William DiBella and North Cove Ventures LLC (collectively "defendants-appellants") challenge a jury verdict in an enforcement action brought by the Securities and Exchange Commission (the "SEC") finding defendants-appellants liable for aiding and abetting: (1) violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and 17 C.F.R. § 240.10b-5 by the Connecticut State Treasurer (the "Treasurer"), and (2) a related violation of section 206(2) of the Investment Advisers Act of 1940 ("Advisers Act"), 15 U.S.C. § 80b-6, by Thayer Capital Partners and its chairman (collectively "Thayer"). As evidence for the underlying violations, the SEC alleged that the Treasurer, without informing the state treasury department, Governor, or relevant state legislative committee, invested assets from the state pension fund with Thayer, arranged for defendants-appellants to receive a fee for the investment from Thayer, and increased the amount of the pension fund investment with Thayer to increase defendants-appellants' fee. Defendants-appellants argue the Treasurer had no fiduciary duty to disclose this information to anyone, and the Advisers Act does not apply because the case involves a state government and a state pension fund. We disagree. First, Connecticut state law at the time of the alleged violation made the Treasurer a fiduciary of the fund with duties to disclose to at least the relevant legislative committee. Second, the Advisors Act applies because Thayer, not the state, was the alleged violator.
As part of the jury instruction, the district court told the jury that as part of its case, the SEC had claimed defendants-appellants had done "no meaningful work." Contrary to defendant-appellants' contention, the district court did not err in not providing a definition of this phrase. Nor did the district court abuse its discretion in admitting evidence of prior bad acts of the Treasurer, imposing civil penalties on defendants-appellants, or demanding defendants-appellants disgorge the fee they earned as a result of the violations.
The opinion of the court was delivered by: Wesley, Circuit Judge
Before: MINER, WESLEY, Circuit Judges, and STANCEU,*fn1 Judge.
William DiBella ("DiBella") and North Cove Ventures LLC ("NCV") (together "defendants-appellants") appeal from a judgment entered in the United States District Court for the District of Connecticut (Burns, J.), following a jury verdict, in an enforcement action brought by the Securities and Exchange Commission (the "SEC"). Specifically, defendants-appellants challenge: (1) the jury having found defendants-appellants liable for aiding and abetting violations of section 10(b) ("section 10(b)") of the Securities Exchange Act of 1934 (the "34 Act"), codified as 15 U.S.C. § 78j(b), 17 C.F.R. § 240.10b-5 ("Rule 10b-5"), and section 206(2) of the Investment Advisers Act of 1940 (the "Advisers Act"), codified as 15 U.S.C. § 80b-6; and (2) the district court having denied defendants-appellants' motion for judgment as a matter of law pursuant to Federal Rule of Civil Procedure 50(b), or, in the alternative, for a new trial pursuant to Federal Rule of Civil Procedure 59(a), and imposed penalties on defendants-appellants.
Paul Silvester ("Silvester") served as Connecticut State Treasurer (the "Treasurer") from 1997 to 1999. As Treasurer, Silvester managed the Connecticut Retirement and Trust Funds (the "Fund"), the pension fund for approximately 150,000 employees of the State of Connecticut, valued at the time at approximately $18 billion. SEC v. DiBella, No. 3:04 CV 1342 (EBB), 2005 WL 3215899, at *1 (D. Conn. Nov. 29, 2005) (DiBella I).
DiBella was a Connecticut State Senator from 1981 to 1996, and while in office he served on the Investment Advisory Council (the "IAC"), the committee that oversaw investments made by the Treasurer on behalf of the Fund. After serving in the legislature, DiBella formed NCV to further his consulting business. SEC v. DiBella, No. 3:04 CV 1342 (EBB), 2007 WL 2904211, at *1 (D. Conn. Oct. 3, 2007) (DiBella II).*fn2
In the fall of 1997, DiBella introduced Silvester to Joseph Grano Jr., president of PaineWebber & Co. ("PaineWebber"), at that time a brokerage and asset management firm. As a result of that meeting, Silvester approved a $100 million investment by the Fund with PaineWebber. Id. at *2. Both Silvester and DiBella were under the impression that DiBella would receive a finder's fee for arranging the meeting between Silvester and Grano. Id. When DiBella discovered he would not be paid because he did not qualify as a finder under PaineWebber's internal process, DiBella asked Silvester to intercede with Grano. After Silvester and DiBella had still failed to convince Grano to pay DiBella a year later, Silvester told DiBella that he "would try to work something else out."
On November 11, 1998, the day after Silvester and DiBella met with Grano, and eight days after Silvester lost re-election as Treasurer, Silvester telephoned Frederic Malek, chairman of Thayer Capital Partners ("Thayer"), an investment firm, to notify Malek that Silvester intended to invest $50 million of Fund assets with Thayer. DiBella I, 2005 WL 3215899, at *2. Thayer, with the help of Merrill Lynch, had been trying to solicit the Treasurer to invest Fund assets with Thayer since August 1998. DiBella II, 2007 WL 2904211, at *2. An officer at the Treasurer's office, Michael MacDonald, initially rejected the Thayer investment but eventually recommended a maximum investment by the Fund of $25 million. Id.
Silvester instructed Malek to talk to DiBella regarding a finder's fee. DiBella I, 2005 WL 3215899, at *2. Malek felt that DiBella "could be helpful in developing a relationship with the new [T]reasurer" and with "expediting and consummating the document process" for the Fund investment, but Malek did not think that DiBella would be helpful in raising capital. At no point did DiBella inform Malek that because he was not a registered lobbyist he was precluded by Connecticut state law from representing Thayer in negotiations with the Treasurer.
Silvester hoped DiBella would be a "representative of the state of Connecticut... and earn a finder's fee." Silvester thought that allowing DiBella to be part of the Thayer investment would "take care of" DiBella for the PaineWebber deal and for his help with Silvester's campaign for re-election as Treasurer, while solidifying a "future business and political relationship." DiBella also viewed the Thayer fee as a way for Silvester to compensate DiBella for the PaineWebber deal.
After just one conversation with Malek, and without any knowledge of where Thayer planned to invest the money, DiBella asked Silvester to increase the Fund's investment with Thayer from $50 million to $75 million. Silvester obliged. DiBella II, 2007 WL 2904211, at *1. Silvester indicated that he "revisited... and reconsidered" the investment and increased the amount the Fund invested with Thayer solely because of DiBella's request. DiBella testified that he made the request knowing that as the amount of Fund moneys invested increased, his fee would increase. Silvester also indicated that by increasing the amount of the Fund's investment with Thayer, Silvester was also increasing DiBella's fee. Malek, on the other hand, testified that he was "relatively indifferent to raising [the Fund investment] to [$]75[million]" because the investment portfolio was "fully subscribed." DiBella and Malek agreed that DiBella -- and thereby NCV -- would receive a fee for his services in arranging the Fund's investment with Thayer.
On November 24, 1998, Silvester -- now a lame duck Treasurer -- committed $75 million of Fund assets to Thayer for investment, which, according to Silvester, was a typical amount for a Fund investment. Id. On November 30, 1998, defendants-appellants signed an agreement with Thayer to consult and represent Thayer regarding the Fund investment in exchange for $525,000. Id. In December 1998, Thayer paid defendants-appellants $25,000. Id.
Upon the conclusion of his term in January 1999, Silvester was hired by Grano to work for PaineWebber. Denise Nappier succeeded Silvester as Treasurer in January 1999. When Nappier took office, she reduced the Fund's commitment to Thayer. Id. Correspondingly, Thayer reduced the amount owed to defendants-appellants to $374,500. Id. In March 1999, Thayer paid DiBella and NCV $349,500, the remainder owed them. Id. Malek testified that he was satisfied with the reduction and never needed to discuss investment strategies with DiBella.
In 2003, Silvester pled guilty to federal racketeering charges based on the predicate offense of conspiracy to commit money laundering. Silvester pled guilty because, among other things, he "asked Thayer to pay someone a finder fee in exchange for doing business with the [Fund]." The SEC then sued defendants-appellants for aiding and abetting (1) Silvester in violating section 10(b) and Rule 10b-5 of the 34 Act; and (2) Thayer and Malek in violating section 206(2) of the Advisers Act. Id. In particular, the SEC claimed "DiBella... engaged with Thayer, helped put the arrangement into the language of a consulting contract that did not reflect the true consideration and services to be provided, and collected fees under it."
After Silvester testified as to other transactions inculpating him for racketeering, the district court instructed, "[t]he jury will utilize the material for purposes of -- all of this is offered... to describe Mr. Silvester's activities. At this point, I will remind you or tell you that Mr. DiBella is not accused in any way of being involved in transactions that have been enumerated so far." The district court later instructed: "you heard Mr. Silvester testify with respect to the transactions as to [a] certain number of funds.... Mr. DiBella is not alleged to have been involved in any of these funds and, in fact, Mr. Silvester has so stated.... Mr. DiBella is not alleged to have any responsibility for that kind of activity." The district court went on to state that "[a]ny illegal act committed by Mr. Silvester which he has admitted is not coming in to be used against Mr. DiBella, it was merely to establish a foundation for the kind of activity that Mr. Silvester was involved in, that's all." At the conclusion of the trial, the district court again instructed the jury:
You have heard evidence concerning certain criminal acts and charges against and involving Paul Silvester. Other than evidence involving Thayer Capital, those acts and charges did not involve Defendants DiBella or North Cove Ventures, LLC, and they are not alleged in this case to have been involved in those acts or charges. That evidence was presented at trial for the limited purpose by the Plaintiff of showing the criminal acts or charges against Silvester. You should not consider those acts or charges against the Defendants, but may consider them in determining whether Silvester committed a securities violation.
The district court also instructed the jury on the nature of the SEC's claims against defendants-appellants. The district court explained that defendants-appellants were charged with aiding and abetting Silvester's violations of section 10(b) of the 34 Act and Rule 10b-5, as well as aiding and abetting Thayer's violation of section 206(2) of the Advisor's Act. The district court explained that the SEC charged Silvester with violating section 10(b) and Rule 10b-5 "by engaging in a fraudulent scheme, pursuant to which he arranged, so as to pay for unrelated work, political favors, and future goodwill, for the [d]efendants[-appellants] to receive substantial fees despite providing no meaningful work in connection with Silvester's investment of... Fund money with Thayer" and by "fail[ing] to disclose this arrangement to the... Fund." The district court explained that the SEC charged Thayer and Malek with violating section 206(2) by "breach[ing] their fiduciary duties to the... Fund when they entered into their arrangement with [defendants-appellants], to pay them a fee despite their providing no meaningful work, and without disclosing that they had done so to the... Fund."
As to the aiding and abetting claims, the district court instructed the jury that the SEC argued that defendants-appellants "were aware of the fraudulent nature of the fee arrangement and that they provided substantial assistance to the fraud by entering into the arrangement with Thayer, by successfully soliciting a larger investment by the Pension Fund in order to increase their fees, and by ultimately accepting payment despite having performed no meaningful services." The district court then instructed the jury as to the legal elements of violations of section 10(b) and Rule 10b-5, section 206(2), and aiding and abetting.
The jury found that Silvester violated section 10(b) and Rule 10b-5, Thayer violated section 206(2), and defendants-appellants knowingly aided and abetted all violations. The district court ordered DiBella to disgorge $374,500 and pay $307,127.45 in pre-judgment interest and $110,000 in civil penalties.
Defendants-appellants moved for judgment as a matter of law and, in the alternative, for a new trial. DiBella II, 2007 WL 2904211, at *1. Defendants-appellants claimed: (1) the SEC failed to prove the existence of a fraudulent scheme, as required by Rule 10b-5, because the SEC failed to prove that defendants-appellants provided no "meaningful work" in exchange for defendants-appellants' fee; (2) the jury instructions were flawed because they failed to provide a definition of "meaningful work"; (3) Silvester, as Treasurer, had no duty to disclose the fee agreement between DiBella and Thayer and, therefore, Silvester could not have violated Rule 10b-5(b); and (4) the SEC failed to prove a primary violation of section 206(2) of the Advisers Act by Thayer, and even if this proof were established, defendants-appellants could not aid and abet the violation as a matter of law. Id. at *3.
The district court first found that a reasonable jury could conclude that Silvester was motivated by "a desire to receive political favors and repay DiBella for unrelated work" and that this qualified as a fraudulent scheme under Rule 10b-5, regardless of whether defendants-appellants provided any meaningful work to Thayer. Id. at *4-5. Next, the district court held that a jury could reasonably find defendants-appellants provided Silvester with substantial assistance because of DiBella's testimony that he asked ...