Adviser Employee Sanctioned For Taking Gifts From Brokers - Indigent, Homeless and Without Wheels Test Revived

Robert L. Burns, IA Act Rel. 3260, August 5, 2011

Burns was a trader at Fidelity who received gifts from brokers that sought and obtained orders from Fidelity in violation of Section 17(e) of the Exchange Act. The Commission imposed a censure, $141,000 of disgorgement plus interest and a $40,000 civil penalty. It based the amount of disgorgement on the amount paid by the donor of the gift. Because his total assets were enough (just barely) to pay such amounts it refused to reduce the monetary penalties and rejected Burns' inability to pay argument.

Burns sent orders to ten firms from which he accepted gifts such as rare wine, travel, and tickets to entertainment and sporting events. The value of those gifts was $141,000.

Exchange Act Section 17(e) prohibits persons affiliated with investment companies from receiving compensation or any economic benefit "for the purchase or sale of any property to or for" an investment company.

Burns did not contest receiving the gifts. The Commission rejected his claim that he could not be found to violate the statute unless it could be established that he traded to the detriment of Fidelity clients. The harm involved is the conflict of interest, and potential, rather than actual harm to clients.

The Commission also rejected Burns' argument that the value of the gifts for purposes of calculating disgorgement should be based on the recipient's subjective belief as to the actual value of the item. Here, the Commission based the disgorgement amount on the actual price paid by the broker who provided the gifts.

Burns claimed his total net worth was $277,000. The Commission rejected his inability to pay argument noting that his net worth was in excess of the amount of disgorgement, interest, and penalty sought. This demonstrates a very hard line by the Commission in determining when to limit such monetary sanctions. This Commission will apparently diminish such amounts only when there are literally no assets available to satisfy the judgment. This recalls the rhetoric of a long ago chairman of the SEC who famously announced that monetary sanctions would be reduced only if a respondent could prove he was "indigent, homeless, and without wheels."

Read more commentary on SEC administrative opinions at SEC Tea Party, a blog by Robert Fusfeld.

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