The Securities and Exchange Commission brought a complaint against the former Chief Financial Officer of a now defunct investment adviser seeking enforcement of the Investment Advisers Act of 1940 (IAA). The U.S. District Court for the Southern District of New York denied the defendant’s motion to dismiss, rejecting his argument that the SEC was barred from enforcing the IAA where the alleged fraud was not directed at domestic clients of the adviser.
D.B. Zwirn & Co. L.P. (Zwirn) managed five hedge funds from 2002 to 2009, including D.B. Zwirn Special Opportunities Fund, Ltd. (the Offshore Fund) and D.B. Zwirn Special Opportunities Fund, L.P. (the Onshore Fund). The SEC alleged that Zwirn’s former CFO authorized more than $870 million in improper transfers of client cash from the Offshore Fund to the Onshore Fund. The defendant argued that based on a recent Supreme Court decision in Morrison v. National Australia Bank Ltd., fraud claims involving the IAA must be directed only at domestic clients and that the IAA could not be applied extraterritorially. He contended that since the alleged fraud involved a Cayman Islands entity (the Offshore Fund), the SEC should be barred from enforcing the IAA against him.
The court rejected the argument and distinguished Morrison. It noted that Morrison involved the enforcement of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 as opposed to the IAA which focuses on investment advisers. Because the IAA regulates advisers rather than clients, the defendant’s argument that the SEC’s claim seeks extraterritorial application of a federal statute was unpersuasive. The court also found that Morrison, even if applicable in this case, would not bar the SEC’s complaint because more than half of the Offshore Fund’s investors were located in the U.S. and investors of both funds were affected by the transfers. Further, the defendant approved the transfers, involving U.S. bank accounts, in New York.
Securities and Exchange Commission v. Gruss, No. 11 Civ. 2420 (S.D.N.Y. May 9, 2012).