ZPR Investment Management Inc., et al v. Securities and Exchange Commis

Filing

Opinion issued by court as to Petitioners ZPR Investment Management Inc. and Max E. Zavanelli. Decision: Affirmed in part and Reversed in part. Petition Granted in part, Denied in part, and Remanded. Opinion type: Published. Opinion method: Signed. The opinion is also available through the Court's Opinions page at this link http://www.ca11.uscourts.gov/opinions.

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[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 16-15322
________________________
Agency No. 3-15263

ZPR INVESTMENT MANAGEMENT INC.,
MAX E. ZAVANELLI,
Petitioners,
versus
SECURITIES AND EXCHANGE COMMISSION,
Respondent.
________________________
Petition for Review of a Decision of the
Securities and Exchange Commission
________________________
(June 30, 2017)
Before MARTIN, JILL PRYOR, and MELLOY, ∗ Circuit Judges.
MARTIN, Circuit Judge:
∗

Honorable Michael J. Melloy, United States Circuit Judge for the Eighth Circuit, sitting
by designation.

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Max Zavanelli and his investment firm, ZPR Investment Management, Inc.
(“ZPRIM”), are before us seeking review of a final order of the Securities and
Exchange Commission (“SEC” or the “Commission”). 1 The Commission found
that Mr. Zavanelli and ZPRIM (the “petitioners”) made material
misrepresentations to prospective clients in violation of the Investment Advisers
Act of 1940 (the “Advisers Act”), 15 U.S.C. § 80b-1. Based on these violations,
the Commission imposed monetary and other sanctions. After careful
consideration, and with the benefit of oral argument, we grant the petitioners some,
but not all, of the relief they seek. We vacate the violations and monetary
sanctions related to the newsletter ZPRIM published in December 2009, but we
affirm all other violations and sanctions set out in the Commission’s order.
I. BACKGROUND
A. THE FACTS
1. Mr. Zavanelli and ZPRIM
In 1994, Mr. Zavanelli founded ZPRIM, an investment firm registered as an
“investment adviser” with the SEC. Mr. Zavanelli was ZPRIM’s president and
sole shareholder. As such, he “had ultimate authority over all aspects of ZPRIM’s
advisory business, including its advertising.” ZPRIM employed Ted Bauchle as its
operations manager from 1999 until early 2013. According to Mr. Bauchle, Mr.
1

For clarity, we use “SEC” to refer to the party opposing this appeal and “the
Commission” to refer to the administrative tribunal whose decision we are reviewing.
2

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Zavanelli was ZPRIM’s “boss man.” Mr. Zavanelli “made all the decisions” and
“was difficult to disagree” with “because he was under the impression that the
company should be run his way and that he was always correct.”
2. Global Investment Performance Standards
The Global Investment Performance Standards (“GIPS”) are “universal,
voluntary standards to be used by investment managers for quantifying and
presenting investment performance that ensure fair representation, full disclosure,
and apples-to-apples comparisons.” GIPS has two related components, which are
the performance standards and the advertising guidelines. The performance
standards establish how a firm should calculate and present its investment
performance. As you might have guessed, those firms that comply with the GIPS
performance standards may represent themselves as being “GIPS-compliant.” It is
generally understood that compliance with GIPS “provides a level of credibility” to
the firm’s performance results and gives prospective clients “a greater level of
confidence” in the firm’s performance presentations.
Under GIPS, if a firm chooses to advertise that it is GIPS compliant, that
firm must also comply with the GIPS advertising guidelines.2 The advertising
guidelines require any advertisement claiming GIPS compliance to disclose

2

The GIPS rules say: “[S]hould a GIPS-compliant FIRM choose to advertise
performance results, the FIRM MUST apply . . . the GIPS Advertising Guidelines in order to
include a claim of compliance with the GIPS standards.”
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specific information about the firm’s investment returns. Specifically, the firm
must provide: “(1) period-to-date composite performance results and (2) either
one-, three-, and five-year cumulative annualized composite returns or five years of
annual composite returns.”
3. ZPRIM Began Claiming It Was GIPS Compliant
Mr. Zavanelli knew that GIPS compliance was “very important” for
marketing to institutional clients and he wanted ZPRIM to have those “bragging
rights.” To that end, ZPRIM hired a GIPS verification firm, Ashland Partners &
Company LLP (“Ashland”), to help bring ZPRIM into compliance. In January,
February, and April 2008, ZPRIM placed advertisements in financial magazines
claiming it was GIPS compliant. Together with the claim of GIPS compliance, and
in keeping with GIPS advertising guidelines, the ads included period-to-date
returns and at least five years of annual returns.
4. In Fall 2008, ZPRIM Published Ads Omitting Information Required
Under GIPS
In the fall of 2008, ZPRIM published three more magazine ads claiming
GIPS compliance. But these ads had no period-to-date performance results, nor
did they include either one-, three-, and five-year annualized results or five years of
annual results. One effect of leaving out this GIPS-required information was that
the ads hid ZPRIM’s recent poor performance. Had ZPRIM shown its investment
returns over the time periods required by GIPS, the ads would have revealed that
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the firm’s performance lagged behind ZPRIM’s benchmark index by as much as
ten percentage points. Instead of disclosing the called-for returns with the
unflattering information, ZPRIM showed its returns over a longer period of time
during which ZPRIM outperformed its benchmark index.
Mr. Bauchle testified that before these ads were published, he told Mr.
Zavanelli they didn’t meet the GIPS requirements for showing investment return
information. But Mr. Zavanelli dismissed Mr. Bauchle’s concerns, saying it
wasn’t necessary to put the information in the ads because ZPRIM would give it to
prospective clients before they invested. Mr. Zavanelli “wanted to run those ads,”
so ZPRIM published them even though they did not comply with the GIPS
advertising guidelines. Although Ashland had reviewed and approved ZPRIM’s
earlier ads, ZPRIM never asked Ashland to review the fall 2008 ads.
5. ZPRIM Published Newsletters Omitting Information Required
Under GIPS
Mr. Zavanelli wrote a monthly investment newsletter for ZPRIM that
contained information about ZPRIM’s performance results. This newsletter went
to ZPRIM’s clients, dozens of investment consultants, and others in the industry.
In November 2008, Ashland told ZPRIM that if “[GIPS] compliance is
being claimed” in ZPRIM’s newsletters, the “GIPS Advertising Guidelines need to
be followed.” Ashland then explained precisely how investment returns should be
listed in the newsletters in order to comply with the GIPS advertising guidelines.
5

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Nevertheless, ZPRIM sent out newsletters in April and December 2009 that
claimed GIPS compliance, yet failed to include the required information.
In contrast to the April 2009 newsletter, the December 2009 newsletter
contained several corrective statements. Although it is true the December 2009
newsletter said on one page that “[a]ll numbers are GIPS compliant,” the next page
contained a number of disclaimers. It said, for example: “The investment report
you are reading is not GIPS compliant. It was never intended to be nor can it be. . .
. Our report remains not GIPS compliant.”
6. The SEC Notified ZPRIM of False Claim of GIPS Compliance
In January 2010, the SEC sent ZPRIM a letter. The letter noted that, while
ZPRIM’s December 2008 advertisement “claimed compliance” with GIPS, “the
[SEC’s] examination found that it did not comply with GIPS advertising
guidelines.” The letter told ZPRIM that “[a]s a result, ZPR[IM] may have violated
Section 206 of the Advisers Act and Rule 206(4)-1, thereunder.”
ZPRIM responded that it “did not intend to mislead with this ad.” Beyond
that, ZPRIM assured the SEC that “[w]e have changed our ads” going forward to
comply with the GIPS advertising guidelines by including the “1-3-5 year
annualized returns” as a “[c]orrective action[].”
In August 2010, the SEC sent ZPRIM another letter notifying the firm that
the SEC was “conducting an investigation” into ZPRIM.
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7. ZPRIM Represented in Two Morningstar Reports that It Was Not Under
Investigation
In order to attract institutional clients, ZPRIM regularly gave information
about itself to Morningstar, which is a major provider of independent investment
research. Using the information it gets from investment firms, Morningstar creates
a report about each firm, and investors use these reports to research potential
money managers. It was Mr. Bauchle’s job to submit ZPRIM’s information to
Morningstar.
One piece of information included in a Morningstar report is whether or not
there are any “[p]ending SEC investigations” of a firm. This is important here
because, even though the SEC told ZPRIM in August 2010 that it was
investigating the firm, Mr. Bauchle continued to tell Morningstar there were “No”
“[p]ending SEC investigations” of ZPRIM. Mr. Bauchle, on behalf of ZPRIM,
made this misrepresentation to Morningstar twice: first for the period ending on
September 30, 2010, and, again, for the period ending on March 31, 2011.
8. In Spring 2011, ZPRIM Published Additional Ads Omitting Information
Required Under GIPS
Despite ZPRIM’s assurances to the SEC that it would change its ads to
comply with the GIPS advertising guidelines, ZPRIM published three more ads—
in February, March, and May 2011—claiming GIPS compliance but failing to

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include the returns required by the GIPS advertising guidelines. Mr. Zavanelli
testified that he conceived of and approved these ads.
B. THE ADVISERS ACT
The Advisers Act sets “federal fiduciary standards for investment advisers.”
Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 471 n.11, 97 S. Ct. 1292, 1300 n.11
(1977). For our purposes here, we review the antifraud provisions of the Advisers
Act—sections 206(1), (2), and (4). 3 In order to establish a violation, each of these
sections requires the SEC to show the investment adviser made a material
misrepresentation with a culpable mental state. See Steadman v. SEC, 603 F.2d
1126, 1129–34 (5th Cir. 1979) (Steadman I), aff’d, 450 U.S. 91, 101 S. Ct. 999
(1981) (interpreting sections 206(1)–(2)); 4 SEC v. Steadman, 967 F.2d 636, 643,

3

Section 206 says:

It shall be unlawful for any investment adviser by use of the mails or any means
or instrumentality of interstate commerce, directly or indirectly—
(1) to employ any device, scheme, or artifice to defraud any client or prospective
client;
(2) to engage in any transaction, practice, or course of business which operates as
a fraud or deceit upon any client or prospective client;
...
(4) to engage in any act, practice, or course of business which is fraudulent,
deceptive, or manipulative. The Commission shall, for the purposes of this
paragraph (4) by rules and regulations define, and prescribe means reasonably
designed to prevent, such acts, practices, and courses of business as are
fraudulent, deceptive, or manipulative.
15 U.S.C. §§ 80b-6(1), (2) & (4).
4

In Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir. 1981) (en banc), we adopted as
binding precedent all decisions of the former Fifth Circuit handed down before October 1, 1981.
Id. at 1209.
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647 (D.C. Cir. 1992) (Steadman II) (interpreting section 206(4)). While the
material-misrepresentation element is the same for all three sections, the mentalstate element for section 206(1) is different than that for sections 206(2) and (4).
See Steadman I, 603 F.2d at 1134; Steadman II, 967 F.2d at 647. Section 206(1)
requires the SEC to show the adviser acted with scienter. Steadman I, 603 F.2d at
1134. Sections 206(2) and (4) require no showing of scienter, and a showing of
negligence is sufficient. See id.; Steadman II, 967 F.2d at 643 & n.5, 647.
C. PROCEEDINGS BEFORE THE COMMISSION
In April 2013, the SEC began administrative proceedings against ZPRIM
and Mr. Zavanelli. After a seven-day hearing, the Administrative Law Judge
found both had violated the Advisers Act and imposed sanctions. ZPRIM and Mr.
Zavanelli appealed to the Commission, which affirmed. 5
1. Violations
The Commission found ZPRIM violated sections 206(1), (2), and (4) of the
Advisers Act by making false or misleading claims (a) in the fall-2008 and spring2011 magazine ads, and in the 2009 newsletters, that it was GIPS compliant; and
(b) in the 2011 Morningstar report that it was not under SEC investigation. The
Commission also found ZPRIM violated sections 206(2) and (4), which, again,
require only a showing of negligence, for the 2010 Morningstar report.
5

There was one finding by the Administrative Law Judge that the Commission reversed,
but that issue is not before us.
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As for Mr. Zavanelli, the Commission found him liable under sections
206(1) and (2) for all the charges involving misrepresentations of GIPS
compliance. The Commission found him liable both directly and for aiding and
abetting ZPRIM. It found him not liable for ZPRIM’s misrepresentations in the
Morningstar reports.
2. Sanctions
The Commission also affirmed the sanctions imposed on ZPRIM and Mr.
Zavanelli. First, the Commission placed an “industry bar” on Mr. Zavanelli, which
prohibits him from associating “with any investment adviser, broker, dealer,
municipal securities dealer, municipal advisor, transfer agent, and nationally
recognized statistical rating organization.” Second, the Commission ordered
ZPRIM and Mr. Zavanelli to cease and desist their misconduct. Third, the SEC
imposed civil penalties of $570,000 against Mr. Zavanelli and $250,000 against
ZPRIM. ZPRIM and Mr. Zavanelli timely petitioned this Court for review.
II. STANDARD OF REVIEW
When the Commission makes findings of fact, we must affirm them if they
are “supported by substantial evidence.” Orkin v. SEC, 31 F.3d 1056, 1063 (11th
Cir. 1994). Substantial evidence is “such relevant evidence as a reasonable mind
might accept as adequate to support a conclusion.” Universal Camera Corp. v.

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NLRB, 340 U.S. 474, 477, 71 S. Ct. 456, 459 (1951) (quotation omitted). We
review de novo the Commission’s legal conclusions. Orkin, 31 F.3d at 1063.
“The fashioning of an appropriate and reasonable remedy is for the
Commission, not this court . . . .” Steadman I, 603 F.2d at 1140. “We may
overturn the [Commission’s] decision to impose a particular sanction only upon
finding a gross abuse of discretion.” Orkin, 31 F.3d at 1066.
III. DISCUSSION
Petitioners challenge the Commission’s order on two grounds. First, they
say the Commission’s factual findings about both materiality and mental state are
not supported by substantial evidence. More specifically, they say substantial
evidence does not support the Commission’s findings that: (1) the false claims of
GIPS compliance in ZPRIM’s advertisements were material; (2) the false claims of
GIPS compliance in ZPRIM’s newsletters were material; (3) the false claims of
GIPS compliance in ZPRIM’s ads and newsletters were made with scienter; and
(4) the false claims in the Morningstar reports that ZPRIM was not under
investigation were made with the required mental state. Second, petitioners argue
the Commission abused its discretion in imposing sanctions. We address each
argument in turn.

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A. MATERIALITY OF ZPRIM’S ADVERTISEMENTS
1. The Materiality Requirement
A false or misleading statement by an investment adviser violates the
antifraud provisions of the Advisers Act only if the fact misrepresented or omitted
is “material.” See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180,
200–01, 84 S. Ct. 275, 287 (1963); Steadman I, 603 F.2d at 1129–34. An “omitted
fact is material if there is a substantial likelihood that a reasonable [investor] would
consider it important.” Basic Inc. v. Levinson, 485 U.S. 224, 231, 108 S. Ct. 978,
983 (1988) (quotation omitted). “[T]here must be a substantial likelihood that the
disclosure of the omitted fact would have been viewed by the reasonable investor
as having significantly altered the ‘total mix’ of information made available.” Id.
at 231–32, 108 S. Ct. at 983 (quotation omitted).
2. Materiality as to ZPRIM’s Advertisements
ZPRIM published ads claiming GIPS compliance but omitted the investment
return information required by the GIPS advertising guidelines. ZPRIM’s claim of
GIPS compliance was therefore false, and petitioners do not say otherwise. Rather,
they argue their omission of the GIPS-required information was not material. We
conclude to the contrary. Substantial evidence showed that reasonable investors
would find it important that ZPRIM’s ads did not actually comply with GIPS even
while they claimed compliance.
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To begin, the evidence showed that the status of being “GIPS compliant” is
important to investors. Mr. Zavanelli himself testified that being able to market
oneself as GIPS compliant “is very important” for attracting institutional clients.
Mr. Bauchle explained that institutional clients “screen[]” for GIPS compliance
and will not even consider firms that are not compliant. Given the significance of
GIPS compliance as a marker in the industry, reasonable investors would have
wanted to know that ZPRIM’s claim of GIPS compliance was false.
Beyond the value of the label itself, the false claim of GIPS compliance was
also material because it caused prospective clients to wrongly believe the
performance results in ZPRIM’s ads adhered to the GIPS advertising guidelines.
As the Commission explained, the purpose of the advertising guidelines is to give
investors the assurance that any GIPS-compliant firm will present its performance
data in a way that is “complete, fair[], and comparable to those of other firms.”
The guidelines’ requirements for presenting performance data provide “uniformity
and comparability among investment managers.” That meant investors looking at
the ZPRIM ads could have believed they were looking at the uniform, standardized
set of returns required by GIPS, when in fact ZPRIM was deviating from the
standardized presentation and putting its investment performance in a more
favorable light. ZPRIM presented its numbers as an “apples-to-apples
comparison” with the data posted by other GIPS-compliant firms, when its
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numbers were not actually comparable. This discrepancy is something a
“reasonable [investor] would consider [] important.” Basic, 485 U.S. at 231, 108
S. Ct. at 983 (quotation omitted).
For the ads published in fall 2008, the showing of materiality was even
stronger. If ZPRIM had listed its investment returns in those ads as required by
GIPS, the information would have revealed that ZPRIM was significantly
underperforming its benchmark. Certainly, a prospective investor would have
wanted to know about those undisclosed, negative results. See SEC v. Merch.
Capital, LLC, 483 F.3d 747, 769 (11th Cir. 2007) (holding that defendants made
material omissions by marketing interests in their company to investors “without
disclosing the poor performance of the interests that had already been sold”).
Petitioners argue that ZPRIM’s failure to disclose the GIPS-required
information in its ads was not a material omission because the firm provided the
information later. Petitioners say ZPRIM sent a fact sheet that disclosed the
performance data required by GIPS to every prospective client who responded to a
ZPRIM ad. Petitioners also point to data the firm posted on its website. Because
ZPRIM eventually gave prospective clients the GIPS-required information,
petitioners say that information was “part of the total mix of information
provided,” and therefore its omission from the ads was not material. See Basic,
485 U.S. at 231–32, 108 S. Ct. at 983.
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These after-advertisement disclosures do not carry the day. Materiality is
“determined in light of the circumstances existing at the time the alleged
misstatement occurred.” Ganino v. Citizens Utils. Co., 228 F.3d 154, 165 (2d Cir.
2000) (emphasis added); see also SEC v. Morgan Keegan & Co., 678 F.3d 1233,
1253 (11th Cir. 2012) (per curiam) (holding that disclosures made “after the
alleged oral misrepresentations” do not render the misrepresentations immaterial).
Because our inquiry is limited to what investors knew at the time the false
statements were made, ZPRIM’s later disclosures cannot negate the materiality of
the earlier misrepresentations. 6 See Morgan Keegan, 678 F.3d at 1253.
Focusing the materiality inquiry on the time when the misrepresentations
were made is especially important where, as here, the context of the false
statements is advertising to attract new investors. A later disclosure would not
have cured the misrepresentation that already occurred at the advertising stage
because, again, many institutional investors “screen[]” for GIPS compliance.
ZPRIM’s false claims of GIPS compliance likely resulted in interest from investors
6

It could be argued that ZPRIM’s publishing of the GIPS-required information on its
website was not a subsequent disclosure, since the website was available at the same time as the
ads. But, even assuming that ZPRIM put the correct information on its website, that would not
render immaterial the false claims of GIPS compliance in ZPRIM’s ads. That is because the ads
never alerted investors that they needed to look to ZPRIM’s website for the GIPS-required
disclosure; neither did the website alert investors that it contained the GIPS-required information
omitted from ZPRIM’s ads. See Morgan Keegan, 678 F.3d at 1252 (finding disclosure of
accurate information on firm’s website did not render immaterial earlier misrepresentations
where there was “no evidence that brokers directed customers” to the information on the web
page).

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who would not otherwise have considered or contacted ZPRIM. As the
Commission explained, “[t]he adviser’s false statement has succeeded because it
has garnered interest, regardless of whether the adviser later provides enough
information for an astute individual to detect its misstatement.” The problems
caused by a false ad cannot be cured by passing along corrected information to the
very customers the company attracted through the misinformation in the first place.
See id. at 1252 (holding that “adequate written disclosures” provided after a false
statement did not render the false statement immaterial because the disclosure was
“given to customers only upon a customer’s request”).
Petitioners also say the First Circuit’s decision in Flannery v. SEC, 810 F.3d
1 (1st Cir. 2015), supports their argument. But the conduct at issue in Flannery
was less egregious than the conduct we consider here. In Flannery, the
Commission found that an investment firm made a material misrepresentation in a
slide presentation to investors in which one slide said that a fund typically was
55% invested in a certain type of security, when the investment was actually
around 100%. Id. at 5. The First Circuit reversed. Id. at 15. The court found the
record supported only a “thin” showing of materiality because, among other things,
(1) “the slide was clearly labeled ‘Typical,’” and (2) the firm had already
distributed the correct data to clients six weeks before the presentation with the
inaccurate slide. Id. at 10–11.
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ZPRIM did not label its return information “typical,” which would have
cautioned a reasonable investor he should conduct further research. See id. at 11
n.8. ZPRIM claimed it was presenting the actual, complete set of performance
returns required by GIPS. By claiming GIPS compliance, ZPRIM falsely signaled
to investors there was no need to look any further for the performance data GIPS
requires. Also, here the GIPS-required figures were distributed only after ZPRIM
made the misrepresentations—not weeks before—and then only to those
prospective clients who came forward.
As the Flannery court explained, “the mere availability of accurate
information” does not “negate[] an inaccurate statement.” Id. And it does not do
so here. This record contains substantial evidence to support the Commission’s
finding that ZPRIM’s false claim of GIPS compliance in its ads was material.
B. MATERIALITY OF ZPRIM’S NEWSLETTER STATEMENTS
Petitioners also challenge the Commission’s finding of materiality for the
false claims of GIPS compliance in ZPRIM’s April and December 2009
newsletters. They argue that the two newsletters did not actually claim to be
compliant with GIPS. We reject this argument with respect to the April 2009
newsletter. However, the record supports petitioners’ argument that the December
2009 newsletter sufficiently disclaimed GIPS compliance. The Commission’s
finding of materiality for that publication cannot therefore stand.
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1. The April 2009 Newsletter
The April 2009 newsletter unmistakably asserted GIPS compliance. A
footnote to a table listing ZPRIM’s investment returns said that ZPRIM’s
“compliance with the Global Investment Performance Standards (GIPS®) has been
verified firm-wide by Ashland Partners & Company LLP from December 31, 2000
through September 30, 2008.” The table listed investment returns for periods
falling within this window of purported GIPS compliance, but omitted the GIPSrequired information. This false claim of GIPS compliance in the newsletter was
material for the same reasons the false claims of GIPS compliance in the
advertisements were material. Thus for the April 2009 newsletter as well,
substantial evidence supported the Commission’s finding of materiality.
2. The December 2009 Newsletter
The December 2009 newsletter is different. On page three of the December
2009 newsletter, at the bottom of a list of ZPRIM’s investment returns, the
newsletter said: “All numbers are GIPS compliant.” But on the next page, under a
section titled “GIPS COMPLIANCE,” the newsletter said: “The investment report
you are reading is not GIPS compliant. It was never intended to be nor can it be. . .
. Our report remains not GIPS compliant.” Petitioners say these statements
“disavowed a claim of GIPS compliance,” rendering the initial false claim
immaterial. We agree.
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There is no question the newsletter’s initial statement—“[a]ll numbers are
GIPS compliant”—was not true. But our rule is that when a misrepresentation is
“accompanied by meaningful cautionary statements and specific warnings . . ., that
language may be sufficient to render the alleged omissions or misrepresentations
immaterial as a matter of law.” Saltzberg v. TM Sterling/Austin Assocs., Ltd., 45
F.3d 399, 400 (11th Cir. 1995) (per curiam); see also Merch. Capital, 483 F.3d at
767 (stating the “well-established principle that a statement or omission must be
considered in context, [because] accompanying statements may render it
immaterial as a matter of law” (quotation omitted)). While “general cautionary
language” is not sufficient to render a misrepresentation immaterial, see Morgan
Keegan, 678 F.3d at 1253, the disclaimer in the December 2009 newsletter did not
use generic or vague language. It expressly and unequivocally said: “The
investment report you are reading is not GIPS compliant.” This statement was
then followed by two more that reiterated the point. And these statements were all
below a bold, underlined header titled “GIPS COMPLIANCE,” which would have
alerted reasonable investors that ZPRIM was calling attention to a GIPS
compliance issue that investors should be aware of. Like the cautionary statements
in Saltzberg, ZPRIM’s disclaimer was “no[t] boilerplate and was not buried among
too many other things, but was explicit, repetitive and linked to the [statement]
about which [the SEC] complain[s].” See 45 F.3d at 400. In light of the clear
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cautionary statements in the December 2009 newsletter, we conclude that the
Commission’s finding of materiality for that newsletter is not supported by
substantial evidence. We therefore reverse the Commission’s finding that ZPRIM
and Mr. Zavanelli violated sections 206(1), (2), and (4), and sections 206(1) and
(2), respectively, based on the December 2009 newsletter.
C. SCIENTER FOR ZPRIM’S ADS AND NEWSLETTERS
1. The Scienter Requirement
To prove a violation of section 206(1) of the Adviser’s Act, the SEC must
show the adviser acted with scienter. Steadman I, 603 F.2d at 1134. Scienter is “a
mental state embracing intent to deceive, manipulate, or defraud.” Matrixx
Initiatives, Inc. v. Siracusano, 563 U.S. 27, 48, 131 S. Ct. 1309, 1323 (2011)
(quotation omitted). “Scienter may be established by a showing of knowing
misconduct or severe recklessness.” SEC v. Monterosso, 756 F.3d 1326, 1335
(11th Cir. 2014) (per curiam) (quotation omitted). Scienter can be established
through direct or circumstantial evidence. Id. The scienter of a corporation is
established by showing that the corporation’s officers or directors acted with
scienter. See Thompson v. RelationServe Media, Inc., 610 F.3d 628, 635 (11th
Cir. 2010) (“Corporations have no state of mind of their own; rather, the scienter of
their agents must be imputed to them.”).

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2. Scienter as to ZPRIM’s Ads and Newsletters
The Commission found that Mr. Zavanelli (and thus ZPRIM) acted with
scienter in publishing the false claims of GIPS compliance in ZPRIM’s ads and
newsletters. Petitioners challenge this finding. Because the facts underlying each
set of publications differ, we discuss the issue of scienter separately for each, and
conclude the scienter findings are supported by substantial evidence.
a. Scienter as to the Fall 2008 Ads
Substantial evidence supported the Commission’s finding that Mr. Zavanelli
(and thus ZPRIM) acted with scienter in making misrepresentations of GIPS
compliance in the fall 2008 ads. In short, the evidence showed that Mr. Zavanelli
knew the claims of GIPS compliance in the fall 2008 ads were false but approved
them anyway. See SEC v. Carriba Air, Inc., 681 F.2d 1318, 1324 (11th Cir. 1982)
(holding that scienter is established when the defendant “engaged in the
dissemination of a known falsehood” (quotation omitted)).
The record supports a finding that Mr. Zavanelli knew exactly what was
required of an ad that claimed GIPS compliance. He testified that he read the
GIPS requirements, including its advertising guidelines, “[n]umerous times . . .
forward and backwards.” He even described himself as “an expert” on GIPS.
Beyond that, Mr. Zavanelli clearly knew how to present GIPS-compliant
investment returns in advertisements because he was responsible for “ensuring that
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marketing materials [were] GIPS compliant.” Indeed, from January to April 2008,
ZPRIM published ads that contained the GIPS-required information.
Then in the fall of 2008, Mr. Zavanelli approved the new, non-compliant
ads. Mr. Bauchle testified that before these ads were published, he told Mr.
Zavanelli they didn’t contain the return information required by GIPS. Yet Mr.
Zavanelli ran the ads anyway. Indeed, he affirmatively directed Mr. Bauchle to
leave the statement that ZPRIM is GIPS-compliant in the ad, even though he knew
the investment returns in the ad did not comply with the GIPS advertising
guidelines. In doing so, he “engaged in the dissemination of a known falsehood.”
Carriba Air, 681 F.2d at 1324 (quotation omitted).
There is also a strong inference of “intent to deceive” because the omitted
GIPS-required returns resulted in covering up ZPRIM’s poor investment
performance. Matrixx, 563 U.S. at 48, 131 S. Ct. at 1323. There is certainly
sufficient evidence to support the Commission’s finding that the petitioners
knowingly made false claims of GIPS compliance in the fall 2008 ads.
b. Scienter as to the Spring 2011 Ads
Substantial evidence also supported the Commission’s finding of scienter for
ZPRIM’s false claims of GIPS compliance in the ads published in spring 2011.
After the 2008 ads were published, the SEC notified ZPRIM that its ads falsely
claimed compliance with GIPS and might violate the Advisers Act. With this
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letter, the SEC expressly put Mr. Zavanelli on notice that he needed to change the
information on ZPRIM’s ads to meet the GIPS advertising guidelines. In response,
ZPRIM made clear it understood what was required of it. The firm told the SEC it
would take “[c]orrective action[]” by “chang[ing] our ads” to include the
investment returns required by GIPS. Yet despite ZPRIM’s assurances, the firm
published its 2011 ads without the GIPS-required information. Mr. Zavanelli
concedes this omission made the claim of GIPS compliance “untrue,” and also
concedes he conceived of and approved the spring 2011 round of “untrue” ads.
This establishes that he acted with scienter. See Carriba Air, 681 F.2d at 1324.
c. Scienter as to the April 2009 Newsletter
It is similarly clear that Mr. Zavanelli acted with scienter in publishing the
April 2009 newsletter. 7 Of course he had the same knowledge of the GIPS
requirements in April 2009 as he had when he decided to publish the false claims
of GIPS compliance in the fall 2008 ads. Beyond that, by this time ZPRIM had
received an express warning from Ashland that if “[GIPS] compliance is being
claimed” on ZPRIM’s newsletters, “the GIPS Advertising Guidelines need to be
followed.” Despite this direct admonition from the firm’s GIPS verifier, Mr.
Zavanelli—who wrote “most of the newsletter”—failed to include the GIPSrequired data in the April 2009 newsletter. This is sufficient to support the SEC’s
7

We do not address scienter for the December 2009 newsletter because, as discussed
earlier, substantial evidence did not support a finding of materiality for that newsletter.
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finding that the petitioners knowingly published the false claim of GIPS
compliance in the April 2009 newsletter. See id.
D. REQUIRED MENTAL STATE FOR THE MORNINGSTAR REPORTS
The Commission found ZPRIM liable for falsely stating in two Morningstar
reports that it was not under SEC investigation. ZPRIM (through Mr. Bauchle)
made this false statement in the report for the period ending September 30, 2010,
and, again, in the report for the period ending March 31, 2011. The Commission
found ZPRIM acted with negligence for the 2010 report and scienter for the 2011
report. ZPRIM challenges both findings. We conclude that both are supported by
substantial evidence.
1. Negligence as to the 2010 Morningstar Report
As set out above, violations of sections 206(2) and (4) can be established by
a showing of negligence. Negligence requires a showing that the investment
adviser failed to exercise “reasonable care.” Capital Gains, 375 U.S. at 194, 84 S.
Ct. at 284 (quotation omitted). This record supports finding that Mr. Bauchle
failed to act with reasonable care when he falsely reported to Morningstar in
September 2010 that ZPRIM was not under SEC investigation.
Mr. Bauchle was responsible for submitting ZPRIM’s information to the
Morningstar database. He acknowledged he knew the Morningstar reporting form
asked whether the firm was under SEC investigation. Thus, once the SEC sent
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ZPRIM a letter in August 2010 notifying it that the SEC was “conducting an
investigation” into ZPRIM, Mr. Bauchle had a duty to update the Morningstar
database to show the pending investigation. See Finnerty v. Stiefel Labs., Inc., 756
F.3d 1310, 1317 (11th Cir. 2014) (“[A] duty exists to update prior statements if the
statements were true when made, but misleading or deceptive if left unrevised.”).
Mr. Bauchle did not do this. As a result, the Morningstar report for the period
ending September 2010 falsely showed investors that there were “No” “[p]ending
SEC investigations” of ZPRIM. A person exercising a reasonable degree of care
would have updated the form once the firm received express notice from the SEC
of the pending investigation. Id. Thus, the record supports the finding that
ZPRIM’s misrepresentation in the 2010 Morningstar report was negligent.
2. Scienter as to the 2011 Morningstar Report
The record also supports the Commission’s finding that ZPRIM (through
Mr. Bauchle) acted with scienter in failing to disclose the investigation in the 2011
Morningstar report. In October 2010, Mr. Bauchle gave investigative testimony as
part of the SEC’s proceedings in this case, and counsel for the SEC specifically
informed him that he was testifying in connection with the SEC investigation into
ZPRIM. This shows Mr. Bauchle had direct, personal knowledge of the SEC
investigation yet failed to disclose it in the 2011 report. He thus “engaged in the
dissemination of a known falsehood.” Carriba Air, 681 F.2d at 1324 (quotation
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omitted). Also, Mr. Bauchle testified that the reason he “didn’t go back and
change the [pending investigation] box” on the Morningstar form was “[b]ecause
whenever we would get a new letter from the SEC, we would have a meeting and it
was downplayed as [] being anything significant and so that box wasn’t changed.”
The fact that Mr. Bauchle made a deliberate decision not to disclose the SEC
investigation because the firm “downplayed” its significance supports a finding of
an “intent to deceive” investors. Matrixx, 563 U.S. at 48, 131 S. Ct. at 1323.
Thus, there is substantial evidence to sustain the finding of scienter regarding the
2011 Morningstar report.
E. SANCTIONS
The Commission imposed sanctions against both Mr. Zavanelli and ZPRIM.
First, the Commission imposed an industry bar against Mr. Zavanelli. Second, the
Commission ordered both petitioners to cease and desist their misconduct. Third,
the Commission imposed civil penalties. Petitioners challenge each of these
sanctions. For the reasons that follow, we affirm the Commission’s sanctions
except those imposed for the violations related to the December 2009 newsletter.
1. The Industry Bar Against Mr. Zavanelli
Under the Advisers Act, the Commission may impose an industry bar on an
adviser if the Commission finds: (1) that the bar “is in the public interest,” and (2)
that the adviser “willfully violated” or “willfully aided, abetted, counseled,
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commanded, induced, or procured the violation” of federal securities law. 15
U.S.C. §§ 80b-3(e)(5), (6) & (f). To determine whether a bar is in the public
interest, the Commission considers the following:
[T]he egregiousness of the defendant’s actions, the isolated or
recurrent nature of the infraction, the degree of scienter involved, the
sincerity of the defendant’s assurances against future violations, the
defendant’s recognition of the wrongful nature of his conduct, and the
likelihood that the defendant’s occupation will present opportunities
for future violations.
Steadman I, 603 F.2d at 1140 (quotation omitted). As for the willfulness prong, a
violation is “willful” if the adviser “intentionally commit[ed] the act which
constitutes the violation.” Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000)
(quotation omitted). The adviser need not “also be aware that he is violating one
of the Rules or Acts.” Id. (quotation omitted).
The Commission did not commit a “gross abuse of discretion” in imposing
the industry bar on Mr. Zavanelli. Orkin, 31 F.3d at 1066. In assessing the “public
interest” prong, the Commission analyzed the Steadman factors and found that
each factor showed the bar would be in the public interest. In particular, the
Commission found Mr. Zavanelli “acted with a high degree of scienter” because
“[d]espite his knowledge and familiarity with GIPS, [he] flouted the requirements
of the GIPS Advertising Guidelines”; his “conduct was recurrent,” continuing after
“ZPRIM promised the previous year to take corrective action”; he “does not
genuinely recognize the wrongfulness of his conduct”; and his “assurances against
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future misconduct” were not convincing because he “continues to provide
investment advisory services.” The Commission then made the required finding of
willfulness. The Commission found the “willfulness standard is satisfied because
Zavanelli intentionally authored or approved the advertisements and investment
reports containing the misrepresentations at issue.” Each of these findings is
supported by the record. Thus, the Commission did not grossly abuse its discretion
when it imposed the industry bar. Id.
2. Cease and Desist Order
Under the Advisers Act, the Commission may issue a cease and desist order
against any person it found to have violated the Act. See 15 U.S.C. § 80b-3(k)(1).
Because the Commission found petitioners violated the antifraud provisions, the
Commission was entitled to issue the cease and desist order against them. Id. The
Commission also explained that a “cease-and-desist order will play a substantial
remedial role with respect to ZPRIM considering that we have not revoked its
registration as an investment adviser.” In light of these findings, it was not a
“gross abuse of discretion” to issue the order. Orkin, 31 F.3d at 1066.
3. Monetary Penalties
The standard for imposing monetary penalties is the same as for industry
bars. See 15 U.S.C. § 80b-3(i)(1)(A). However, the factors for determining
whether it would be “in the public interest,” id., are different from the Steadman
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factors. The Advisers Act lists the following factors for making the public interest
determination:
(A) whether the act or omission for which such penalty is
assessed involved fraud, deceit, manipulation, or deliberate or reckless
disregard of a regulatory requirement;
(B) the harm to other persons resulting either directly or
indirectly from such act or omission;
(C) the extent to which any person was unjustly enriched,
taking into account any restitution made to persons injured by such
behavior;
(D) whether such person previously has been found by the
Commission, another appropriate regulatory agency, or a selfregulatory organization to have violated the Federal securities laws,
State securities laws, or the rules of a self-regulatory organization . . .;
(E) the need to deter such person and other persons from
committing such acts or omissions; and
(F) such other matters as justice may require.
Id. § 80b-3(i)(3).
The Act also establishes a three-tier system of civil penalties, with each tier
addressing increasingly serious misconduct and imposing progressively higher
maximum penalties. Id. § 80b-3(i)(2). If the Commission applies the public
interest factors listed in the Act and determines that some monetary penalty is
warranted, the Commission must then decide which tier is appropriate. In this
case, the Commission imposed second-tier penalties, which apply when the
wrongdoing involves fraud or deceit. Id. § 80b-3(i)(2)(B). Specifically, the
Commission imposed a maximum second-tier penalty on Mr. Zavanelli for each of

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his eight violations, totaling $570,000, and a single below-maximum second-tier
penalty of $250,000 on ZPRIM. 8
Petitioners have not shown these penalties were a “gross abuse of
discretion.” Orkin, 31 F.3d at 1066. In deciding whether to impose the monetary
penalties, the Commission discussed each of the public interest factors. The
Commission found, among other things, that the petitioners “repeatedly violated
the antifraud provisions with scienter”; the misconduct was “especially serious
because it involved attempts to promote their firm through false claims”; and
“[t]here is a need to deter [petitioners] from committing future” violations. These
findings are supported by the record, and the Commission appropriately gave them
significant weight. Also, while acknowledging that the SEC did not offer evidence
to quantify the harm caused by the petitioners’ misrepresentations, the Commission
found the market was harmed insofar as the misrepresentations “denied investors
the ability to make direct comparisons between ZPRIM’s performance and that of
other investment advisers.” On this record, we cannot say the Commission grossly
abused its discretion in its choice of monetary penalties. See id.
Although we generally affirm the Commission’s imposition of monetary
penalties, the amount of the penalties imposed here must be reduced by any

8

The maximum penalty for corporations is considerably higher than for “natural
person[s].” 15 U.S.C. § 80b-3(i)(2)(B).
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amounts related to the December 2009 newsletter violations, which we vacate.
Because the Commission’s order makes clear it assessed a $75,000 penalty on Mr.
Zavanelli for the December 2009 newsletter, we vacate that portion of his
monetary sanction. For ZPRIM, however, the Commission did not impose
penalties for each violation, but instead a single $250,000 penalty. As a result, we
vacate the ZPRIM penalty and remand for the Commission to determine the
amount, if any, by which that penalty should be reduced.
IV. CONCLUSION
We affirm the Commission’s finding that ZPRIM violated sections 206(1),
(2), and (4) of the Advisers Act by making false or misleading claims (a) that it
was GIPS compliant in the fall-2008 and spring-2011 magazine ads and in the
April 2009 newsletter; and (b) that it was not under SEC investigation in the 2011
Morningstar report. We also affirm the Commission’s finding that ZPRIM
violated sections 206(2) and (4) for the 2010 Morningstar report. We vacate the
Commission’s finding that ZPRIM violated sections 206(1), (2), and (4) of the
Advisers Act for the December 2009 newsletter. In light of that holding, we also
vacate the monetary penalty against ZPRIM and remand this case to the
Commission for it to determine whether the penalty should be reduced in light of
our decision, and if so by how much.

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We affirm the Commission’s finding that Mr. Zavanelli violated sections
206(1) and (2) of the Advisers Act by making false or misleading claims that
ZPRIM was GIPS compliant in the fall-2008 and spring-2011 magazine ads and in
the April 2009 newsletter. We vacate the Commission’s finding that Mr. Zavanelli
violated sections 206(1) and (2) for the December 2009 newsletter. We therefore
also vacate the $75,000 penalty the Commission imposed on Mr. Zavanelli for the
December 2009 newsletter.
PETITION GRANTED AND REMANDED IN PART AND DENIED
IN PART.

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