ZPR Investment Management Inc. v. Securities and Exchange Commission
861 F.3d 1239
11th Cir.2017Background
- Max Zavanelli controlled ZPR Investment Management, Inc. (ZPRIM), an SEC-registered investment adviser; he approved the firm’s advertising and wrote its newsletter.
- ZPRIM claimed compliance with the voluntary Global Investment Performance Standards (GIPS) in multiple magazine ads (2008, 2011) and newsletters (April and December 2009), but several publications omitted GIPS-required performance disclosures.
- ZPRIM’s fall 2008 ads omitted period-to-date and required annualized returns, concealing poor recent performance; ZPRIM personnel warned Zavanelli but he approved the ads.
- Ashland (ZPRIM’s GIPS verifier) warned ZPRIM that newsletters claiming GIPS compliance must follow the GIPS advertising guidelines; ZPRIM nonetheless sent noncompliant April and December 2009 newsletters (the December newsletter contained nearby disclaimers).
- After the SEC notified ZPRIM in 2010 of a pending investigation, ZPRIM (via its operations manager) falsely reported to Morningstar twice (Sept. 30, 2010 and Mar. 31, 2011) that there were no pending SEC investigations.
- The SEC’s administrative law judge and the Commission found violations of Advisers Act §§ 206(1), (2), and (4); the Commission imposed an industry bar, a cease-and-desist order, and civil penalties; Zavanelli and ZPRIM appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether ZPRIM’s ads omitting GIPS-required returns were material misrepresentations under the Advisers Act | SEC: omission was material because GIPS compliance is important and omission misled investors about comparable, standardized returns | ZPRIM: omission immaterial because required data was provided later (fact sheets/website) | Material: court affirms—omissions in fall 2008 and spring 2011 ads were material; later disclosures do not cure advertising-stage materiality |
| Whether ZPRIM’s April and December 2009 newsletters’ GIPS statements were material | SEC: both newsletters falsely claimed GIPS compliance and were material | ZPRIM: December newsletter disclaimed non-compliance; April newsletter not claiming compliance | April 2009 newsletter: material and upheld. December 2009 newsletter: not material due to clear, prominent disclaimers—violation vacated |
| Whether scienter (intent to deceive or severe recklessness) was proven for false GIPS claims (ads/newsletters) | SEC: Zavanelli knew GIPS rules, previously complied, was warned, yet approved/published; scienter established | ZPRIM: challenges sufficiency of evidence of intent | Scienter supported for fall 2008 ads, spring 2011 ads, and April 2009 newsletter; scienter inquiry for December 2009 newsletter unnecessary because materiality failed |
| Required mental state for Morningstar misstatements (2010, 2011) | SEC: 2010 misstatement negligent; 2011 misstatement intentional (scienter) | ZPRIM: contests negligence/scienter findings | 2010: negligence supported (failed to update after SEC letter). 2011: scienter supported (manager had direct knowledge and deliberately left form unchanged) |
Key Cases Cited
- Basic Inc. v. Levinson, 485 U.S. 224 (materiality: omitted fact is material if a reasonable investor would view it as significantly altering the total mix)
- Steadman v. SEC, 603 F.2d 1126 (5th Cir.) (framework for Advisers Act §§ 206(1)–(2) scienter and negligence standards)
- SEC v. Steadman, 967 F.2d 636 (D.C. Cir.) (interpretation of §206(4) and mental-state requirements)
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (scienter includes intent to deceive or severe recklessness)
- Carriba Air, Inc. v. SEC, 681 F.2d 1318 (dissemination of a known falsehood supports scienter)
- Morgan Keegan & Co. v. SEC, 678 F.3d 1233 (post-statement disclosures do not negate earlier misrepresentations; context matters for materiality)
- Capital Gains Research Bureau v. SEC, 375 U.S. 180 (Advisers Act antifraud principles and negligence standard discussion)