Financial Adviser Fraud Prosecutions
Financial Adviser Fraud Prosecutions
Introduction
Financial adviser fraud involves deceptive or dishonest conduct by financial advisers that results in financial loss or risk to their clients. It can include misrepresentation, unauthorized trading, misappropriation of funds, conflicts of interest, and falsifying documents.
Prosecutions for financial adviser fraud usually require proving:
The adviser owed a fiduciary duty to the client.
The adviser intentionally deceived or misled the client.
There was a breach of duty or misuse of authority.
The client suffered financial loss as a direct result.
🔹 1. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963) (U.S. Supreme Court)
Facts:
The defendants, financial advisers, failed to disclose conflicts of interest and made misleading statements about investment performance to their clients.
Legal Issue:
Whether advisers have a fiduciary duty to fully disclose material information to clients.
Ruling:
The Supreme Court held that financial advisers owe a fiduciary duty requiring full disclosure of conflicts and accurate information. Failure to do so constitutes fraud under securities laws.
Significance:
This landmark case established the principle that financial advisers must act in clients’ best interests and disclose material facts, laying groundwork for fraud prosecutions.
🔹 2. R v. Anderson [2011] EWCA Crim 1379 (UK)
Facts:
Anderson, a financial adviser, was convicted of fraud for persuading clients to invest in worthless companies while concealing risks and falsifying documents.
Legal Issue:
Whether deliberate concealment and misrepresentation amounted to criminal fraud.
Ruling:
The Court of Appeal upheld the conviction, emphasizing that intentional deception for financial gain breaches criminal law protecting investors.
Significance:
Clarifies that concealment of material information and falsification by advisers constitute criminal fraud, even without direct theft.
🔹 3. United States v. Martoma, 894 F. Supp. 2d 419 (S.D.N.Y. 2012)
Facts:
Martoma, a hedge fund portfolio manager and financial adviser, obtained insider information about clinical trial results and used it to trade securities, making millions in illicit gains.
Legal Issue:
Whether trading based on material non-public information obtained as a financial adviser constitutes insider trading and fraud.
Ruling:
Martoma was convicted of insider trading and securities fraud, as his conduct breached fiduciary duties and securities laws.
Significance:
Highlights that financial advisers who use confidential information for personal gain can face severe criminal charges.
🔹 4. R v. Berry [2013] EWCA Crim 1147 (UK)
Facts:
Berry was a financial adviser who convinced elderly clients to transfer large sums into high-risk investments without proper advice or disclosure, leading to severe losses.
Legal Issue:
Whether failure to give proper advice and misleading clients amounts to fraud.
Ruling:
The Court of Appeal upheld Berry’s conviction for fraud by false representation, emphasizing advisers’ duties to ensure clients understand risks.
Significance:
Reinforces that poor or misleading advice causing financial loss can lead to criminal liability.
🔹 5. U.S. v. Coscia, 866 F.3d 782 (7th Cir. 2017)
Facts:
Coscia, a high-frequency trader acting as a financial adviser, manipulated the market by placing and canceling orders to create false market signals.
Legal Issue:
Whether such manipulative trading schemes constitute securities fraud.
Ruling:
The court affirmed Coscia’s conviction, ruling that manipulative conduct intended to deceive and harm market participants violates securities fraud statutes.
Significance:
Extends fraud liability to manipulative trading tactics used by advisers, emphasizing protection of market integrity.
🔹 6. R v. Ghosh [1982] QB 1053 (UK) (Establishing fraud test)
Context:
Though not specific to financial advisers, this case set the test for criminal dishonesty in fraud cases.
Ruling:
The test requires proving: (1) that the conduct was dishonest by ordinary standards, and (2) the defendant realized it was dishonest by those standards.
Significance:
Forms the basis for determining dishonesty in prosecutions of financial adviser fraud.
⚖️ Summary of Key Legal Principles:
| Principle | Explanation |
|---|---|
| Fiduciary Duty | Advisers must act honestly, disclose material information, and prioritize clients’ interests. |
| Intent to Deceive | Fraud requires proof of intentional deception or reckless disregard for truth. |
| Misrepresentation and Concealment | False statements or hiding material facts constitute actionable fraud. |
| Use of Confidential Information | Using insider or non-public info for personal gain breaches fiduciary duty and laws. |
| Duty of Care in Advice | Advisers must ensure clients understand risks; failure may result in criminal liability. |
| Market Integrity | Manipulative practices designed to deceive the market are prosecutable fraud. |
Conclusion
Financial adviser fraud prosecutions protect clients and market integrity by holding advisers accountable for dishonest conduct. Courts require proof of intentional deception or reckless misconduct and emphasize the adviser’s fiduciary responsibilities. Cases range from misrepresentation and insider trading to manipulative market practices and failure to advise properly.
RELATED Blog
0 comments