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U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

INVESTMENT ADVISERS ACT OF 1940
Release No. 1825 / September 13, 1999

ADMINISTRATIVE PROCEEDING
File No. 3-10010


In the Matter of

Engebretson Capital Management, Inc.
and Lester W. Engebretson,

Respondents.
ORDER INSTITUTING PUBLIC ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDING PURSUANT TO SECTIONS 203(e), 203(f) AND 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940, MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS

I.

The Securities and Exchange Commission (the "Commission") deems it appropriate and in the public interest that a public administrative and cease-and-desist proceeding be instituted pursuant to Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940 (the "Advisers Act") against Engebretson Capital Management, Inc. ("ECMI") and Lester W. Engebretson ("Engebretson").

In anticipation of the institution of this proceeding, ECMI and Engebretson have submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purposes of this proceeding and any other proceeding brought by or on behalf of the Commission, or in which the Commission is a party, and without admitting or denying the findings contained herein, except those findings pertaining to the jurisdiction of the Commission over them and over the subject matter of this proceeding, ECMI and Engebretson consent to the issuance of this Order Instituting Public Administrative and Cease-and-Desist Proceeding Pursuant to Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940, Making Findings and Imposing Remedial Sanctions (the "Order").

Accordingly, IT IS ORDERED that a proceeding pursuant to Sections 203(e), 203(f) and 203(k) of the Advisers Act be, and hereby is, instituted.

II.

On the basis of this Order and the Offer submitted by ECMI and Engebretson, the Commission finds that:

Respondents

  1. ECMI is a California corporation located in Newport Beach, California and has been registered with the Commission as an investment adviser since August 1970 (File No. 801-06778).

  2. Engebretson, age 65, is the president and sole shareholder of ECMI. During the relevant period, Engebretson controlled ECMI's operations and was responsible for the firm's compliance with the federal securities laws.

    Facts

  3. From at least 1994 through mid-1998, ECMI and Engebretson, directly or indirectly, distributed false and misleading documents, which significantly overstated ECMI's performance results. The materials appeared in the form of: (i) charts which summarized ECMI's performance history from 1973 forward; and (ii) questionnaires submitted to Nelson Information, Inc. ("Nelson"), an independent advisory rating service, which provided performance results dating back to 1984.

  4. The materials failed to disclose that ECMI's performance from 1973 through 1994 did not represent the results of actual client trading, but instead reflected hypothetical securities transactions effected in a model account. Moreover, the returns reported by ECMI were not indicative of actual client performance, and failed to deduct management fees normally charged to clients. Although ECMI began to report actual client performance in 1995, the adviser failed to include cash and cash equivalents in its return calculations. As a result of these practices, ECMI overstated its annual performance by as many as 15 percentage points, and the inflated results propelled ECMI to the top of Nelson's published rankings.

  5. The materials also misrepresented that ECMI's performance results were prepared in accordance with standards promulgated by the Association for Investment Management and Research ("AIMR"). In fact, as noted above, the reported results were based upon composites of client accounts that excluded cash and cash equivalents, in contravention of AIMR standards. Moreover, ECMI improperly linked actual and model account performance, also in violation of AIMR requirements.

  6. In addition, ECMI represented to Nelson that the adviser's performance was audited by a certified public accounting firm, both for accuracy and for AIMR compliance. In reality, the accounting firm reviewed, but did not audit, ECMI's model account between 1986 and 1992, and never examined the performance of ECMI's actual client accounts.

  7. Engebretson also granted a feature interview to an investment journal known as the Wall Street Transcript. The paper published a transcript of the interview in its February 16, 1998 edition, and ECMI distributed copies to clients, prospective clients and solicitors. The article quoted Engebretson as stating that ECMI averaged a 21.5 percent return for its equity accounts over 27 years. Engebretson further noted that, during the preceding three years, Nelson had ranked ECMI first among large cap equity managers, on a 10-year basis. Engebretson did not mention, however, that the returns were derived in part from ECMI's model account and, thus, did not reflect actual client performance.

  8. H. Furthermore, ECMI and Engebretson, directly or indirectly, violated the Commission's books and records requirements. In particular, ECMI failed to maintain and make available for staff inspection copies of each notice, circular, advertisement, newspaper article, investment letter, bulletin or other communication circulated. ECMI also failed to make and keep all documents necessary to form the basis for or demonstrate the calculation of its advertised performance.

    Violations

  9. During the relevant period, ECMI willfully violated, and Engebretson willfully aided and abetted and caused ECMI's violations of, Sections 206(1) and 206(2) of the Adviser's Act by making use of the mails and the means and instrumentalities of interstate commerce, directly and indirectly, to employ devices, schemes and artifices to defraud clients and prospective clients; and to engage in transactions, practices and courses of business which operated as a fraud and deceit upon clients and prospective clients. As part of the aforesaid conduct, ECMI and Engebretson, directly and indirectly, misrepresented and omitted to state material facts to clients and prospective clients by: (1) overstating ECMI's annual performance results; (2) creating the impression that ECMI's performance from 1973 through 1994 reflected actual client results, rather than hypothetical trades effected in ECMI's model account; (3) failing to deduct management fees when calculating model account returns; (4) failing to include returns generated by cash and cash equivalents when calculating actual account performance beginning in 1995; (5) falsely representing that the adviser's performance results were prepared in accordance with AIMR standards; (6) falsely stating in Nelson publications that ECMI's performance results were audited for accuracy and AIMR compliance by a certified public accountant; and (7) providing misleading information to the Wall Street Transcript concerning ECMI's performance results.

  10. During the relevant period, ECMI willfully violated, and Engebretson willfully aided and abetted and caused ECMI's violations of, Section 206(4) of the Advisers Act and Rule 206(4)-1(a)(5) thereunder, by making use of the mails and the means and instrumentalities of interstate commerce to, directly and indirectly, engage in acts, practices and courses of business which were fraudulent, deceptive and manipulative by publishing, circulating and distributing advertisements which contained untrue statements of material fact, and which were otherwise false and misleading. As part of the aforesaid conduct, ECMI and Engebretson, directly and indirectly, engaged in the acts and practices described in Paragraph II.I, above.

  11. During the relevant period, ECMI willfully violated, and Engebretson willfully aided and abetted and caused ECMI's violations of, Section 204 of the Advisers Act and Rules 204-2(a) (11) and (16) thereunder by, among other things, making use of the mails and the means and instrumentalities of interstate commerce in connection with ECMI's business as an investment adviser while failing to create, maintain and make available for inspection, by representatives of the Commission, the records listed in Paragraph II.H, above.

III.

In view of the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by ECMI and Engebretson and impose the sanctions specified therein.

Accordingly, IT IS ORDERED that:

  1. Pursuant to Sections 203(e) and 203(f), respectively, ECMI and Engebretson be censured;

  2. Pursuant to Section 203(k) of the Advisers Act, ECMI and Engebretson cease and desist from committing or causing any violation or any future violation of Sections 204, 206(1), 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(11) and (16) and 206(4)-1(a)(5) thereunder;

  3. Pursuant to Section 203(i) of the Advisers Act, ECMI pay a civil money penalty in the amount of $100,000 and Engebretson pay a civil money penalty in the amount of $50,000 to the United States Treasury within 30 days of the entry of the Order. Such payment shall be: (1) made by United States postal money order, certified check, bank cashier's check or bank money order; (2) made payable to the Securities and Exchange Commission; (3) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Suite B, Mail Stop 0-3, Alexandria, Virginia 22312; and (4) submitted under cover letter that identifies the file number of this proceeding and ECMI and Engebretson as the respondents. A copy of said cover letter and money order or check shall be sent to Sandra J. Harris, Regional Director, Pacific Regional Office, Securities and Exchange Commission, 5670 Wilshire Blvd., Suite 1100, Los Angeles, California 90036.

  4. ECMI and Engebretson comply with the following undertakings:

    1. Within thirty days of the effective date of the Order and continuing five years thereafter, ECMI shall retain, at its own expense, an independent certified public accountant, not unacceptable to the staff of the Commission's Pacific Regional Office (the "PRO"), to conduct an annual audit of ECMI's performance figures, as well as its policies, practices and procedures to determine the accuracy of such figures and the adequacy of such policies, practices and procedures to reasonably detect and prevent violations of the Advisers Act and the Investment Company Act of 1940. ECMI shall provide the PRO with a copy of the engagement letter detailing the nature and scope of the certified public accountant's responsibilities. For any particular calendar year, ECMI shall, no earlier than three months prior to the commencement of the audit, notify the PRO in writing of the scope of and standards for the audit to be conducted with respect to that year. The PRO shall, within thirty days of the date of such notice, inform ECMI in writing of any objections to the proposed scope and standards. It is understood that the scope and standards for the audit shall not be unacceptable to the PRO. Each audit shall be completed within 150 days of the calendar year-end. Within thirty days of the completion of each audit, ECMI shall arrange for the certified public accountant to provide a written audit report to ECMI and the PRO, describing the condition of ECMI's policies, procedures and practices, providing a detailed statement of any material deficiencies identified during the audit, and recommending improvements to ECMI.

    2. In addition, the independent certified public accountant shall review on a quarterly basis, prior to publication or dissemination, all notices, circulars, advertisements, news articles, investment letters, bulletins or other communications pertaining to ECMI's performance or investment services (collectively, referred to as "advertising"), and all supporting books and records made and maintained or required to be made and maintained under the Advisers Act. The independent certified public accountant, additionally, shall review on a quarterly basis ECMI's policies, practices and procedures to assure continued compliance with the Order and the undertakings agreed to therein. Within ninety days of the entry of the Order, and quarterly thereafter, ECMI shall arrange for the independent certified public accountant to prepare and deliver a written report which shall set forth in detail the nature and scope of the review conducted, the accountant's findings, and recommendations of policies, practices and procedures (or amendments thereto) designed to correct any non-compliance with the advertising and books and records provisions of the Advisers Act, and prevent and detect future violations of the Order. ECMI shall further arrange for the certified public accountant's quarterly reports to be submitted to the PRO annually, within 30 days of ECMI's receipt of the fourth quarter report, and shall provide the PRO with a copy of the engagement letter detailing the nature and scope of the certified public accountant's responsibilities pursuant to this paragraph.

    3. ECMI shall adopt, implement, and maintain all policies, practices and procedures recommended by the independent certified public accountant within thirty days of the receipt of any such recommendations.

    4. For the period of the engagement and for a period of two years from the completion of the engagement, the independent certified public accountant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with ECMI or any of its present or former affiliates, directors, officers, employees or agents acting in their capacity as such (other than as contemplated in this Order or expressly approved in writing by the Commission staff). Nor shall any firm with which the independent certified public accountant is affiliated or of which it is a member, and any person engaged to assist the independent certified public accountant in the performance of its duties under this Order, without prior written consent of the Commission staff, enter into any employment, consultant, attorney-client, auditing or other professional relationship with ECMI or any of its present or former affiliates, directors, officers, employees, or agents in their capacity as such for the period of the engagement and for a period of two years after the engagement.

    5. ECMI shall cooperate fully with the independent certified public accountant, and provide such persons with access to its files, books, records and personnel as reasonably requested for their audits and reviews.

    6. ECMI shall maintain and make available at ECMI's offices for inspection by the PRO, copies of all reports by the independent certified public accountant for a period of eight years from the entry of the Order.

    7. ECMI shall compile a compliance manual containing the policies and procedures adopted and implemented pursuant to the recommendations made by the independent certified public accountant, along with existing policies and procedures to the extent that the accountant has not recommended that the latter be revised. ECMI shall make available copies of the compliance manual to its employees and familiarize them with the policies and procedures set forth therein. In addition, ECMI shall maintain and make available at ECMI's offices for inspection by the PRO, a copy of the ECMI compliance manual for a period of eight years from the entry of the Order.

    8. Within thirty days of the effective date of the Order, ECMI shall mail a copy of the Order, together with a cover letter in a form acceptable to the PRO, to each of its existing clients and solicitors by certified mail, return receipt requested. In addition, from the effective date of the Order and for twelve months thereafter, ECMI shall provide a copy of the Order to all prospective investment advisory clients and prospective solicitors, not less than forty-eight hours prior to entering into any written or oral investment advisory or solicitation contract (or no later than the time of entering into such contract if the client has the right to terminate the contract without penalty within five business days after entering into the contract). Within sixty days of the effective date of the Commission's Order, ECMI shall execute and deliver to William S. Fiske, or such other person designated by the PRO, an affidavit that it has provided the Order to its existing clients and solicitors; and within thirteen months of the effective date of the Order, ECMI shall execute and deliver to William S. Fiske, or such other person designated by the PRO, an affidavit that it has provided the Order to prospective clients and prospective solicitors.

    9. Within thirty days of the effective date of the Order, ECMI shall provide written notification to Nelson of the deceptive practices described above, in a form acceptable to the PRO. Within sixty days of the effective date of the Commission's Order, ECMI shall execute and deliver to William S. Fiske, or such other person designated by the PRO, an affidavit that it has provided the required notice.

By the Commission.

Jonathan G. Katz
Secretary

http://www.sec.gov/litigation/admin/ia-1825.htm


Modified:09/17/1999