## Facts

- Jerome Deutsch was an executive vice president of Realty Equities Corp. of New York, which sought to raise capital through private placements of promissory notes with warrants.
- Frank D. Mills was involved in management of mutual funds, including Puritan Fund, Inc. and Fidelity Trend Fund, Inc., both registered investment companies.
- Realty notes were placed in Mills’s personal account and in the portfolios of the mutual funds.
- The prosecution alleged Deutsch arranged transactions in which Mills obtained Realty notes at more favorable prices than the funds, conferring a financial benefit on Mills tied to his role in fund-related transactions.
- The government treated the price differential as “compensation” from the issuer (Realty) to Mills while Mills acted as an agent for the registered investment companies, conduct prohibited by Investment Company Act § 17(e)(1).
- Deutsch argued the favorable pricing reflected a prior commitment or arrangement with Mills and did not constitute compensation for agency services.
- A jury convicted Deutsch on Count Six for aiding and abetting Mills’s § 17(e)(1) violation; Mills pleaded guilty to a separate count.
- Deutsch appealed the conviction and the denial of a post-conviction coram nobis motion; both were affirmed.

## Issues

1. Whether “acting as agent” under Investment Company Act § 17(e)(1) requires proof that the person had the ability to influence investment decisions, or instead functions to distinguish covered agents from brokers.
2. Whether § 17(e)(1) requires proof of a quid pro quo intent to influence fund investment decisions, or only proof that compensation was accepted because of the agent’s position or conduct.
3. Whether § 17(e)(1) is unconstitutionally vague as applied, including as to the meaning of “compensation.”
4. Whether the evidence was sufficient for the jury to find that the pricing differential constituted prohibited “compensation.”
5. Whether Mills’s absence at trial (after pleading guilty) deprived Deutsch of a fair trial.

## Decision

- The Second Circuit affirmed Deutsch’s conviction and the denial of coram nobis relief.
- The court held the district court’s construction of “acting as agent” was too narrow, but the error was harmless because it increased the government’s burden.
- The court held § 17(e)(1) does not require proof that compensation actually influenced investment decisions or that the parties had a quid pro quo intent to influence.
- The court rejected the vagueness challenge, finding the statute gave adequate notice and enforceable standards.
- The court found sufficient evidence for a rational jury to conclude Mills received prohibited “compensation,” including from the pattern of transactions and price differentials.
- The court held Mills’s absence did not deny Deutsch a fair trial.

## Legal Principles

- Investment Company Act § 17(e)(1) prohibits an affiliated person (or an affiliated person of such person), acting as an agent, from accepting any compensation (beyond regular salary or wages from the company) in connection with purchases or sales of property to or for a registered investment company.
- “Acting as agent” in § 17(e)(1) is not limited to agents proven to have influenced investment decisions; it operates as a role-based, categorical limitation distinguishing covered agents from brokers.
- A § 17(e)(1) violation does not require proof of a quid pro quo intent to influence or proof that compensation changed fund conduct; acceptance of prohibited compensation because of the agent relationship is sufficient.
- A favorable economic advantage conveyed by an issuer (including through differential pricing) may qualify as “compensation” within § 17(e)(1).
- An instruction that improperly narrows the statute may be harmless where it raises the government’s burden and does not prejudice the defendant.

## Conclusion

The Second Circuit upheld Deutsch’s aiding-and-abetting conviction for causing an investment-company agent to accept issuer-provided economic benefits connected to fund transactions, holding that § 17(e)(1) reaches gratuity-like compensation without requiring proof of an actual quid pro quo or demonstrated influence on investment decisions.


United States v. Deutsch, 451 F.2d 98 (2d Cir. 1971)