SEC v. Rashid

20-4080-cv
SEC v. Rashid
In the
United States Court of Appeals
For the Second Circuit
________
A UGUST TERM 2021
A RGUED: JANUARY 19, 2022
D ECIDED: MARCH 13, 2024
No. 20-4080-cv
SECURITIES AND E XCHANGE C OMMISSION,
Plaintiff-Appellee,
v.
MOHAMMED A LI R ASHID,
Defendant-Appellant.
________
Appeal from the United States District Court for the Southern
District of New York.
________
Before: KEARSE , WALKER , AND S ULLIVAN, Circuit Judges.
________
This appeal arises from a Securities & Exchange Commission
enforcement action brought against Defendant-Appellant
Mohammed Ali Rashid, a former employee of private equity firm
Apollo Management L.P. Rashid was accused of breaching his
fiduciary duties to the Apollo-affiliated private equity funds he

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advised by submitting expense reports for phony business expenses
that were ultimately paid by the funds. The district court, following
a bench trial, determined that Rashid was not liable under § 206(1) of
the Investment Advisers Act because he was not aware that the funds,
rather than Apollo, would pay for his expenses. The district court
concluded, however, that Rashid was liable under § 206(2) of the Act
because Rashid was “indifferent,” and therefore negligent, as to
which entity would pay for his expenses.
Because it was not reasonably foreseeable to Rashid that the
funds would pay for his expenses, we conclude that Rashid did not
breach his duty of care to the funds or proximately cause their harm.
Accordingly, we REVERSE the judgment of the district court.
Judge Kearse dissents in a separate opinion.
________
WILLIAM K. S HIREY, Counsel to the Solicitor,
(Michael A. Conley, Acting General Counsel, on
the brief), Securities and Exchange Commission,
Washington, DC, for Plaintiff-Appellee.
C AITLIN J. H ALLIGAN, Selendy & Gay PLLC, New
York, NY (Faith E. Gay, Ryan W. Allison, Selendy
& Gay PLLC, New York, NY; Theresa Van Vliet,
Genovese Joblove & Battista, P.A., Fort
Lauderdale, FL, on the brief), for Defendant-
Appellant.
________
JOHN M. WALKER , JR ., Circuit Judge:
This appeal arises from a Securities & Exchange Commission
(“SEC”) enforcement action brought against Defendant-Appellant
Mohammed Ali Rashid, a former employee of private equity firm

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Apollo Management L.P. Rashid was accused of breaching his
fiduciary duties to the Apollo-affiliated private equity funds he
advised by submitting expense reports for phony business expenses
that were ultimately paid by the funds. The district court, following
a bench trial, determined that Rashid was not liable under § 206(1) of
the Investment Advisers Act because he was not aware that the funds,
rather than Apollo, would pay for his expenses. The district court
concluded, however, that Rashid was liable under § 206(2) of the Act
because Rashid was “recklessly indifferent,” and therefore negligent,
as to which entity would pay for his expenses. Sec. & Exch. Comm'n
v. Rashid, No. 17-cv-8223 (PKC), 2020 WL 5658665, at *1 (S.D.N.Y.
Sept. 23, 2020).
Because it was not reasonably foreseeable to Rashid that the
funds would pay for his expenses, we conclude that Rashid did not
breach his duty of care to the funds or proximately cause their harm.
Accordingly, we REVERSE the judgment of the district court.
Judge Kearse dissents in a separate opinion.
BACKGROUND
I. Factual Background1
A. Rashid, Apollo, and the Investment Funds
Apollo Management L.P., a subsidiary of Apollo Global
Management, LLC (together, “Apollo”), is a private equity firm
registered as an investment adviser with the SEC. As of 2018, Apollo
managed more than $270 billion in assets. Defendant-Appellant
1 The following facts are drawn from the district court’s findings of fact and
conclusions of law, see SEC v. Rashid, No. 17-cv-8223, 2020 WL 5658665 (S.D.N.Y.
Sept. 23, 2020), or are otherwise undisputed.

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Mohammed Ali Rashid worked for Apollo from 2004 to 2014,
ultimately reaching the level of senior partner.
During the relevant period, Apollo managed several
investment funds structured as limited partnerships. These private
equity funds took large, often controlling, positions in portfolio
companies. Each fund was managed by a distinct Apollo-controlled
general partner, which delegated its authority to a distinct Apollo-
affiliated management company. A limited partnership agreement
governed the allocation of expenses between each fund and the
corresponding management company. These limited partnership
agreements specified that the Apollo-affiliated management
company associated with that specific fund was responsible for
“[a]dministrative [e]xpenses,” including “all costs and
expenses . . . incurred in developing, negotiating and structuring
Portfolio Investments” and “all ordinary costs and
expenses . . . incurred in monitoring Portfolio Investments.” App’x
121, 126, 130, 159–60.
As a senior partner at Apollo, Rashid helped manage several
funds. In this role, Rashid acted as an “investment adviser” to these
funds under the Investment Advisers Act by evaluating and
recommending investments, monitoring these funds’ portfolio
companies, and finding ways to improve their financial performance.
See 15 U.S.C. § 80b-2(a)(11).2
B. Employee Expense Reports
Apollo tracked employee expenses using a data-entry platform
called PeopleSoft. For all expenses, employees were required to enter
2 “Investment adviser” is defined as “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 . . . .” 15 U.S.C. § 80b-2(a)(11).

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into a PeopleSoft spreadsheet the type of expense (e.g., “hotel &
lodging”), a description of the expense (e.g., “dinner with lawyers
while working late on [specific portfolio company]”), and the
department associated with the expense (e.g., “private equity”).
Rashid, 2020 WL 5658665, at *4 (internal quotation marks omitted)
(capitalization standardized). The PeopleSoft spreadsheet also
included a column titled “Investment,” which required employees to
enter a numeric code—referred to herein as an “investment code”3—
and the name of an entity associated with that expense. Apollo had
over 3,500 investment codes, the majority of which corresponded to
specific portfolio companies and projects in which the funds invested.
Some of the investment codes corresponded to specific funds, but
none of the codes corresponded to the Apollo-affiliated management
companies that managed these funds.
Apollo maintained written reimbursement policies that
outlined which expenses could and could not be reimbursed. The
policies generally stated that “Apollo [would] reimburse employees
for business and travel expenses incurred while performing their
duties, provided the expenses [were] necessary, reasonable and
appropriately documented.” App’x 119. The guidance given to
Apollo employees, however, did not explain who ultimately paid for
reimbursements. It also did not instruct employees on how to select
the appropriate investment code or the project or entity to list in the
“Investment” column of their expense reports.
Apollo employees such as Rashid were not responsible for
choosing which entity would ultimately be charged for business
expenses submitted on PeopleSoft. That was the responsibility of
3 At Rashid’s trial, employees at Apollo variously referred to these codes as
“investment code[s],” “project code[s],” “deal code[s],” and “allocation code[s].”
Rashid, 2020 WL 5658665, at *5.

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Apollo’s accounts receivable department, which would use the
information provided on PeopleSoft to determine which entity (e.g.,
the fund-specific Apollo management company, the fund, or the
portfolio company in which a fund was invested) would be billed for
the expense’s reimbursement. The controllers employed by the funds
also played a role in ensuring that the expenses were charged to the
appropriate entity, as they were able to “push back” if they thought
the fund was improperly charged for any given expense. Id. at 83.
During the relevant time, Apollo’s accounts receivable
department improperly charged all expenses relating to the
monitoring of a fund’s portfolio company directly to the fund, in
contravention of the fund partnership agreements requiring that the
fund-specific Apollo management companies bear the cost of such
“administrative expenses.”
C. Rashid’s Fraud
Although employees were supposed to submit only business
expenses for reimbursement, Rashid regularly sought reimbursement
for personal expenses. There is no question that, from 2010 to 2013,
Rashid “engaged in a pattern of repeatedly, knowingly and falsely
describing personal expenses as business expenses.” Rashid, 2020 WL
5658665, at *8.4 These expenses included, for example, travel
expenses to Montreal for a friend’s bachelor party, Miami for a
friend’s wedding, Brazil for a vacation with his wife, and New
Orleans for the Super Bowl. Rashid also sought reimbursement for
expensive dinners and lavish gifts for his friends and family. Rashid
intentionally submitted expense reports for these expenses in which
4 The parties stipulated to a limitations period of June 13, 2011 to June 2013, but
the district court appropriately considered evidence relating to expense reports
submitted outside of that period as it relates to Rashid’s state of mind within the
limitations period.

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he falsely stated that the expenses were related to meetings with
executives at his funds’ portfolio companies. Such expenses, if
legitimate, would have constituted “administrative expenses”
payable by the Apollo-affiliated management companies.
Rashid’s actions did not escape Apollo’s notice. In 2010, Rashid
submitted an expense report for a business dinner at “La Contessa,”
which Apollo recognized was a hair salon and not a restaurant.
Apollo admonished Rashid not to submit personal expenses for
reimbursement and, following a review of the prior six months’
expense reports, Rashid reimbursed Apollo for nearly $8,000 in
falsely reported personal expenses. In 2012, Apollo again confronted
Rashid, this time for expensing thousands of dollars for personal
expenses at a spa and a Beverly Hills clothing store. Apollo
conducted a review of Rashid’s expenses from the prior year, and
Rashid reimbursed Apollo for approximately $7,000 in falsely
reported personal expenses.
In 2012, in anticipation of an SEC audit, Apollo retained Paul,
Weiss, Rifkind, Wharton & Garrison LLP to review its firm-wide
expense allocation procedures. In 2013, Paul, Weiss was retained to
specifically review expenses submitted by Rashid. Paul, Weiss, with
Rashid’s cooperation, identified hundreds of dubious expenses
reported by Rashid and ultimately, in 2014, Rashid entered into a
separation agreement with Apollo. As part of that agreement, Rashid
paid Apollo $325,000 as reimbursement for his fraudulently
submitted personal expenses.
In 2016, as part of a settlement, the SEC issued an
administrative order requiring Apollo to pay over $52.7 million in
disgorgement and fines in relation to Apollo’s breaches of its
fiduciary duties to the funds. Two of these breaches—Apollo’s failure
to make adequate disclosures to investors regarding accelerated

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monitoring fees to portfolio companies and Apollo’s use of client
funds to effectively take a $19 million interest-free loan—do not
pertain to Rashid. As relevant to this case, the SEC also found that
Apollo failed to reasonably supervise Rashid in his submission of
expense reports and that Apollo “failed to implement its policies and
procedure[s] concerning employees’ reimbursement of expenses.”
App’x 180.
II. Procedural History
In October 2017, the SEC commenced the present action against
Rashid, alleging that Rashid violated §§ 206(1) and 206(2) of the
Investment Advisers Act by submitting fraudulent claims for
reimbursement, thereby intentionally and negligently defrauding the
funds. See 15 U.S.C. § 80b-6(1)–(2).5 The SEC also alleged that Rashid
aided and abetted Apollo’s violations of §§ 206(1) and 206(2). See 15
U.S.C. § 80b-9(d), (f).
The district court (P. Kevin Castel, Judge) held a nine-day bench
trial, during which 33 witnesses testified. Rashid testified that he had
believed that the expenses for which he sought reimbursement were
paid by the Apollo-affiliated management companies, not the funds.
The district court did not credit his testimony, finding that Rashid was
“recklessly indifferent” as to “who would pay [for] his phony
business expenses” and that his testimony was “an after-the-fact
construct to avoid liability.” Rashid, 2020 WL 5658665, at *22.
Although other employees—including a senior partner and Apollo’s
current and former CFOs—similarly testified that they had believed
5 Section 206 provides, inter alia, that “[i]t shall be unlawful for any investment
adviser by use of the mails or any means or instrumentality of interstate
commerce, directly or indirectly[] (1) to employ any device, scheme, or artifice to
defraud any client or prospective client; [or] (2) to engage in any transaction,
practice, or course of business which operates as a fraud or deceit upon any client
or prospective client . . . .” 15 U.S.C. § 80b-6.

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(mistakenly, as it turned out) that such expenses would be borne by
the Apollo-affiliated management companies, the district court
concluded that these employees did not have the same reason to
investigate because they had not submitted false expense reports. The
district court noted that “significant blame” resided with Apollo and
its accounts receivable department’s billing practices, but that
Rashid’s falsehoods “began a chain of events that operated as a fraud
upon investors in the private equity funds.” Id. at *22; see also id. at
*24, 27.
The district court determined that Rashid did not intend to
defraud the funds because he had not known the source of
reimbursement for his expenses. The district court also found,
however, that it was reasonably foreseeable to Rashid that his entry
of investment codes corresponding to specific portfolio companies
would result in the funds being charged. Accordingly, Rashid should
have ensured the funds would not pay for his false business expenses
“by drilling down within Apollo.” Id. at *23.
Consistent with these findings, the district court found that the
SEC had failed to prove that Rashid acted with scienter sufficient to
support a finding that he violated § 206(1) or aided and abetted
Apollo’s violation of § 206(1).6 But the district court found that Rashid
had violated § 206(2) by at least negligently breaching his duties to
the funds.7 In remedy, the district court permanently enjoined Rashid
from violating § 206 and ordered him to pay a $240,000 civil penalty.
6 The district court did not reach whether Rashid was liable for aiding and
abetting Apollo’s violation of § 206(2).
7 The district court noted that scienter under § 206(1) could be proved by a
finding of “‘conscious recklessness,’” Rashid, 2020 WL 5658665, at *23 (quoting
Setzer v. Omega Healthcare Invs., Inc., 968 F.3d 204, 214 (2d Cir. 2020)), but found

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This appeal followed.
DISCUSSION
On appeal, Rashid argues that (1) the district court erred in
finding him liable under § 206(2) of the Investment Advisers Act
because his actions did not violate his duty of care to the funds or
proximately cause the funds’ loss; (2) the district court erred by failing
to address whether his conduct was material to investors; and (3) the
district court abused its discretion by enjoining him from future
violations of § 206 without considering collateral consequences to
such an injunction. Because we conclude that the district court erred
as to the first issue, we reverse without addressing the remaining
issues.
I. Legal Standards
This court reviews conclusions of law de novo, findings of fact
for clear error, and mixed questions of law and fact under either the
de novo or clearly erroneous standard, “depending on whether the
question is predominantly legal or predominantly factual.” Fed. Hous.
Fin. Agency v. Nomura Holding Am. Inc., 873 F.3d 85, 138 n.54 (2d Cir.
2017) (internal quotation marks omitted).
The purpose of the Investment Advisers Act is “to substitute a
philosophy of full disclosure for the philosophy of caveat emptor and
thus to achieve a high standard of business ethics in the securities
industry.” SEC v. Cap. Gains Rsch. Bureau, Inc., 375 U.S. 180, 186
(1963); see also SEC v. DiBella, 587 F.3d 553, 568 (2d Cir. 2009) (“The
‘legislative history of the Advisers Act leaves no doubt that Congress
intended to impose enforceable fiduciary obligations’ on investment
that “Rashid’s reckless indifference to the source of his reimbursement did not
reflect recklessness approximating actual knowledge.” Id. at *24.

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advisors.” (alteration marks omitted) (quoting Transamerica Mortgage
Advisers, Inc. (TAMA) v. Lewis, 444 U.S. 11, 17 (1979))). To that end,
§ 206(2) of the Act makes it unlawful for an investment adviser, such
as Rashid, to “engage in any transaction . . . which operates as a fraud
or deceit upon any client or prospective client.” 15 U.S.C. § 80b-6(2).
Section 206(2) does not have a scienter requirement, and so this
section holds investment advisers liable for negligent acts. See DiBella,
587 F.3d at 569. Negligence is the failure to exercise the degree of care
that a reasonably prudent person would use under like
circumstances. See Restatement (Third) of Torts: Liability for Physical
& Emotional Harm § 3 (2010); 57A Am. Jur. 2d Negligence § 5 (2023);
see also Restatement (Third) of Agency § 8.08 (2006) (“[A]n agent has
a duty to the principal to act with the care, competence, and diligence
normally exercised by agents in similar circumstances.”). A
defendant acts negligently if he fails to exercise reasonable care and,
as a result, causes reasonably foreseeable harm. See Restatement
(Third) of Torts: Liability for Physical & Emotional Harm § 3 (2010).
Here, the funds’ harm is not disputed, but the parties disagree about
the extent of Rashid’s duty and, relatedly, whether he proximately
caused their harm.
As to duty, the Investment Advisers Act established “federal
fiduciary standards to govern the conduct of investment advisers,”
Robare Grp., Ltd, 922 F.3d 468, 472 (D.C. Cir. 2019) (quoting TAMA, 444
U.S. at 17). It imposed on advisers “an affirmative duty of utmost
good faith, and full and fair disclosure of all material facts, as well as
an affirmative obligation to employ reasonable care to avoid
misleading [their] clients.” Cap. Gains Rsch. Bureau, 375 U.S. at 194
(internal quotation marks omitted).
A primary consideration in evaluating whether a person’s
conduct lacks reasonable care is the “foreseeable likelihood that the

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person’s conduct will result in harm.” Restatement (Third) of Torts:
Liability for Physical & Emotional Harm § 3 (2010); see also Cullen v.
BMW of N. Am., Inc., 691 F.2d 1097, 1101 (2d Cir. 1982)
(“[F]oreseeability of injury is an indispensable requisite of negligence,
and . . . negligence exists only when there is a reasonable likelihood
of danger as the result of the act complained of.”). An action is
“reasonably foreseeable” when “a reasonably prudent person would
anticipate [it] as likely to result” from the breach. 57A Am. Jur. 2d
Negligence § 449 (2023).
This reasonable-foreseeability principle extends to the acts of
intervening parties in the context of assessing proximate cause. “[A]n
intervening act, tortious or criminal, will ordinarily insulate a
negligent defendant from liability,” unless the intervening act or end
result was reasonably foreseeable. Cullen, 691 F.2d at 1101; see also
57A Am. Jur. 2d Negligence § 620 (2023).
II. Rashid’s Duty of Care and the Alleged Breach
In concluding that Rashid breached his duty of care to the
funds, the district court found that Rashid did not have actual
knowledge that the funds were paying for his phony business
expenses, but that Rashid should have investigated the matter further
to ensure that the funds would not pay for such expenses. See Rashid,
2020 WL 5658665, at *23 (“Rashid[,] as a senior partner of
Apollo, . . . had the ability to ensure, by drilling down within Apollo,
that none of his false business expenses were paid by the funds.”).
Rashid argues that the district court erred by imposing a heightened
duty of care that would require him to have independently
discovered Apollo’s misbilling practices. We agree that the district
court erred because the record demonstrates that a reasonable person
in Rashid’s shoes would not have known that the funds would pay
for his claimed expenses.

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Rashid’s “affirmative obligation to employ reasonable care,”
Cap. Gains Rsch. Bureau, 375 U.S. at 194 (internal quotation marks
omitted) (emphasis added), is defined objectively, 57A Am. Jur. 2d
Negligence § 131 (2023). As explained above, the record shows that
many Apollo professionals—including Apollo’s current and former
CFOs and an employee who held the same title as Rashid—believed
that Apollo, and not the funds, would pay for expenses incurred
while monitoring the funds. These employees all owed to the funds
similar fiduciary duties as Rashid. They are the “reasonable persons”
against whom Rashid should be compared when evaluating whether
he should have known that the funds would pay for his business
expenses. But Rashid’s peers did not believe that the funds would
pay for reimbursements. In fact, it would have been difficult for any
of them to have discovered the truth: that Apollo’s accounts
receivable department was improperly billing the funds for expenses
that should have been allocated to the Apollo-affiliated management
companies. And if Rashid had decided to look into the matter further,
he would have reasonably consulted the fund partnership
agreements and reached the same conclusion as his peers: that the
Apollo-affiliated management companies were supposed to pay for
his claimed expenses. Apollo’s reimbursement policies did not say
otherwise, and Apollo never informed Rashid of any fact to the
contrary when they caught him submitting fraudulent expense
reports in 2010 and 2012. On this record, we cannot conclude that
Rashid’s general fiduciary duties included undertaking the sort of
extensive, independent investigation that might have revealed that
the funds would pay for his business expenses.
The district court suggests that Rashid owed the funds a
heightened duty of care, stating that the other Apollo employees did
not have “the same reason as Rashid to ensure that no fund was billed
for an expense because they, unlike Rashid, were not submitting false

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business expenses.” Rashid, 2020 WL 5658665, at *22. Nothing in the
record suggests, however, that Rashid’s own fraud should have made
him more aware of Apollo’s charging practices. Nor were the funds
at greater risk because his expenses were fraudulent. Indeed, to the
funds, all expenses charged to them in violation of the fund
partnership agreements, whether falsified or not, were harmful.
Thus, nothing about Rashid’s fraud itself put him on heightened
notice of Apollo’s billing practices or the potential harm that could
result from it. His fiduciary duties to the funds therefore remained
unchanged by his fraudulent conduct.
The SEC insists that Rashid violated his fiduciary duties to the
funds because, as the district court found, he was “utterly
indifferent,” id. at *23, as to who would pay for his phony expenses,
“notwithstanding his affirmative responsibilit[ies] as a fiduciary to
the Funds.” Appellee’s Br. 41. Our dissenting colleague likewise
observes that Rashid “made no effort to find out whether his personal
expenses were being billed to the clients he identified.” Diss. Op. 9.
But Rashid’s heightened duty of care as a fiduciary to the funds only
required Rashid to “drill down” to the level of a reasonably prudent
investment adviser—here, to that of his peers. Reviewing the fund
partnership agreements or asking his colleagues would have led
Rashid to reasonably believe that Apollo, not the funds, would pay
for his claimed expenses.
Any contrary conclusion would not just impose an unduly high
duty of care on Rashid, but would be effectively the equivalent of
imposing strict liability. And that appears to be the implicit
conclusion advanced by the dissent, which would affirm Rashid’s
liability under § 206(2) simply because his conduct was generally
improper. See id. at 4–5. Notwithstanding the propriety expected of
fiduciaries, however, the Investment Advisors Act imposes only a
duty of reasonable care on fiduciaries such as Rashid, even when those

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fiduciaries’ conduct runs afoul of other legal or ethical proscriptions.
Cap. Gains Rsch. Bureau, 375 U.S. at 194; see also Restatement (Third) of
Agency § 8.08 cmt. d (2006) (“Although an agent has a duty of
diligence, that duty is to make reasonable efforts to achieve a result
and not a duty to achieve the result regardless of the effort, risk, and
cost involved.”). A fiduciary’s duties under the Investment Advisers
Act are demanding, but they are not boundless. Applying ordinary
negligence principles to this case, we conclude that Rashid did not
breach his duty of care to the funds by failing to discover that Apollo
was improperly charging the funds for his reported expenses.
III. Reasonable Foreseeability of the Intervening Cause
Rashid next argues that, because Apollo’s intervening actions
in improperly charging the funds for administrative expenses were
not reasonably foreseeable, his fraudulent reimbursement requests
could not have been the proximate cause to the funds’ harm. We
agree; just as reasonable foreseeability bears on the question of
Rashid’s duty of care, it also affects our calculus as to proximate
cause.
As noted earlier, an intervening action is “reasonably
foreseeable” when “a reasonably prudent person would anticipate [it]
as likely to result” from the breach. 57A Am. Jur. 2d Negligence § 449
(2023). This is an objective standard. As discussed above, Rashid’s
peers—including the former and current CFOs of Apollo—believed
that Apollo, not the funds, reimbursed employees for expenses
incurred while monitoring the funds. And the fund partnership
agreements confirmed the same. Nevertheless, Apollo’s accounts
receivable department contravened the terms of the fund partnership
agreements—negligently or otherwise—and billed the funds directly
for such administrative expenses. Even the funds’ controllers, whose
job it was to ensure that the funds were not being overcharged, did

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not bring to Apollo’s attention the fact that its accounts receivable
department had erroneously billed the funds. On this record, we
cannot say that a reasonably prudent person would have anticipated
that the funds would be billed for Rashid’s fraudulent expenses.
The district court found that “it was reasonably foreseeable to
Rashid that in causing or acquiescing in the entry of a[n investment]
code for a portfolio company that the expense would be borne directly
by the fund or indirectly by charging it to the portfolio company in
which it was heavily invested.” Rashid, 2020 WL 5658665, at *23; see
also id. at *3, 25. But, as explained above, Apollo employees like
Rashid were not responsible for choosing which entity would
ultimately be charged for claimed expenses. Nor could they have
been, since Apollo did not explain to employees how the
reimbursement process worked. Instead, Apollo’s accounts
receivable department would independently determine whether the
fund-specific Apollo management company, the fund, or the portfolio
company in which the fund was invested would be billed for the
expense’s reimbursement.
The district court and the dissent make much of the fact that the
expense forms bore investment codes that specified the client fund
associated with the expenses incurred. But the code identifier had
nothing to do with how a particular expense would be allocated for
reimbursement. Naturally, the accounts receivable department used
the information on the expense forms in the process of deciding the
entity to whom the expense should be billed. But the investment code
that an employee entered was not determinative of the accounts
receivable department’s ultimate billing decision. In fact, our
examination of these investment codes reveals that none of the more
than 3,500 possible investment codes corresponded to the Apollo-
affiliated management companies that were responsible for the
administrative expenses claimed by Rashid. Thus, even if the

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investment codes used by Rashid identified a particular fund or a
portfolio company or project associated with a particular fund, there
is no evidence that these investment codes distinguished between
expenses chargeable to the fund-specific Apollo management
companies and those chargeable to the funds themselves.
Accordingly, it would not have been reasonably foreseeable to Rashid
(or other employees who also entered such investment codes) that the
funds would cover his expenses merely because he entered the
investment code associated with a particular fund, portfolio
company, or project.
The SEC argues that Rashid, who did not thoroughly read the
fund partnership agreements or Apollo’s reimbursement policies,
“should have reasonably expected as a default assumption that the
Funds would be invoiced for the expenses.” Appellee’s Br. 42. The
SEC cites the testimony of an accounting expert to support this default
assumption. But the accounting expert at the same time testified that
the fund partnership agreements usually govern expense allocation
and that he would “defer first” to such agreements to ascertain which
entity would pay for which expenses. D. Ct. Dkt. No. 201, at 74–75.
The accounting expert’s testimony thus does not provide the support
the SEC assigns to it.
The SEC’s argument fails for another reason: it faults Rashid for
not consulting the fund partnership agreements, but then creates a
new (conjectural) “default assumption” for Rashid that is at odds with
the agreements it claims Rashid should have consulted. See
Appellee’s Br. 42 (“[T]he failure to investigate and understand
Apollo’s expense-allocation practices was part and parcel of Rashid’s
negligence.”). This position is internally inconsistent and also
purports to treat Rashid differently based on his subjective ignorance
of Apollo’s specific expense-allocation practices. If, as the SEC argues,
a reasonably prudent adviser in Rashid’s position would have

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consulted the fund partnership agreements to determine whether the
funds would be charged for his claimed expenses, it follows that the
reasonable adviser would not foresee that the funds would bear the
cost of such expenses.
Finally, the SEC argues that the causation requirements should
be “loosen[ed]” where a defendant breaches his fiduciary duties and
that we can therefore disregard “any negligence or error on the part
of Apollo in connection with invoicing the Funds.” Id. at 42–43. It is
true that we sometimes “loosen” the stringent causation requirements
where a defendant has breached his fiduciary duties. See Milbank,
Tweed, Hadley & McCloy v. Boon, 13 F.3d 537, 543 (2d Cir. 1994).
Contrary to the SEC’s argument, however, we do not dispense with
the causation analysis in its entirety in the context of fiduciary duties.
See id. (plaintiff must show that defendant’s breach was a “substantial
factor” contributing to her injury); Evvtex Co. v. Hartley Cooper Assocs.
Ltd., 102 F.3d 1327, 1334 (2d Cir. 1996) (finding no error where district
court’s finding of causation was “implicit”).8 And, in any case, we
have concluded that Rashid did not breach his fiduciary duties to the
funds, so no loosened analysis would be warranted here.
In sum, we conclude that Apollo’s intervening actions in
overbilling the funds were not reasonably foreseeable to Rashid, and
Rashid therefore did not proximately cause the funds’ harm.
8 In ABKCO Music, Inc. v. Harrisongs Music, Ltd., 722 F.2d 988 (2d Cir. 1983), we
concluded that “the district judge was not required to find a ‘but for’ relationship
between [the defendant’s] conduct and [the plaintiff’s injury]” where the
defendant breached its fiduciary duty to the plaintiff. Id. at 996. Subsequently, in
Evvtex, however, we clarified that the district court in ABKCO Music had “made
an implicit finding of causation” and that “the broadest reading of the ABKCO
Music holding would likely be limited to the unique facts of that case,” which
“involved a conflict of interest and breach of fiduciary duty by use of confidential
information.” Evvtex, 102 F.3d at 1334 & n.9.

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No. 20-4080-cv
19
* * *
We recognize that Rashid committed serious, and almost
certainly criminal, misdeeds by improperly seeking reimbursement
for personal expenses. But we must not confuse the fraud Rashid
committed against his employer with fraud committed against the
funds. Indeed, § 206(2) of the Investment Adviser Act is limited to a
“transaction, practice, or course of business which operates as a fraud
or deceit upon any client or prospective client.” 15 U.S.C. § 80b-6(2)
(emphasis added). Section 206(2) of the Investment Adviser Act,
while broad in its reach, was not intended as a catchall provision to
penalize all acts of wrongdoing, untethered to the ordinary
negligence principles that apply under that provision.
CONCLUSION
For the foregoing reasons, we REVERSE the judgment of the
district court.

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SEC v. Rashid,
No. 20-4080
1 KEARSE, Circuit Judge, dissenting:
2 Defendant Mohammed Ali Rashid was an "investment adviser" to
3 several private equity funds managed by his employer Apollo Management L.P.
4 ("Apollo"); as such, he was a fiduciary to the funds he managed. He does not
5 challenge on appeal the factual findings of the district court that, inter alia (see
6 Appendix hereto), for years he "intentionally submitted false expense reports for the
7 purpose of obtaining reimbursement for his personal expenses," SEC v. Rashid, 17-cv-
8 8223, 2020 WL 5658665, *2 (S.D.N.Y. Sept. 23, 2020) ("D.Ct. Op."). With all due respect
9 to the majority, I dissent from its rulings that, inter alia, "it was not reasonably
10 foreseeable to Rashid that the funds [managed by him] would pay for his [personal]
11 expenses [that he falsely claimed to be business expenses]" (Majority opinion ante
12 at 3), and that "Rashid did not breach his duty of care" (id.) or "his fiduciary duties to
13 the funds" (id. at 19).
14 Section 206 of the Investment Advisers Act ("Advisers Act" or "Act") not
15 only prohibits investment advisers from intentionally defrauding clients, see 15 U.S.C.
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1 § 80b-6(1), but also prohibits them from "directly or indirectly . . . engag[ing] in any
2 transaction, practice, or course of business which operates as a fraud or deceit upon any
3 client," id. § 80b-6(2) (emphasis added). A "fundamental purpose" of the Act was "to
4 achieve a high standard of business ethics in the securities industry," SEC v. Capital
5 Gains Research Bureau Inc., 375 U.S. 180, 186 (1963); and Congress's prohibition against
6 conduct that "operates as" a fraud is "not" limited to fraud "'technically,' as it has
7 traditionally been applied in damage suits between parties to arm's-length
8 transactions involving land and ordinary chattels," id. at 195. Instead, § 206
9 "regulat[es] the special fiduciary relationship between an investment adviser and his
10 client," and "it is quite clear that the [§ 206(2)] language," i.e., "'any . . . practice . . .
11 which operates . . . as a fraud or deceit,' . . . focuses not on the intent of the investment
12 adviser, but rather on the effect of a particular practice." Aaron v. SEC, 446 U.S. 680,
13 694 (1980) (emphasis in Aaron). Section "206 establishes federal fiduciary standards
14 to govern the conduct of investment advisers." Transamerica Mortgage Advisors, Inc.
15 (TAMA) v. Lewis, 444 U.S. 11, 17 (1979).
16 "A fiduciary relationship creates the highest duty of loyalty known to the
17 law." Restatement (Third) of Torts: Liability for Economic Harm § 16 comment a (2020).
18 A fiduciary who "has benefited improperly by engaging in self-dealing, deception, or
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1 other disloyal conduct" has engaged in "conduct inconsistent with the fiduciary duty."
2 Id. § 16 comment c.
3 The Advisers Act, consistent with these exacting standards, imposes on
4 investment advisers not only "an affirmative obligation to employ reasonable care to
5 avoid misleading his clients," but also "an affirmative duty of utmost good faith." Capital
6 Gains, 375 U.S. at 194 (internal quotation marks and footnote omitted) (emphases
7 mine). An investment adviser "owe[s] a duty of uncompromising fidelity and
8 undivided loyalty to the Funds' shareholders." Operating Local 649 Annuity Trust Fund
9 v. Smith Barney Fund Management LLC, 595 F.3d 86, 93 (2d Cir. 2010) (internal
10 quotation marks omitted). Section 206(2), in prohibiting conduct that "operates as"
11 a fraud or deceit, reflects Congress's intent to eliminate "conflicts of interest" between
12 an investment adviser and his clients. Capital Gains, 375 U.S. at 191. And in
13 "focus[ing] not on the intent of the investment adviser, but rather on the effect of a
14 particular practice," Aaron, 446 U.S. at 694 (emphasis added), and thus prohibiting any
15 transaction that "functions or otherwise results in a fraud," the Act makes investment
16 advisers "liable [for] negligent acts," SEC v. DiBella, 587 F.3d 553, 569 (2d Cir. 2009).
17 In the present case, the district court concluded that Rashid could not be
18 held liable for intentional fraud under § 206(1) of the Act, despite his deliberate and
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1 knowing submission of false expense reimbursement requests, because Apollo's
2 "expense allocation and reimbursement process" had not been explained in its written
3 guidance to employees, D.Ct. Op., 2020 WL 5658665, at *21. To be clear, this did not
4 mean that the court "determined that Rashid did not intend to defraud the funds"
5 (Majority opinion at 9 (emphasis added)); rather the court determined that
6 the SEC failed to prove by a preponderance of the evidence that Rashid
7 acted with the scienter required of section 206(1) in employing a
8 device, scheme or artifice to defraud a fund. To be clear, the
9 record amply demonstrates that Rashid intentionally submitted
10 false expense reports for the purpose of obtaining reimbursement
11 for his personal expenses. But the SEC failed to prove that Rashid
12 had actual knowledge that the funds paid his expenses, or that his
13 recklessness was of a nature that satisfies the scienter required
14 under the federal securities laws,
15 D.Ct. Op., 2020 WL 5658665, at *2 (emphases added).
16 The court rejected, as "not credi[ble]," Rashid's testimony that at the times
17 he submitted his false expense-reimbursement requests, it was his understanding that
18 the expenses would be "paid by an Apollo management company," id. at *22, i.e., a
19 company owned and operated by Apollo that was distinct from the fund managed,
20 id. at *6. The court found that this testimony was "an after-the-fact construct to avoid
21 liability under the securities laws." Id. at *22. It found that Rashid had made no effort
22 to determine whether or not his client funds were being billed for his falsely claimed
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1 expenses, noting that "[w]hen asked whether he took any steps to ensure that his
2 personal expenses were not being billed to individual private equity funds," Rashid
3 testified, "'I don't believe I did.'" Id. at *6 (quoting Trial Transcript 933 (emphasis
4 mine)). The court found that "Rashid was recklessly indifferent concerning who
5 would pay his phony business expenses as long as it was not him." Id. at *22.
6 I disagree with the majority's view that Rashid's lack of actual knowledge
7 that Apollo would bill his expenses to his client funds was excusable because other
8 Apollo fund managers, with respect to their respective clients and management
9 companies, also lacked such knowledge. Those other managers were not similar to
10 Rashid. While they too were fiduciaries with respect to their client funds, they were
11 not comparable to Rashid because their personal interests did not conflict with the
12 interests of their clients: The other managers were not seeking reimbursement for
13 their personal trips, meals, gifts, and hairstyling, etc., disguised as business expenses
14 on behalf of their clients.
15 Rashid knew that he was submitting fraudulent requests for
16 reimbursement of his personal expenses. He had a fiduciary obligation to his client
17 funds to attempt to avoid having those personal expenses passed on to his client. His
18 own testimony supported the finding that he had made no such effort.
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1 The district court, applying principles of negligence, found that, despite
2 the absence of disclosures in written instructions from Apollo, it was reasonably
3 foreseeable to Rashid that the funds he managed would be billed for the personal
4 expenses he claimed were business expenses. Unlike the majority, I see no error in
5 this finding. The expense report forms that Apollo required fund managers to use
6 instructed that the entities on whose behalf the claimed expenses had been incurred
7 were to be identified, using codes that were provided. There were "over 3,500
8 investment codes, [most] of which corresponded to specific portfolio companies and
9 projects in which the funds were invested," with some "correspond[ing] to specific
10 funds." (Majority opinion ante at 5 (emphasis added).) But while the Apollo limited
11 partnership agreements creating the funds provided that administrative expenses of
12 monitoring the funds were to be borne by Apollo, the majority opinion correctly notes
13 that "none of the [expense report form] codes corresponded to the Apollo-affiliated
14 management companies that managed those funds" (id. (emphasis added)).
15 Rashid, in submitting these forms and requesting reimbursement,
16 entered the codes for funds he managed or for portfolio companies in which those
17 funds were invested. The funds identified by Rashid were the entities to which
18 Apollo billed Rashid's claimed expenses. The district court found that Rashid's
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1 testimony that he believed his fraudulent expense requests would be borne by Apollo
2 was not credible. See D.Ct. Op., 2020 WL 5658665, at *22. It found that Rashid
3 "[r]epeatedly . . . caused or acquiesced in the entry of internal project codes
4 corresponding to a portfolio company in which a fund held a large equity position,
5 and, thus, it was reasonably foreseeable to him that these phony business expenses
6 would be charged to a fund." D.Ct. Op., 2020 WL 5658665, at *3. I cannot concur in
7 the majority's view that the district court erred in concluding that Rashid--who as a
8 fiduciary had both "an affirmative duty of utmost good faith" and "an affirmative
9 obligation to employ reasonable care to avoid misleading his clients," Capital Gains,
10 375 U.S. at 194 (internal quotation marks and footnote omitted), and who sought
11 reimbursement using Apollo-mandated forms that did not provide for attribution of
12 an expense to a management company but instead required identification of the
13 funds on whose behalf the expense was supposedly incurred--could reasonably
14 foresee that the expenses he claimed would be billed to the funds he specified.
15 Principally because of that sustainable finding of foreseeability, I also
16 disagree with the majority's ruling that Rashid's submission of fraudulent expense
17 claims was not a proximate cause of his clients' being billed for those expenses, on the
18 premise that Apollo's billing the clients constituted an "intervening" act (Majority
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1 opinion at 15-16, 19). See generally Restatement (Second) of Torts § 442A (1965) ("Where
2 the negligent conduct of the actor creates or increases the foreseeable risk of harm
3 through the intervention of another force, and is a substantial factor in causing the
4 harm, such intervention is not a superseding cause." (emphases added)); see also
5 Woodling v. Garrett Corp., 813 F.2d 543, 555 (2d Cir. 1987) ("If the intervening act was
6 foreseeable, it does not excuse the original actor that the intervening act was reckless,
7 . . . or intentional, . . . or even intentional and criminal . . . ." (internal quotation marks
8 omitted)).
9 Moreover, the original tort by Rashid was not his negligence in failing
10 to ensure that his clients were not paying for his personal expenses but rather his
11 deliberate fraud in seeking reimbursement for those expenses. While Rashid did not
12 care who would pay for those expenses, given (a) that he had identified the funds he
13 fraudulently linked to those expenses, (b) that the expense forms did not provide
14 codes for him to link the expenses to a management company, and (c) that his claimed
15 belief that those expenses would be paid by an Apollo management company was not
16 credible, the court did not clearly err in finding that Rashid had reason to expect that
17 the expenses he claimed would be billed to and paid by the funds he identified. Nor
18 did the court err in finding that "[t]he funds had every reason to believe that the
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1 expenses tendered to them as business expenses were legitimate business expenses,
2 but they were, in fact, personal expenses of Rashid." D.Ct. Op., 2020 WL 5658665,
3 at *23. In these circumstances, even if Rashid had not been a fiduciary, the
4 supposedly "intervening" acts of Apollo would not spare him from liability. See
5 generally Restatement (Second) of Torts § 533 (1977) ("The maker of a fraudulent
6 misrepresentation is subject to liability for pecuniary loss to another who acts in
7 justifiable reliance upon it if the misrepresentation, although not made directly to the other,
8 is made to a third person and the maker . . . has reason to expect that its terms will be
9 repeated or its substance communicated to the other, and that it will influence his
10 conduct in the transaction or type of transaction involved." (emphases added)).
11 In sum, the district court found that Rashid--a fiduciary to his client
12 funds--engaged in a long-running practice of knowingly and falsely submitting
13 personal expenses as business expenses, and that "Rashid's behavior was egregious,
14 reckless, and recurrent," D.Ct. Op., 2020 WL 5658665, at *27. These findings and
15 others (see, e.g., attached Appendix) were amply supported by the record, and they
16 are not challenged on appeal. Rashid deliberately sought to defraud someone into
17 paying for his personal expenses. On the requisite expense forms, no code was
18 provided for him to associate expenses with a management company; he provided
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1 the codes for the client funds he fraudulently linked to those expenses; those funds
2 were billed, and they paid. Despite his fiduciary obligation to avoid conflicts of
3 interest with his client funds, he made no effort to find out whether his personal
4 expenses were being billed to the clients he identified. Rashid self-identified 988
5 claims that he had submitted for his personal expenses, falsely represented as
6 business expenses for his client funds, totaling $220,796.87. See id. at *19.
7 I dissent from the majority's ruling that the district court erred in
8 concluding that Rashid's conduct "operated as a fraud," on his clients.
9 APPENDIX
10 The district court's findings of fact, see D.Ct. Op., 2020 WL 5658665,
11 at *1-*2, *20-*24--none of which is claimed to be erroneous--included the following:
12 # Rashid intentionally submitted false expense reports that "contained
13 a pattern of lies," id. at *20, *23;
14 # his claim of "false and fraudulent business expenses" was commonly
15 accompanied by "fabricated factual assertions," including "fabricated
16 attendees and business purposes for expensive restaurant dinners," id.
17 at *20;
18 # the "consistency and precision" of Rashid's fabrications--and the trial
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1 evidence from the purported attendees demonstrating the falsity of his
2 submitted details--constituted "strong evidence of his intent to lie, and
3 to intentionally submit personal expenses as business expenses," id.;
4 # that pattern of fabrications "negate[d Rashid's] claims of innocent
5 mistakes," id.;
6 # Rashid's claim that he believed business expenses would be borne not
7 by the investment funds but instead by Apollo was not credible and was
8 "an after-the-fact construct to avoid liability under the securities laws,"
9 id. at *22;
10 # it was reasonably foreseeable to Rashid that his advisee funds--whose
11 codes he caused to be entered into the expense spreadsheet--would be
12 responsible for the reimbursement of those charges, see id. at *23;
13 # as an Apollo senior partner, he had the position and ability to find out
14 whether his expenses were being paid by his advisee funds and to
15 prevent that, see id.;
16 # instead, Rashid exhibited a "wholesale lack of diligence and due care"
17 and was "reckless[ly] indifferen[t] to the source of his reimbursements,"
18 id. at *19, *24;
19 # "if he was not recklessly indifferent, he was at least negligent in failing
20 to protect the funds from the consequences of his thefts which were
21 reasonably foreseeable to him," id. at 23;
22 # Rashid did not inquire whether the entities he identified would be
23 billed, because he did not care "who would pay his phony business
24 expenses as long as it was not him," id. at *22;
25 # Rashid "engaged in a long-running practice of knowingly and falsely
26 submitting personal expenses as business expenses and that practice
27 operated as a fraud or deceit upon private-equity funds he advised," id.
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1 at *23;
2 # Rashid's "repeatedly lying over the course of several years"--which
3 "continued even after being caught"--"was egregious," id. at *27;
4 # Eventually, Rashid "voluntarily repaid all expenses that Apollo
5 identified to be personal in nature, totaling approximately $290,000," id.
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