408 F.Supp.3d 93
D. Conn.2019Background
- Westport Capital Markets, LLC (owned/managed by Christopher McClure) is dually registered as a broker-dealer and investment adviser; McClure served as president, CEO, CFO, and CCO.
- From 2011–2017 Westport bought allocations of syndicated (selling-dealer) offerings for its own account at concession prices and promptly resold them to advisory clients at prevailing market prices, generating ~$650,000 (2012–2015); McClure personally received ~$530,000 attributable to clients he advised.
- Westport also purchased Class A mutual-fund shares for many advisory clients and received 12b-1 distribution fees (~$105,968 total); Westport admits receipt but disputes feasibility of buying institutional shares earlier.
- Westport’s Forms ADV warned generally that the firm "may" receive commission/fee-based compensation but elsewhere denied engaging in principal transactions and failed to disclose 12b-1 receipts in response to specific ADV questions; no transaction-specific client consents were obtained.
- SEC sued under the Investment Advisers Act: Count 1 (§206(1) fraud/omission), Count 2 (§206(2) negligence), Count 3 (§206(3) principal transactions), Count 4 (aiding and abetting §206(3)), Count 5 (§207 willful false statements in Forms ADV).
- Court granted summary judgment in part and denied in part: Counts Two, Three, and Four granted; Counts One and Five denied; trial to proceed on remaining issues.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether defendants violated §206(1) by failing to disclose material conflicts and with requisite scienter | Westport/McClure failed to disclose material conflicts (syndicate profits & 12b‑1 fees); Form ADV warnings were vague and contradicted specific ADV answers | Form ADV disclosures sufficed; no intent/recklessness — transactions were not the kind of "principal" trades requiring disclosure; platform issues affected 12b‑1 purchases | Disclosure inadequate as matter of law, but genuine fact issues exist on scienter (recklessness/intent); SJ denied on Count One |
| Whether defendants negligently violated §206(2) by failing to disclose conflicts | Negligence shown because conflicts and inadequate disclosures are undisputed | Reliance on compliance consultant and platform limitations | No genuine dispute as to negligence for both syndicated transactions and 12b‑1 fees; SJ granted on Count Two |
| Whether Westport violated §206(3) by acting as principal without prior written disclosure and client consent | Westport sold securities from its own account to advisory clients as principal without written disclosure or consent | Post‑trade confirmations or general ADV statements suffice; client silence equals consent | No evidence of prior written disclosure or consent; after‑the‑fact confirmations insufficient; SJ granted on Count Three |
| Whether McClure aided and abetted Westport’s §206(3) violation | McClure knew of and substantially assisted the undisclosed principal trades (daily review; majority of trades involved his clients) | Argues lack of requisite knowledge | McClure knew or was reckless and substantially assisted; SJ granted on Count Four |
| Whether false statements/omissions in Forms ADV were made willfully in violation of §207 | ADV responses falsely denied principal trades and omitted 12b‑1 receipts | Lack of willfulness: believed transactions not reportable as principal; platform issues for 12b‑1s | Fact issues remain as to willfulness; SJ denied on Count Five |
Key Cases Cited
- Capital Gains Research Bureau, Inc. v. Securities & Exchange Commission, 375 U.S. 180 (Investment Advisers Act imposes duty of utmost good faith and full disclosure of material conflicts)
- Robare Group, Ltd. v. Securities & Exchange Comm’n, 922 F.3d 468 (D.C. Cir.) (boilerplate Forms ADV language that adviser "may" receive payments can be inadequate where adviser in fact received payments)
- SEC v. Steadman, 967 F.2d 636 (D.C. Cir.) (recklessness standard for securities‑fraud scienter)
- SEC v. DiBella, 587 F.3d 553 (2d Cir.) (elements of aiding‑and‑abetting liability in securities cases)
- Mathis v. SEC, 671 F.3d 210 (2d Cir.) (interpretation of "willfully" for false statements in filings)
- Tolan v. Cotton, 572 U.S. 650 (summary judgment requires viewing evidence in light most favorable to nonmovant)
- SEC v. Nadel, 97 F. Supp. 3d 117 (E.D.N.Y.) (section 206(3) requires written disclosure and client consent; blanket or post‑transaction disclosure insufficient)