ALJ REVOKES ADVISER'S FEDERAL REGISTRATION AND SUSPENDS ITS CEO/CONTROLLING SHAREHOLDER/PRESIDENT FOR VIOLATING 1998 INJUNCTION

* In the Matter of Seaboard Investment Advisers, Inc. and Eugene W. Hansen, SEC Admin. Proc. File No. 3-9725 (September 21, 1999). [11360] November 1, 1999 TO: COMPLIANCE ADVISORY COMMITTEE No. 43-99 INVESTMENT ADVISER ASSOCIATE MEMBERS No. 26-99 INVESTMENT ADVISER MEMBERS No. 23-99 SEC RULES MEMBERS No. 64-99 RE: ALJ REVOKES ADVISER’S FEDERAL REGISTRATION AND SUSPENDS ITS CEO/CONTROLLING SHAREHOLDER/PRESIDENT FOR VIOLATING 1998 INJUNCTION ______________________________________________________________________________ Pursuant to an administrative action brought by the Securities and Exchange Commission ("SEC") and subsequent to a hearing before an Administrative Law Judge ("ALJ"), the ALJ revoked the federal registration of an investment adviser and suspended its CEO/controlling shareholder/president ("CEO") for a period of twelve months for violating a 1998 injunction, which was issued based upon violations of a 1994 cease and desist order.* The 1994 Cease and Desist Order In 1993, the SEC commenced administrative proceedings against the adviser, its CEO and a key employee based upon allegations that the respondents had fraudulently advertised misleading performance figures covering the period from 1984 through at least the third quarter of 1991 and had violated certain recordkeeping requirements of the Investment Advisers Act of 1940 (the "Advisers Act"). This proceeding was resolved in 1994 through an offer of settlement in which the respondents were ordered to: cease and desist from violating the Advisers Act and the rules thereunder; pay a $1 million civil penalty; adhere to stringent audit requirements on the adviser’s future performance figures; retain a special review person to monitor the company’s advertising and recordkeeping policies and procedures; mail a copy of the SEC’s order to all of its current consultants and clients; disclose the material terms of the order to all prospective clients for ten years following the date of the order; and take miscellaneous additional measures designed to ensure future compliance with federal securities laws. [Subsequent to settlement of this proceeding, clients of the adviser began to close their accounts and the adviser’s assets under management dwindled such that by the spring of 1997, the adviser was out of business.] The 1998 Injunction In September 1996, the SEC commenced an action in federal court seeking a permanent injunction and civil penalties against the adviser and its CEO for violating the antifraud provisions of the Advisers Act and the 1994 SEC order. According to the SEC’s complaint, in 1995 the respondents had violated the Advisers Act and the 1994 order by sending false and misleading advertisements to clients. The court granted the SEC’s requested relief and, in July 1998, permanently enjoined the respondents from violating the Advisers Act and the rules thereunder, as well as the 1994 order. The respondents were also ordered to pay a civil penalty of $50,000. The Current Proceeding In September 1998, the SEC filed yet another action against the respondents. This action alleged that the respondents had violated the 1998 injunction by violating the Advisers Act. In particular, the SEC alleged:
The respondents sent letters to 46 clients in 1995 misrepresenting how the clients’ accounts had fared in comparison to the "Lipper Total Return Analysis." (These letters alleged stated that, according to Lipper, the average balanced fund lost approximately 7% in 1994 when, in fact, this amount was 2-2.5%. An attachment to these letters, however, showed the correct Lipper Index figure.) According to information presented to the ALJ, the CEO stated that he had included this statement in the client letters to help the adviser;
The respondents sent letters to two clients in 1995 that contained misrepresentations relating to how their accounts had performed in comparison to comparable market returns. These letters, too, were accompanied by attachments with data contradicting these alleged misrepresentations; and
The CEO respondent made material omissions on a Form U-4, Uniform Application for Securities Industry Registration, he filed with the State of Virginia in October 1998 to obtain registration as an investment adviser representative with another adviser. In particular, the SEC alleged that, while the CEO did not disclose all information relating to the previous SEC actions against him, as required by the Form, he did report having a disciplinary history with the SEC. The ALJ found that, although the CEO’s conduct was "unacceptable," several factors "indicate that it was not driven by a desire to defraud or injure" the adviser’s clients: i.e., the fact that, in sending out the client letters, the adviser included an attachment showing the correct information and the fact that the CEO respondent did provide some information concerning his disciplinary history with the SEC. The ALJ found, however, that the respondents had "made no assurances, sincere or otherwise, that they will comply with the federal securities laws in the future" and that the CEO respondent "will have opportunities in the future to commit violations of the Advisers Act." Accordingly, the ALJ concluded that it is in the public interest to revoke the adviser’s registration. With respect to the CEO respondent, however, while the ALJ noted that barring him from association with an adviser "would be unduly harsh and, therefore, not in the public interest" and that his argument that "any further sanctions by the [SEC] would be ’piling on’" to be "somewhat compelling," she ordered, based upon the totality of the evidence, that he be suspended from association with an investment adviser for twelve months. A copy of the ALJ’s decision is attached. Tamara K. Reed Associate Counsel Attachment Note: Not all recipients receive the attachment. To obtain a copy of the attachment referred to in this Memo, please call the ICI Library at (202) 326-8304, and ask for attachment number 11360. ICI Members may retrieve this Memo and its attachment from ICINet (http://members.ici.org).