## Facts

- ZPR Investment Management, Inc. (ZPRIM) was an SEC-registered investment adviser founded and controlled by Max E. Zavanelli, who had final authority over the firm’s advertising.
- ZPRIM marketed its services using advertisements, newsletters, and fact sheets that represented the firm as compliant with the Global Investment Performance Standards (GIPS).
- GIPS permits a firm to claim “GIPS-compliant” status, but advertisements making that claim must include specified time-period performance figures under GIPS advertising guidelines.
- ZPRIM distributed ads claiming GIPS compliance while omitting the performance data required by the GIPS advertising guidelines.
- After initial contact, ZPRIM often sent separate materials containing more complete performance information, but the challenged ads themselves did not include the required GIPS figures.
- Evidence showed ZPRIM and Zavanelli were informed of the relevant GIPS advertising requirements yet continued using non-compliant ads.
- In SEC administrative proceedings, the Commission found ZPRIM and Zavanelli violated Investment Advisers Act § 206(1) and § 206(2), found scienter, and imposed censure, cease-and-desist relief, an industry bar against Zavanelli, and civil penalties.
- One set of findings and penalties was based on a December 2009 newsletter that asserted GIPS compliance and superior performance.

## Issues

1. Whether substantial evidence supported findings that ZPRIM and Zavanelli made materially false or misleading statements about GIPS compliance and performance in violation of Advisers Act § 206(1) and § 206(2).
2. Whether substantial evidence supported the SEC’s scienter finding under § 206(1) and, alternatively, negligence under § 206(2).
3. Whether the SEC proved materiality as to the alleged misrepresentations in the December 2009 newsletter.
4. Whether the SEC’s sanctions, including civil penalties and an industry bar, were within its authority and justified on the record.

## Decision

- The Eleventh Circuit affirmed the SEC’s findings that ZPRIM and Zavanelli made materially misleading GIPS-compliance and performance representations in multiple advertisements, constituting violations of § 206(1) and § 206(2).
- The court affirmed the SEC’s finding of scienter (at least recklessness) for § 206(1) and concluded the same evidence supported negligence for § 206(2).
- The court vacated the SEC’s violations findings tied to the December 2009 newsletter because the SEC failed to prove the newsletter misrepresentations were material.
- The court upheld the industry bar and other sanctions, but vacated the monetary sanctions attributable to the December 2009 newsletter: it vacated Zavanelli’s newsletter-specific penalty and remanded ZPRIM’s civil penalty for recalculation excluding the vacated conduct.

## Legal Principles

- Under Advisers Act § 206(1) and § 206(2), an investment adviser commits fraud by making materially false or misleading statements to clients or prospective clients; materiality requires a substantial likelihood the information would significantly alter the total mix of information for a reasonable investor.
- A claim of GIPS compliance can be materially misleading when the advertisement does not meet GIPS advertising requirements; omissions of required performance data may render the compliance claim deceptive.
- Later distribution of corrective or more complete materials does not necessarily cure a misleading impression created by an earlier advertisement directed to prospective clients.
- Scienter for § 206(1) may be shown by recklessness, including continuing a misleading advertising practice despite notice of applicable standards; § 206(2) requires only negligence.
- Appellate review sustains the SEC’s factual findings if supported by substantial evidence, but the Commission must prove each charged misrepresentation’s materiality; sanctions must be adjusted to exclude vacated violations.

## Conclusion

The Eleventh Circuit sustained the SEC’s core determination that ZPRIM and its controlling principal committed adviser fraud by advertising GIPS compliance while omitting required GIPS performance information, and it upheld most sanctions based on substantial evidence of at least reckless misconduct. However, it set aside liability and monetary penalties tied to a specific December 2009 newsletter because the SEC did not adequately prove that newsletter’s alleged misrepresentations were material.


ZPR Inv. Mgmt., Inc. v. SEC, 861 F.3d 1239 (11th Cir. 2017)