## Facts

- Patricia Ostrander worked as a Fidelity portfolio manager from 1970 to 1987 and directed large-volume securities purchases, including hundreds of millions of dollars in trades with Drexel Burnham Lambert.
- In 1985–86, KKR conducted a leveraged buyout of Storer Communications; Drexel underwrote the securities issued in the transaction, including preferred stock and a large issuance of warrants intended to help sell the offering.
- The warrants were structured as valuable “equity sweeteners” and were purportedly available only through limited channels tied to participation in the offering.
- Michael Milken arranged for the warrants to be distributed on unusually favorable terms to a small, select group, including insiders, through vehicles such as MacPherson Investment Partners, L.P.
- Milken offered Ostrander an opportunity to invest personally in MacPherson; she invested $13,200 of her own funds.
- The government alleged the investment opportunity was conferred because Ostrander could steer Fidelity business to Drexel in connection with Storer-related transactions and thus constituted unlawful outside compensation.
- The government also alleged Ostrander failed to disclose the MacPherson investment to Fidelity as required for access persons under the Investment Company Act and SEC rule 17j-1.
- After an eight-day trial in the Southern District of New York, the jury convicted Ostrander on two counts of unlawful compensation/thing of value and one count of failure to report; she received concurrent two-month prison terms.

## Issues

1. Whether an opportunity to participate in a specially favorable investment can constitute “compensation” or a “thing of value” under Investment Company Act § 17(e).
2. Whether the evidence supported a finding that Ostrander accepted the benefit “in connection with” her portfolio-management duties and because of her influence over the fund’s transactions.
3. Whether the jury instructions and challenged evidentiary rulings improperly stated the law or denied Ostrander a fair trial.
4. Whether the evidence supported conviction for failing to report a personal securities investment under Investment Company Act § 17(j) and SEC rule 17j-1.

## Decision

- The Second Circuit affirmed the convictions and sentence.
- The court held that § 17(e) reaches indirect and intangible benefits, including a specially structured investment opportunity offered because of a fiduciary’s position.
- The court concluded the jury instructions properly allowed the jury to decide whether the MacPherson opportunity was a prohibited “thing of value” accepted in connection with fund transactions.
- The court found the evidence sufficient to support the jury’s findings on both the unlawful-compensation counts and the reporting-violation count.
- The court found no reversible error in the district court’s evidentiary rulings, including admission of background evidence about the warrant distribution scheme.

## Legal Principles

- Investment Company Act § 17(e) is construed broadly to prevent fund fiduciaries from receiving side benefits from third parties connected to the fund’s purchases or sales.
- “Compensation” and “any thing of value” under § 17(e) can include an opportunity to participate in a favorable investment, not only cash payments or commissions.
- The “in connection with” element may be proven with circumstantial evidence showing the benefit was offered because of the fiduciary’s role and ability to influence fund transactions.
- Investment Company Act § 17(j) and SEC rule 17j-1 require covered personnel to disclose personal securities holdings/transactions to permit monitoring of conflicts; concealment can support criminal liability.
- Trial courts have discretion to admit background evidence explaining the structure and value of an alleged benefit where it bears on motive, context, and the nature of the “thing of value,” subject to Rule 403 limits.

## Conclusion

The court affirmed Ostrander’s convictions, holding that § 17(e) prohibits investment-fund fiduciaries from accepting specially favorable investment opportunities offered due to their transactional influence, and that failure to disclose such personal investments can support liability under § 17(j) and rule 17j-1.


United States v. Ostrander, 999 F.2d 27 (2d Cir. 1993)