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Media Alerts - United States of America v. Everett C. Miller - Third Circuit
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August 24, 2016
  United States of America v. Everett C. Miller - Third Circuit
Headline: Sentencing Guidelines Investment Enhancement applied to defendant even though he was not registered as an investment advisor

Area of Law: Securities Law

Issue(s) Presented: Does a defendant have to be a registered investment advisor to be subject to the investment enhancement under the Sentencing Guidelines?

Brief Summary:

Appellant Everett C. Miller sold investors over $41 million in phony "promissory notes" and then squandered their money. Miller pled guilty to one count of securities fraud and one count of tax evasions. He was sentenced to 120 month's imprisonment. The Third Circuit rejected Miller's argument his sentence should not have included the Sentencing Guidelines investment enhancement, because he was not an "investment adviser," as defined by the Investment Advisers Act of 1940. The Court held that, based on the text of the investment adviser enhancement and at the definition of investment adviser under the Act, Miller was an "investment adviser" he was in the business of providing securities advice, which he provided for compensation. It was not necessary for him to be a registered investment adviser to be considered one under the Act.

Extended Summary:

Everett C. Miller was the founder, chief executive and sole owner of Carr Miller Capital LLL (Carr Miller), an investment and financial services firm. Carr Miller was based in New Jersey and had more than thirty affiliates and related entities. Between June 2006 and December 2010, Carr Miller received over $41.2 million in capital from more than 190 investors. Miller himself was a registered investment adviser representative under New Jersey securities law. While he only had a high school GED, he passed several securities industry examinations. Through Carr Miller, Miller sold investors "Carr Miller Capital promissory notes, which were securities under the Securities Act of 1933 and the Securities Exchange Act of 1934, and not exempt from federal or state registration requirements. Miller did not register the notes. The notes promised annual returns of between 7 and 20 percent, which varied by investor, plus the return of the principal after nine months. These promises were false.

Miller deceived his investors in various ways. For one, he operated Carr Miller as a Ponzi Scheme as he spent approximately $11.7 million of its investors' principal to repay earlier investors. He also invested in risky business ventures without informing investors. Carr Miller lost approximately $15.7 million of $22.9 million invested by the firm. Carr Miller also comingled investors' funds in seventy-five related bank accounts, which Miller then tapped like a "credit card" for Carr Miller overhead and his own expenses. Miller spent lavishly on luxury cars, home furnishings, electronics, vacations and tickets to entertainment and sporting events. The Arkansas Securities Department opened an investigation of a Carr Miller affiliate in August 2009. This investigation put Miller on notice that his promissory notes were unregistered securities. After becoming aware of the investigation, he knowingly sold almost $5 million in promissory notes to forty new investors. He did not return any of their principal. Instead, Miller used a portion of the funds to repay earlier investors and spent the balance of the money on Carr Miller overhead and his own expenses. This period from August 2009 to December 2010, formed the basis of Miller's securities fraud conviction and led to a stipulated loss amount of $2.5 to $7 million.

Miller pled guilty pursuant to a plea agreement and a cooperation agreement. The parties stipulated to a combined offense level of 29, followed by a 3-level reduction for acceptance of responsibility, resulting in a sentence within offense level 26. Under the cooperation agreement, Miller agreed to provide substantial assistance in exchange for the Government's downward departure motion, further reducing the stipulated offense level of 26 to offense level 23. At Miller's sentencing, the District Court applied the 4-level investment adviser enhancement, rejecting his argument that he did not meet the definition of an "investment adviser." Although the District Court did grant a 3-level downward departure, its having added 4 levels for the investment adviser enhancement, resulted in the downward departure being from offense level 30 to 27 rather than from 26 to 23. The plea agreement was silent as to this enhancement. When the District Court asked the Government for its sentencing recommendation the Government stated that it was requesting a sentence at "offense level 23." However, the District Court did not depart below level 27 and imposed an upward variance of 2 levels. This produced a final offense level of 29 and a Guidelines range of 97 to 121 months' imprisonment. It imposed a sentence of 120 months imprisonment on Miller.

The Court rejected Miller's challenge to the District Court's application of the Sentencing Guidelines investment adviser enhancement. The text of the investment adviser enhancement applies a 4 level enhancement for securities violations where the defendant was an investment advisor. The enhancement adopts the definition of "investment adviser" in the Investment Advisers Act of 1940 which states: "Investment adviser means any person who for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities." The Act enumerates exemptions from this definition, which the Court concluded did not apply to Miller. It also concluded that the structure of the act demonstrated Congressional intent to define "investment adviser" broadly while carving out exemptions.

The Court rejected Miller's argument that he was not an "investment adviser" as he was not in the business of providing securities advice, he did not provide securities advice for compensation and he was not a registered investment adviser. It found that Miller provided securities advice by personally advising individuals to invest in Carr Miller promissory notes. Under the SEC interpretive release, Miller was in "the business" of providing securities advice because he held himself out as a person who provides investment advice. Miller was a registered investment adviser representative, which may involve rendering securities advice.

The Court then looked to the SEC Release for the definition of compensation. The SEC defined compensation as "any economic benefit, whether in the form of an advisory fee or some other fee relating to the total services rendered, commissions, or some combination of the foregoing." Miller provided securities advice to Carr Miller investors for compensation, as based upon Miller's securities advice, investors bought Carr Miller promissory notes. The principal they provided became Miller's compensation when he commingled investors' accounts and spent the money for his own purposes. The Court also rejected his final argument that he was not an "investment adviser" because he was not registered as an investment adviser, but rather as an investment adviser representative. The Court held that registration is not necessary to be an "investment adviser" under the Act. Under the Act some rules apply to registered investment advisers, some to unregistered investment advisers and some to both. The Act prohibits fraud by "any" investment adviser, regardless of registration. As Miller was an "investment adviser" under the Act, despite his failure to register as such, the Court held that the District Court properly applied the investment adviser enhancement. The Court affirmed the District Court's sentence.

The full opinion can be found at http://www2.ca3.uscourts.gov/opinarch/152577p.pdf

Panel: Fuentes, Chagares, Restrepo, Circuit Judges

Argument Date:

Date of Issued Opinion: August 12, 2016

Docket Number: No. 15-2577

Decided: Affirmed

Case Alert Author: Cynthia C. Pereira

Counsel: Richard Sparaco, Counsel for Appellant; Mark E. Coyne, Norman Gross, Counsel for Appellee.

Author of Opinion: Circuit Judge Restrepo

Circuit: Third Circuit

Case Alert Circuit Supervisor: Prof. Susan L. DeJarnatt

    Posted By: Susan DeJarnatt @ 08/24/2016 03:48 PM     3rd Circuit  

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