## Facts

- Valicenti Advisory Services, Inc. (VAS) was an SEC-registered investment adviser.
- Vincent R. Valicenti was VAS’s president and sole owner.
- During 1992, VAS distributed a packet of marketing materials to prospective clients.
- The packet included a chart stating VAS’s “Total Portfolio” rates of return from 1987 through 1991.
- A footnote next to “Total Portfolio” stated that the figures were a “composite of discretionary accounts with a balanced objective.”
- The SEC later learned of the chart during an inspection that began in December 1993.
- The SEC found the chart misleading because a reasonable investor would read “composite” to mean all discretionary accounts with a balanced objective, but the chart reflected only a selected portion of those accounts.
- The SEC also found that the chart’s 1991 rate of return was more than seven percentage points higher than it would have been if all balanced accounts had been included.
- The SEC concluded that VAS, aided and abetted by Valicenti, willfully violated antifraud provisions of the Investment Advisers Act (including § 206) through the misleading performance presentation.
- The SEC imposed sanctions including censure, a cease-and-desist order, and civil money penalties of $50,000 against VAS and $25,000 against Valicenti.
- VAS and Valicenti petitioned the Second Circuit for review of the SEC’s order.

## Issues

1. Whether substantial evidence supported the SEC’s findings that VAS’s performance chart was materially misleading and that petitioners willfully violated § 206 of the Investment Advisers Act.
2. Whether the SEC acted within its statutory authority and sound discretion in ordering censure, a cease-and-desist order, and civil penalties.

## Decision

- The Second Circuit denied the petition for review and affirmed the SEC’s opinion and order.
- The court held that substantial evidence supported the SEC’s determination that the chart was materially misleading because “composite” would reasonably be understood to include all qualifying balanced discretionary accounts, not a chosen subset.
- The court accepted the SEC’s conclusion that excluding accounts changed the reported results in a meaningful way, including inflating the 1991 return by more than seven percentage points.
- The court upheld the SEC’s finding that petitioners acted with a deliberate intent to defraud, based on the way the chart was constructed and presented.
- The court held that the SEC’s chosen sanctions (censure, cease-and-desist order, and monetary penalties) were authorized and not an abuse of discretion.
- The Supreme Court denied certiorari, leaving the Second Circuit’s judgment in place. 530 U.S. 1276 (2000).

## Legal Principles

- Under § 206 of the Investment Advisers Act, an investment adviser may not use deceptive or misleading statements or omissions in communications with prospective clients, including performance advertising.
- Materiality is evaluated from the standpoint of a reasonable investor; a performance presentation can be misleading when labeling (such as “composite”) creates a false impression about what accounts were included.
- A chart that reports returns for only selected accounts, without making that selection clear, can misstate an adviser’s record and support an antifraud finding when the difference is meaningful.
- “Willfulness” in this setting focuses on whether the respondent intentionally engaged in the conduct that constituted the violation; it does not require proof that the respondent knew the conduct was unlawful.
- On review of SEC administrative enforcement actions, courts generally uphold the Commission’s factual findings when supported by substantial evidence and uphold sanctions unless the SEC acted outside its authority or abused its discretion.

## Conclusion

Valicenti Advisory Services and its owner challenged SEC sanctions imposed after the SEC found that VAS’s marketing packet used a “composite” performance chart that omitted certain balanced discretionary accounts and materially overstated results, including a 1991 return inflated by more than seven percentage points; the Second Circuit affirmed the SEC’s antifraud findings and sanctions (censure, cease-and-desist order, and civil penalties), and the Supreme Court denied certiorari.


Valicenti Advisory Services, Inc. v. SEC, 198 F.3d 62 (1999), 530 UI.S. 1276 (2000)