Second Circuit: Criminal Convictions Under Section 206 of the Investment Advisers Act Do Not Require Proof of Intent to Harm (2024)

Second Circuit Holds Common Law Requirement of Intent to Harm Does Not Apply to Criminal Convictions Brought Under Section 206

In the case before the Second Circuit, an investment adviser appealed his conviction under Section 206 on the grounds that the district court “erred in declining to instruct the jury that [defendant’s] intent to harm his clients was a necessary element of the investment adviser charge.” Defendant contended “[S]ection 206 incorporates the common law requirement that intent to defraud includes both intent to deceive and intent to harm.”

The Second Circuit began its analysis with the Supreme Court’s decision in SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963), a case involving the SEC’s authority to seek a preliminary injunction for conduct violating Section 206. The Capital Gains Court “held that [S]ection 206 departs from common law and does not ‘require proof of intent to injure and actual injury to clients.’” Id. (quoting Capital Gains, 375 U.S. 180). In so holding, the Court took into account both “the delicate fiduciary nature of an investment advisory relationship” as well as the legislative history of the Investment Advisers Act. The Capital Gains Court emphasized that investment advisers have an obligation to proceed in “utmost good faith” with “full and fair disclosure of all material facts.”

Defendant attempted to distinguish Capital Gains on the grounds that the Court’s decision concerned a civil action rather than a criminal prosecution. However, the Second Circuit found “the only textual distinction between the civil and criminal enforcement mechanisms for [S]ection 206 is the Act’s requirement that a criminal defendant commit a violation ‘willfully.’” In light of “the special context of a fiduciary relationship,” the Second Circuit determined “it would be inconsistent with the text of [S]ection 206 and the congressional purpose motivating it to require specific intent to harm.” Rather, the Second Circuit held “the willfulness mental state” for criminal convictions under Section 206 only requires the Government to prove “the defendant acted with knowledge that his conduct was unlawful.”

The Second Circuit emphasized that “[S]ection 206 prohibits not only common-law fraud by investment advisers but also ‘any practice which operates as a fraud or deceit.’” Id. (quoting Capital Gains, 375 U.S. 180). The court explained that “[b]ecause the wrongfulness of [S]ection 206 violations derives from their deceptiveness, proof that the defendant intended to deceive his clients suffices to establish the requisite mens rea for guilt.” The Second Circuit held the district court did not err in instructing the jury that Section 206 requires “only intent to deceive and not intent to harm.”