Unreported / Non-Citable
Background
The Ninth Circuit affirmed an SEC judgment against Choice Advisors, LLC and Matthias O’Meara for a referral arrangement that divided municipal-bond underwriting fees with a bank. The unpublished decision is a practical warning for firms advising California charter schools and other public-sector borrowers: a payment’s mechanics do not save an arrangement that creates the conflict barred by municipal-securities rules.
Charter schools retained Choice as their municipal advisor. Choice referred underwriting work to BB&T under an agreement that allocated part of the bank’s traditional 2% underwriting fee to Choice. The SEC alleged that Choice performed municipal-advisory work without proper registration, participated in prohibited fee-splitting, and breached the fiduciary obligations that municipal advisors owe their clients.
The district court granted partial summary judgment to the SEC and imposed a permanent injunction, disgorgement of gains plus prejudgment interest, and civil penalties. Choice and O’Meara challenged both the liability ruling and those remedies.
The Court’s Holding
The panel held that Municipal Securities Rulemaking Board Rule G-42 broadly prohibits a municipal advisor from making or participating in a fee-splitting arrangement with an underwriter. Choice argued that the bank paid both participants simultaneously rather than first receiving and then sharing a fee. The court found that distinction immaterial: the agreement divided an underwriting fee and gave the advisor a financial incentive to steer clients to a particular bank, creating the precise conflict the rule targets.
The court also upheld the permanent injunction. Although the defendants said they had not intended to cheat clients, the district court could find a meaningful risk of future violations because they planned to continue advising often-unsophisticated charter-school clients, had knowingly performed regulated activities, had not followed registration and compliance requirements, and did not fully recognize the misconduct.
Disgorgement was permissible because the advisory fees were gains the defendants were not entitled to receive while unregistered. The SEC did not have to prove that investors suffered a matching out-of-pocket loss. Civil penalties likewise fell within the district court’s discretion, particularly because the defendants offered only a general claim of inability to pay rather than quantified financial evidence.
Key Takeaways
- Substance controls over payment mechanics: simultaneous payment does not prevent an agreement from being prohibited fee-splitting.
- A referral-based share of an underwriter’s fee creates an acute conflict when the recipient also owes fiduciary duties as the borrower’s municipal advisor.
- Lack of fraudulent intent does not eliminate exposure where the governing violations do not require scienter, meaning intent to deceive or reckless disregard.
- SEC disgorgement may be based on gains obtained through unlawful conduct without proof that clients suffered equivalent pecuniary harm.
- A party seeking reduced civil penalties based on inability to pay should present concrete, quantifiable financial evidence.
Why It Matters
Municipal-finance professionals should examine compensation arrangements across advisory, placement, referral, and underwriting roles, especially when serving charter schools or smaller public entities that may rely heavily on their advisor. Written disclosure alone may not cure an arrangement that a rule prohibits outright. Firms should also confirm registrations and define roles before any advisory activity begins.
For enforcement counsel, the decision illustrates the broad remedial consequences that can follow compliance failures even without a finding that clients were intentionally cheated. The memorandum is not generally precedential, but it offers a direct application of Rule G-42 and Ninth Circuit remedies law to a real-world fee arrangement.