Waltzer and Associates, Lewis N. Waltzer, and Karney E. Waltzer
Securities Act of 1933
Release No. 7915 / November 14, 2000
Securities Exchange Act of 1934
Release No. 43562
Investment Advisers Act of 1940
Release No. 1909
Investment Company Act of 1940
Release No. 24739
ADMINISTRATIVE PROCEEDING
File No. 3-10142
| In the Matter of WALTZER AND ASSOCIATES,
|
ORDER MAKING FINDINGS,
IMPOSING REMEDIAL SANCTIONS AND ISSUING A CEASE-AND-DESIST ORDER AGAINST KARNEY E. WALTZER |
I.
In connection with a previously instituted public administrative proceeding and cease-and-desist proceeding pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Sections 15(b)(6) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"), Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act"), and Section 9(b) of the Investment Company Act of 1940 ("Investment Company Act"), Respondent Karney E. Waltzer has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept.1 Solely for the purpose of these proceedings, and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained in this Order Making Findings, Imposing Remedial Sanctions and Issuing a Cease-and-Desist Order Against Karney E. Waltzer ("Order"), except as to the Commission's jurisdiction over her and the subject matter of these proceedings, which she admits, Karney Waltzer consents to the findings and remedial sanctions set forth below and to the issuance of a cease-and-desist order.
II.
On the basis of the Order Instituting Proceedings and the Offer of Settlement submitted by Karney Waltzer, the Commission finds that:2
Respondents
A. Waltzer and Associates ("Waltzer"), a New York partnership formed in 1978, has been registered with the Commission as an investment adviser from 1984 through the present. Located in Monticello, New York from 1985 through 1993 and in Newburgh, New York from January 1994 through August 1996, Waltzer ceased operations in August 1996. As of December 31, 1995, Waltzer managed assets of approximately $38.8 million for over three hundred clients. Waltzer was, at all relevant times, a licensed insurance agent with several insurance companies. Waltzer generally recommended and caused its clients to invest in mutual funds and insurance contracts, including variable annuities. At all relevant times, Waltzer was wholly owned and managed by its two partners, Lewis Waltzer and Karney Waltzer.
B. Waltzer and Lewis Waltzer were the subjects of a prior Commission enforcement action. Waltzer and Associates and Lewis N. Waltzer, Investment Advisers Act Release No. 1182 (July 28, 1989). In that action, they consented, without admitting or denying the Commission's findings, to the imposition of sanctions by the Commission based upon, among other things, Lewis Waltzer's fraudulent performance claims. The Commission found that Lewis Waltzer had made false claims regarding the performance of clients' accounts in advertisements. The Commission further found that Lewis Waltzer had violated Section 206(4) of the Advisers Act and Rule 206(4)-1(a)(5) thereunder, and found that Waltzer and Lewis Waltzer, respectively, had violated and aided and abetted violations of certain books and records provisions of the Advisers Act.
C. Lewis Waltzer has been a partner of Waltzer since its founding. At all relevant times, Lewis Waltzer was also a registered representative of a broker-dealer registered with the Commission and a licensed insurance agent.
D. Karney Waltzer was, at all relevant times, a partner of Waltzer, a registered representative of a broker-dealer registered with the Commission, and a licensed insurance agent.
Respondent's Conduct
E. Throughout the relevant period, Waltzer entered into advisory agreements that provided for advisory fees based upon the performance of client accounts. Karney Waltzer told clients that Waltzer would almost certainly earn at least a twelve percent annual return on their accounts. Karney Waltzer further promised clients that if Waltzer did not earn at least twelve percent on their accounts in a year, Waltzer would reduce or forego its advisory fee in the following year.
F. At various times during the relevant period, Karney Waltzer falsely represented to Waltzer's clients that: (1) they had earned at least one percent returns each month on their Waltzer-managed accounts and (2) they were on track to earn at least twelve percent per year. Karney Waltzer disregarded the actual performance of the clients' accounts and used false performance numbers to cause clients to believe they had earned at least one percent per month. In fact, for much of the relevant period, Waltzer's clients generally earned less than one percent per month or twelve percent per year. By falsifying the rate of return on Waltzer-managed accounts, Karney Waltzer was able to: (1) convince clients to renew their advisory agreements with Waltzer; and (2) avoid reducing Waltzer's advisory fee for the following year.
G. As registered representatives of a broker-dealer and licensed insurance agents, Lewis and Karney Waltzer received transaction-based compensation for selling certain securities, including variable annuities, and insurance contracts to their advisory clients. Karney Waltzer failed to disclose that she and Lewis Waltzer received transaction-based compensation (including commissions and 12b-1 fees) on purchases and sales Waltzer recommended of securities and/or insurance contracts.3
H. Waltzer was required by Rule 206(4)-4 under the Advisers Act to promptly disclose to clients and prospective clients all material facts with respect to any material legal or disciplinary event. A Commission proceeding finding that an investment adviser (or a management person) was involved in a violation of an investment-related statute or rule and was subject to an order denying, suspending or revoking the investment-related business of those persons is presumed to be a material fact under subparagraph (b)(2) of that rule. On certain occasions, Karney Waltzer caused Waltzer to fail to disclose to clients and prospective clients the 1989 Commission enforcement action against Waltzer and Lewis Waltzer.
I. At all relevant times, Waltzer made use of the mails or means or instrumentalities of interstate commerce in connection with its business as an investment adviser.
Violations
J. From at least January 1994 through August 1996, Karney Waltzer willfully violated Section 17(a) of the Securities Act in that she, in the offer and sale of the securities, directly or indirectly, by use of the means or instruments of transportation or communication in interstate commerce, and the mails: (a) employed devices, schemes, and artifices to defraud; (b) obtained money or property by means of, or otherwise made, untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; and (c) engaged in transactions, acts, practices and courses of business which operated or would operate as a fraud or deceit upon purchasers or sellers of securities. As part of such conduct, Karney Waltzer failed to disclose that she and Lewis Waltzer received transaction-based compensation (including commissions and 12b-1 fees) on purchases and sales Waltzer recommended of securities and/or insurance contracts, as described in Paragraph G. above.
K. From at least January 1994 through August 1996, Karney Waltzer willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in that she, in connection with the purchase and sale of securities, directly or indirectly, by use of the means or instrumentalities of interstate commerce and the mails: (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; and (c) engaged in acts, practices and courses of business which operated or would operate as a fraud or deceit upon any person. As part of such conduct, Karney Waltzer failed to disclose that she and Lewis Waltzer received transaction-based compensation (including commissions and 12b-1 fees) on purchases and sales they recommended of securities and/or insurance contracts, as described in Paragraph G. above.
L. From at least January 1994 through August 1996, Waltzer willfully violated, and Karney Waltzer willfully aided and abetted and caused violations of, Sections 206(1) and (2) of the Advisers Act, in that they, by use of the mails or means or instrumentalities of interstate commerce, directly and indirectly: (a) employed devices, schemes, or artifices to defraud clients or prospective clients, and (b) engaged in transactions, practices, or courses of business which operated as a fraud or deceit upon clients or prospective clients. As part of such conduct, Karney Waltzer: (1) failed to disclose that she and Lewis Waltzer received transaction-based compensation (including commissions and 12b-1 fees) on purchases and sales Waltzer recommended of securities and/or insurance contracts, as described in Paragraph G. above; and (2) falsely represented to Waltzer's clients that they had earned at least one percent returns each month on their Waltzer-managed accounts and were on track to earn at least twelve percent per year, as described in Paragraph F., above.
M. From at least January 1994 through August 1996, Waltzer willfully violated, and Karney Waltzer willfully aided and abetted and caused violations of, Section 205(a)(1) of the Advisers Act in that they, by use of the mails or means or instrumentalities of interstate commerce, directly and indirectly, entered into, extended, renewed, and performed advisory contracts that provided for compensation to Waltzer on the basis of a share of the capital gains or capital appreciation of the funds or any portion of the funds of clients, as described in Paragraph E. above.
N. From at least January 1994 through August 1996, Waltzer willfully violated, and Karney Waltzer willfully aided and abetted and caused violations of, Section 206(4) of the Advisers Act and Rule 206(4)-4(a)(2) thereunder, in that they, by use of the mails or means or instrumentalities of interstate commerce, directly and indirectly, failed to disclose to clients and prospective clients a legal or disciplinary event that is material to an evaluation of Waltzer's integrity, as described in Paragraphs B. and H. above.
III.
In view of the foregoing, the Commission finds that it is in the public interest to impose the sanctions specified in the Offer of Settlement.
Accordingly, IT IS ORDERED THAT:
A. Karney Waltzer cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 205, 206(1), 206(2), and 206(4) of the Advisers Act and Rule 206(4)-4 thereunder;
B. Karney Waltzer be, and hereby is, barred from association with any broker, dealer, or investment adviser, and prohibited from serving or acting as an employee, officer or director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter; and
C. Karney Waltzer comply with her undertaking to reasonably cooperate with investigations, administrative proceedings, and litigation conducted by the Commission arising from or relating to the matters described in this Order.
By the Commission
Jonathan G. Katz
Secretary
Footnotes
| 1 | The Order Instituting Proceedings in this matter was entered on February 7, 2000. |
| 2 | The findings herein are not binding on anyone other than Karney Waltzer. |
| 3 | Rule 12b-1 under the Investment Company Act of 1940 provides an asset-based alternative method for an investment company to cover sales and marketing expenses. Distribution fees are paid from the fund to the sales agent on an ongoing basis as long as the investor holds shares in the fund. |