Cambridge Equity Advisors, Inc. and Michael E. Goldston

Investment Advisers Act of 1940
Release No. 2001/ December 12, 2001

Administrative Proceeding
File No. 3-10651

I.

The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be instituted against Cambridge Equity Advisors, Inc. ("Cambridge") pursuant to Section 203(e) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act"), and against Michael E. Goldston ("Goldston") pursuant to Sections 203(f) and 203(k) of the Advisers Act.

II.

In anticipation of the institution of these administrative proceedings, Respondents have submitted Offers of Settlement ("Offers") that the Commission has determined to accept. 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, except the jurisdiction of the Commission over them and over the subject matter of these proceedings and those findings contained in paragraph III.A below, which are admitted, Respondents consent to the entry of the Order Instituting Public Proceedings, Making Findings, and Imposing Remedial Sanctions and Cease-and-Desist Order Pursuant to Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940 ("Order"). Accordingly, IT IS ORDERED that proceedings pursuant to Section 203(e), 203(f), and 203(k) of the Advisers Act be, and hereby are, instituted.

III.

On the basis of this Order and the Offers submitted by the Respondents, the Commission finds that:

A. At all times relevant to this proceeding, Cambridge, headquartered in Brentwood, Tennessee, was an investment adviser registered with the Commission. Goldston was Cambridge's president, portfolio manager, and sole stockholder;

B. Between October 1996 and September 1999, Cambridge represented in its Marketing Folder that it "manage[d] over $300 million in a variety of investment styles." At the time the Marketing Folder was printed in late 1995, Cambridge did, in fact, have assets under management of over $300 million. However, as stated in Form ADVs filed with the Commission by Cambridge and signed by Goldston, Cambridge was only managing $110 million in the middle of 1997 and $100 million in January 1998. Between October 18, 1996 and March 1, 1999, officers of Cambridge distributed four memoranda to Cambridge's marketing division stating that the Marketing Folder overstated assets under management and directing the marketing division to clarify that fact in discussions with prospective clients. Goldston, who was responsible for reviewing the Marketing Folder to make sure that the representations contained in it were accurate, reviewed the Marketing Folder regularly. Nevertheless, he did not have new Marketing Folders printed to reflect the decline in the assets under management. Rather, the Marketing Folder contained the incorrect value of the assets under management until new brochures were printed in September 1999 that deleted any reference to an actual dollar amount of assets under management;

C. In the Marketing Folder that Cambridge disseminated from October 1996 to December 2000, Cambridge stated, "[p]erformance for the Capital Appreciation Accounts includes a model portfolio from 1986 - 1989 that has been audited by an independent accounting firm." For the years 1987 and 1989, the audited annual returns for that model portfolio were 30.2% and 50.9%, respectively. When Cambridge recalculated those returns using the quarterly-linked method, it made two errors that caused the performance for 1987 and 1989 to be misstated as 43.2% and 62.9%, resepectively. As a result of those two errors, Cambridge materially overstated in the Marketing Folder the amount to which $100,000 invested in the Capital Appreciation Accounts would have grown by the end of 1998 and 1999;

D. The 1989 - 1993 performance results of five of the mutual fund portfolios discussed in the Marketing Folder and a brochure describing Cambridge's Mutual Fund Advisory Program that Cambridge distributed during 1998 were calculated by back-testing (i.e., a method of calculating performance by means of the retroactive application of a model designed with the benefit of hindsight). Cambridge disclosed that it did not begin managing mutual fund investments for its clients until some time in 1993. Although Cambridge represented that those returns were derived from a "model" portfolio (i.e., a hypothetical portfolio designed and managed to reflect the adviser's management style), it did not disclose that the performance results were derived from models that were back-tested, i.e., retroactively applied and designed with the benefit of hindsight;

E. The Marketing Folders distributed between October 1996 and March 1998 contained a bar-graph comparing the returns of Cambridge's Capital Appreciation Accounts with the returns of the S&P 500 Index. The returns of the Capital Appreciation Accounts combined model performance results for the years 1986 - 1989 with the actual performance results for 1990 - 1997. Although Cambridge never asserted that the returns of its Capital Appreciation Accounts exceeded the performance results of the S&P 500 Index on a yearly basis, by combining actual and model performance into a single bar-graph, Cambridge omitted disclosing that the Capital Appreciation Account's actual annual performance was less than the annual performance of the S&P 500 Index for several years between 1990 and 1997;

F. Between October 1996 and September 1999, Cambridge made references in its Marketing Folder to certain specific recommendations that it had made in the past; and

G. By reason of the conduct alleged in paragraphs III. A through F above, Cambridge committed violations of and willfully violated Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rules 206(4)-1(a)(2) and 206(4)-1(a)(5) thereunder and Goldston caused and willfully aided and abetted Cambridge in such violations.

IV.

In view of the foregoing, it is appropriate and in the public interest to impose the sanctions specified in the Offers.

ACCORDINGLY, IT IS HEREBY ORDERED that:

A. Cambridge and Goldston are censured pursuant to Sections 203(e) and 203(f), respectively, of the Advisers Act;

B. Cambridge, pursuant to Section 203(k) of the Advisers Act, cease and desist from committing or causing any violation and any future violation of Sections 206(1), 206(2), and 206(4) of the Advisers Act and Rule 206(4)-1(a)(2) and 206(4)-1(a)(5) thereunder, and Goldston, pursuant to Section 203(k) of the Advisers Act, cease and desist from causing violations of Sections 206(1), 206(2), and 206(4) of the Advisers Act and Rule 206(4)-1(a)(2) and 206(4)-1(a)(5) thereunder;

C. Cambridge shall pay a civil money penalty totaling $40,174.37, including post-judgment interest of $174.37, in accordance with the following schedule: (1) $13,000 within ten (10) days of the entry of the Order; (2) $13,000 within forty-five (45) days of the entry of the Order; and (3) $14,174.37 within ninety (90) days of the entry of the Order. Goldston shall pay a civil money penalty totaling $20,087.19, including post-judgment interest of $87.19, in accordance with the following schedule: (1) $6,500 within ten (10) days of the entry of the Order; (2) $6,500 within forty-five (45) days of the entry of the Order; and (3) $7,087.19 within ninety (90) days of the entry of the Order. Each 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, Stop 0-3, Alexandria, VA 22312; and (4) submitted under cover letter that identifies Cambridge and Goldston as respondents in these proceedings, the file number of these proceedings; a copy of such cover letter and money order or check shall be sent to Richard P. Wessel, District Administrator, Securities and Exchange Commission, 3475 Lenox Road, Suite 1000, Atlanta, GA 30326;

D. Cambridge will comply with its undertakings:

1. To retain, within thirty (30) days from the date of this Order, at Cambridge's expense, the services of an independent consultant ("Independent Consultant") who is not unacceptable to the staff of the Commission. Cambridge will not terminate the Independent Consultant without the prior written approval of the Commission's staff. The Independent Consultant will:

a. conduct a comprehensive review of Cambridge's policies, practices, and procedures to determine the adequacy of such policies, practices, and procedures to reasonably detect and prevent Cambridge from publishing, circulating, or distributing any advertisement, as defined in Rule 206(4)-1(b) of the Advisers Act ("Advertisement"), which contains any untrue statement of a material fact, or which is otherwise false or misleading;

b. prepare, within ninety (90) days of the entry of the Order, a written report of his or her findings and recommendations of policies, practices, and procedures, or amendments thereto, designed to prevent Cambridge from publishing, circulating, or distributing any Advertisement which contains any untrue statement of a material fact, or which is otherwise false or misleading, with a copy of such report and recommendations to be served simultaneously on the Commission's Atlanta District Office ("ADO") and Cambridge;

2. To adopt, implement, and maintain all policies, practices, and procedures recommended by the Independent Consultant within thirty (30) days of the receipt of the recommendations; provided, however, within these thirty (30) days, that as to any recommendation of the Independent Consultant that Cambridge determines is unduly burdensome, Cambridge may suggest an alternative procedure designed to achieve the same objective or purpose as that of the recommendation of the Independent Consultant. Cambridge shall set forth in an affidavit to be submitted to the Independent Consultant and the ADO such alternative procedure, and a description of how such alternative procedure achieves the same objective or purpose as the Independent Consultant's original recommendation. The Independent Consultant shall evaluate the alternative procedure proposed by Cambridge. If the Independent Consultant approves the alternative procedure or amends a recommendation, the Independent Consultant shall within fourteen (14) days of such decision, prepare a written report which identifies such alternative procedure or amended recommendation and sets forth the Independent Consultant's reasons for his or her decision, with a copy of such report to be served simultaneously on the ADO and Cambridge. However, Cambridge will abide by the Independent Consultant's final determination and adopt those recommendations that the Independent Consultant ultimately determines are appropriate;

3. To file, within 160 days from the date of the Order, an affidavit with the ADO setting forth the details of Cambridge's adoption and implementation of the Independent Consultant's recommendations pursuant to paragraphs IV.D. 1 and 2 above;

4. To have the Independent Consultant, one (1) year from the date of the Order, conduct a review of Cambridge's policies, practices, and procedures to determine whether Cambridge has complied with the Order and the undertakings agreed to herein. As a result of such review, the Independent Consultant may recommend additional polices, practices, and procedures or revisions to existing policies, practices, and procedures, to achieve compliance with the Order and undertakings agreed to herein. The Independent Consultant shall prepare, within 395 days from the date of this Order, a written report of his or her findings and additional recommendations, if any, a copy of such report and recommendations to be served simultaneously on the ADO and Cambridge. Cambridge will adopt, implement, and maintain all policies, practices, and procedures recommended by the Independent Consultant in the same manner as set forth in paragraph IV.D.2 above;

5. To have the Independent Consultant review, for a period of two (2) years from the date of the Order, all Advertisements and any underlying books and records that support any representations made in the Advertisements. Cambridge shall not use an Advertisement during that two (2) year period unless the Independent Consultant has approved it;

6. To require the Independent Consultant to enter into an agreement that provides that for the period of the engagement and for a period of two (2) years from the completion of the engagement, the Independent Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with Cambridge or Goldston, or any of their present or former affiliates, directors, officers, employees, or agents acting in their capacity as such. Any firm with which the Independent Consultant is affiliated or of which he or she is a member, and any person engaged to assist the Independent Consultant in the performance of his or her duties under the Order shall not, without prior written consent of the Commission's staff, enter into any employment, consultant, attorney-client, auditing or other professional relationship with Cambridge or Goldston, or any of their 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 (2) years after the engagement;

7. To mail a copy of the Order, together with a cover letter, in a form acceptable to the staff of the Commission, to each of its existing clients by certified mail, return receipt requested, within thirty (30) days from the date of the Order. For a period of one (1) year from the date of the Order, Cambridge shall deliver to prospective investment advisory clients a copy of the Order prior to such clients entering into any written or oral investment advisory contract. Also, within thirty (30) days from the date of the Order, Cambridge shall execute and deliver to the ADO an affidavit that it has provided a copy of the Order to its existing clients in accordance with this Order's terms. Within thirteen (13) months from the date of the Order, Cambridge shall execute and deliver to the ADO an affidavit that it has provided a copy of the Order to its prospective clients in accordance with this Order's terms; and

E. Cambridge may apply to the ADO for an extension of the deadlines described above before their expiration, and upon a showing of good cause by Cambridge, the Commission's staff may, in its sole discretion, grant such extensions for whatever time period it deems appropriate.

By the Commission.

Jonathan G. Katz
Secretary