and VAS appealed the SEC's decision, arguing that the evidence did not support the findings of scienter or that the graph was materially misleading. They also claimed that the SEC's determination violated due process due to insufficient notice of unlawful conduct, and that the sanctions were beyond the SEC's statutory authority. The review of the SEC’s findings is based on whether substantial evidence supports them, following a deferential standard that does not allow for new fact-finding by the reviewing court. 

The issue of scienter, or the mental state required to prove intent to defraud, is established through circumstantial evidence, as direct proof is not necessary. Petitioners attempted to challenge the SEC’s evidence for intentional fraud but downplayed significant actions such as Valicenti’s rejection of recommended disclosures. They argued that minor performance adjustments indicated a lack of intent to deceive and cited instances suggesting good faith. However, these arguments misinterpret the nature of the review process regarding administrative decisions.

Petitioners argue for a reevaluation of the evidence against them, seeking to overturn the Commission's reasonable determinations. The record indicates that Valicenti knowingly disregarded recommendations for greater disclosure, excluded lower-value accounts due to costs, selectively included accounts based on performance, and created misleading documents to enhance VAS’s performance portrayal. Consequently, the court finds substantial evidence supporting the SEC’s conclusion regarding Valicenti's scienter.

In addressing materiality, petitioners contend that the Chart's adjustments affected VAS's performance by only minor percentages, asserting these changes would not be significant to a reasonable investor. However, the SEC identified a substantial seven-point discrepancy in the reported return on investment (ROR) for 1991, which was deemed materially misleading. The court affirms the SEC's determination, noting that a 7% disparity is indeed material.

Regarding due process, petitioners claim unfair notice of regulatory violations due to the SEC's lack of specific advertising standards. However, due process only requires that laws provide a reasonable opportunity to understand prohibitions. Given Valicenti's extensive experience in the investment sector, the court finds the due process claim unsubstantiated.

Lastly, petitioners contest the SEC's sanctions, including monetary penalties and a cease-and-desist order. The court reviews these sanctions for potential abuse of discretion, finding them legally warranted and factually justified. The SEC is authorized to impose significant monetary penalties for willful violations of the Investment Advisers Act, affirming the imposed sanctions as appropriate under the circumstances.

The Commission has the authority to issue cease and desist orders requiring violators to comply with legal provisions and can impose limitations on their activities, including suspensions of up to twelve months or complete bans from investment advising. In deciding on monetary penalties, the Commission considers if the violations involved fraud or reckless disregard for regulations. Cease and desist orders may be issued as deemed appropriate by the Commission. Sanctions, including limitations on activities, are mandated if violations of the Investment Advisers Act (IAA) are willful. The SEC upheld findings that petitioners intended to defraud, justifying monetary sanctions, cease and desist orders, and a distribution requirement. Petitioners contended that the distribution requirement was excessive; however, the court found it rationally connected to their conduct. The IAA allows for sanctions that can be more severe than the distribution requirement, which serves to inform clients of the Commission's findings and discourage future violations. The SEC provided reasonable justifications for the distribution requirement, highlighting its role in client awareness and as a deterrent. The court affirmed that as long as the agency provides a satisfactory explanation for its actions and the sanctions are rationally linked to the violations, such choices will be upheld, emphasizing the agency's competence in selecting appropriate remedies.

Petitioners contend that the distribution requirement imposed by the Commission represents an abuse of discretion, as such a sanction has not previously been levied against an investment adviser in a contested case. However, the Commission has applied similar sanctions in settled advertising cases involving investment advisers. The Commission found no evidence suggesting that petitioners were subjected to particularly harsh treatment. Petitioners failed to demonstrate instances where others who intentionally misled clients received lesser penalties. Consequently, the Commission's sanctions were deemed not to constitute an abuse of discretion. The conclusion affirms the SEC's opinion and order after reviewing the record and finding petitioners' arguments lacking merit. Additionally, specific legal definitions and prohibitions are detailed, including the SEC's rules against fraudulent practices and the requisite intent for certain violations. Petitioners also waived any challenge to a censure sanction, acknowledging its appropriateness given the findings of misconduct.