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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. 2308 / September 30, 2004

ADMINISTRATIVE PROCEEDING
File No. 3-11691


In the Matter of

GROH ASSET MANAGEMENT, INC. and ROGER O. GROH,

Respondent.


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ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER PURSUANT TO SECTIONS 203(e), 203(f), AND 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940 AS TO GROH ASSET MANAGEMENT, INC. AND ROGER O. GROH

I.

The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") against Groh Asset Management, Inc. ("GAM") and Roger O. Groh ("Groh") (collectively "Respondents").

II.

In anticipation of the institution of these proceedings, Respondents have submitted individual Offers of Settlement (the "Offers") which 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 to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over them and the subject matter of these proceedings, Respondents consent to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940 ("Order"), as set forth below.

III.

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

Nature of Proceedings

1. This matter involves materially false and misleading advertising concerning assets under management and inadequate record keeping by GAM, a registered investment adviser owned and controlled by Groh. Over the past several years, GAM has overstated its assets under management to certain entities in the business of, among other things, gathering, publishing, circulating, and distributing information about investment advisers and money managers ("third-party ranking publications and databases"), which in turn have disseminated the false information to the public. GAM's violations persisted despite the fact that GAM and Groh received deficiency letters following a 1997 Commission compliance examination citing them for overstating assets under management and requiring corrective action.

Respondents

2. Respondent GAM is a California corporation based in San Francisco and an investment adviser registered with the Commission since 1991 (SEC File No. 801-39839). In addition to Groh, GAM currently has one full-time and two part-time employees.

3. Respondent Groh is the President and sole founder, owner, and portfolio manager of GAM, an investment adviser registered with the Commission. Groh, 47, resides in Northern California.

4. GAM provides investment advisory services to about 91 client accounts. GAM's clients include individuals, pension funds, charitable organizations, and trusts. As of September 30, 2003, GAM had approximately $9 million in assets under management.1 As of September 30, 1997, just before a routine staff examination, GAM had approximately 40 clients and approximately $30 million under management.

Facts

5. During the relevant period, Groh asserted significant control over GAM and its operations. He was GAM's President, sole portfolio manager, and sole shareholder. He signed GAM's Forms ADV; he made all investment decisions; and he had ultimate responsibility over the firm's marketing activities.

6. Since 1997, GAM has managed five portfolios or composites: Global Big Cap, Global Small Cap, International Big Cap, International Small Cap, and Balanced.

7. Since that time, GAM has reported performance returns and asset amounts for its composites to various third-party ranking publications and databases, including Nelson Information ("Nelson's"); Callan Associates, Inc. ("Callan"); Money Manager Review ("MMR"); Effron-PSN ("Effron"); and Checkfree Investment Services (formerly Mobius Group) ("Mobius"). At various times, Groh also filled out questionnaires and updates that were provided to these and other third-party ranking publications and databases.

8. In October 1997, the Commission examination staff conducted a routine examination of GAM. The examination disclosed that GAM had overstated assets under management to ranking publications and databases. Following the examination, the staff sent GAM and Groh letters advising them of the deficiencies and requiring them to take remedial action. Groh promised the examiners that GAM would notify the databases of the correct assets under management and revise its marketing materials.

9. In October 1998, just months after receiving the staff's deficiency letters, GAM submitted a questionnaire response to Mobius falsely reporting that GAM's assets under management as of December 31, 1997 were $180 million. The true figure at the time was much less than $180 million. Mobius published the false information to the public.

10. In April 2000, GAM, through Groh, falsely reported to Effron that GAM's International Big Cap composite had $40 million in assets under management as of March 31, 2000. GAM's books and records, however, show less than $22 million in assets for the composite as of that date.

11. In July 2000, GAM, through Groh, falsely reported to Effron that GAM's International Big Cap composite had $30 million in assets as of June 30, 2000. GAM's books and records, however, show less than $22 million in assets for the composite as of that date.

12. In January 2001, GAM, through Groh, submitted a year-end survey to Mobius. In the survey, GAM reported total assets under management as of December 31, 2000 as $38 million. GAM's books and records, however, show less than $28 million as of that date.

13. GAM also provided information about its assets under management to MMR. Based on information provided by GAM, MMR's Manager Directory for the period ending March 30, 2001 reported falsely that GAM had $30 million in each of its Global Big Cap, Global Small Cap, International Big Cap, and International Small Cap composites, for total assets under management of $120 million. GAM's books and records, however, show total assets under management of approximately $24 million as of March 30, 2001. By the Fall of 2001, MMR's Manager Directory reflected that assets in GAM's International Small Cap composite had increased to $40 million as of September 28, 2001. GAM's books and records, however, show assets of approximately $2 million in the composite as of that date.

14. In January 2003, GAM falsely reported to Nelson's in four separate questionnaires that the assets in each of the Global Big Cap, Global Small Cap, International Big Cap, and International Small Cap composites were $30 million as of December 31, 2002. GAM's books and records, however, show assets under management of $2 million, $151,925, $6.9 million, and $444,528, respectively, as of that date.

15. In a "Manager Performance Survey" completed for Callan in January 2003, GAM falsely reported that the size of each of its Global Big Cap, Global Small Cap, and International Small Cap composites was $30 million as of December 31, 2002.

16. In February 2003, GAM falsely reported to Cambridge Associates that GAM's Global Big Cap composite had $12 million in assets as of December 31, 2002. GAM's books and records, however, show assets of approximately $2 million in the composite as of that date.

17. Since January 1, 1998, GAM has failed to maintain, as required, copies of questionnaires, surveys, and other communications with ranking publications and databases about GAM's assets under management and performance. As GAM's president, Groh was responsible for maintaining the firm's books and records.

Legal Discussion

18. Section 206(2) of the Advisers Act makes it unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly, to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client. Section 206(4) prohibits any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly, from engaging in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. Rule 206(4)-1(a)(5) under the Advisers Act provides that it is a fraudulent, deceptive, or manipulative act, practice, or course of business within the meaning of Section 206(4) for an adviser to distribute any advertisement which contains any untrue statement of a material fact, or which is otherwise false or misleading.

19. As described above, GAM disseminated materially false and misleading advertising and marketing materials to potential clients through third-party ranking publications and databases. As a result, GAM willfully2 violated and Groh willfully aided and abetted and caused GAM's violations of Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-1(a)(5) thereunder.

20. Section 204 of the Advisers Act and Rule 204-2(a)(11) thereunder requires an investment adviser to make and keep true, accurate, and current books and records relating to its investment advisory business, including "[a] copy of each notice, circular, advertisement, newspaper article, investment letter, bulletin or other communication that the investment adviser circulates or distributes, directly or indirectly, to 10 or more persons."

21. As described above, GAM did not maintain copies of questionnaires, surveys, and other communications with ranking publications and databases about GAM's assets under management and performance. As a result, GAM willfully3 violated and Groh willfully aided and abetted and caused GAM's violations of Section 204 of the Advisers Act and Rule 204-2(a)(11) thereunder.

IV.

In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions agreed to in GAM and Groh's Offers.

Accordingly, it is hereby ORDERED that:

  1. GAM and Groh be, and hereby are, censured;

  2. GAM and Groh cease and desist from committing or causing any violations and any future violations of Sections 204, 206(2), and 206(4) of the Advisers Act and Rules 204-2(a)(11) and 206(4)-1(a)(5) promulgated thereunder;

  3. GAM and Groh shall, within 180 days of the entry of this Order, together pay a civil money penalty in the amount of $45,000 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check, or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies GAM and Groh as the respondents in these proceedings and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Helane L. Morrison, District Administrator, Securities and Exchange Commission, San Francisco District Office, 44 Montgomery Street, Suite 1100, San Francisco, CA 94104;

  4. GAM shall comply with the following undertakings to:

    1. Retain, not later than 60 days after the date of this Order, at its expense, an Independent Consultant, not unacceptable to the Commission's staff. GAM shall require the Independent Consultant to conduct a review of its policies and procedures relating to (a) amount of assets under management record keeping; and (b) reporting of assets under management, including policies and procedures to detect and prevent GAM from publishing, circulating, or distributing false or misleading information regarding its assets under management;

    2. At the end of that review, which in no event shall be more than six months after the date of this Order, GAM shall require the Independent Consultant to submit to GAM and to Helane L. Morrison of the Commission's San Francisco District Office a Consultant's Report. The Consultant's Report shall describe the review performed and the conclusions reached and shall include any recommendations deemed necessary to make the policies and procedures adequate and address the deficiencies identified in Section III of the Order. GAM may suggest an alternative procedure designed to achieve the same objective or purpose as that of the recommendation of the Independent Consultant. The Independent Consultant may accept or reject GAM's proposed alternative procedure. GAM, however, shall abide by the Independent Consultant's final recommendation;

    3. GAM shall take all necessary and appropriate steps to adopt and implement the recommendations contained in the Consultant's Report;

    4. Within eight months of the date of this Order, GAM shall, in writing, advise the Independent Consultant and Helane L. Morrison of the Commission's San Francisco District Office of the recommendations it is adopting;

    5. No later than twelve months after the date of the Independent Consultant's report, GAM shall submit to Helane L. Morrison of the Commission's San Francisco District Office an affidavit setting forth the details of its efforts to implement the Independent Consultant's recommendations as set forth in the Consultant's Report and its compliance with them;

    6. For a period of five years from the date GAM, in writing, advises the Independent Consultant and Helane L. Morrison of the Commission's San Francisco District Office of the recommendations it is adopting, as described in Paragraph IV.D.4 above, GAM shall require the Independent Consultant to review annually all advertising and marketing materials reflecting, in any way, assets under management given, directly or indirectly, to potential or existing clients (including all communications with third-party ranking publications or databases) and all supporting books and records made and maintained or required to be made and maintained under the Advisers Act. GAM shall require the Independent Consultant to monitor GAM's compliance with the advertising and books and records provisions of the Advisers Act and make recommendations designed to correct any noncompliance. GAM shall require the Independent Consultant to report the results of each annual review to Helane L. Morrison of the Commission's San Francisco District Office;

    7. For good cause shown and upon timely application by the Independent Consultant or GAM, the Commission's staff may extend any of the deadlines set forth in these undertakings;

    8. GAM shall require the Independent Consultant to enter into an agreement that provides that for the period of engagement and for a period of two years from completion of the engagement, the Independent Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with GAM, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity. The agreement will also provide that the Independent Consultant will require that any firm with which he/she is affiliated or of which he/she is a member, and any person engaged to assist the Independent Consultant in performance of his/her duties under this Order shall not, without prior written consent of an authorized representative of the San Francisco District Office of the Commission, enter into any employment, consultant, attorney-client, auditing or other professional relationship with GAM, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of two years after the engagement;

    9. Mail a copy of this Order to each existing investment advisory client within 30 days following the entry of this Order. The Order shall be sent by certificate of mailing, along with a cover letter in a form not unacceptable to the staff of the Commission. GAM shall notify Helane L. Morrison of the San Francisco District Office when this undertaking is completed; and

    10. From the effective date of this Order until the expiration of 12 months, GAM shall provide a copy of the Order to all prospective investment advisory clients not less than 48 hours prior to entering into any written or oral investment advisory 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 one month after expiration of the 12-month period, GAM shall notify the staff of the Commission by mail directed to the San Francisco District Office (as above) when this undertaking is completed.

By the Commission.

Jonathan G. Katz
Secretary

Endnotes

 

http://www.sec.gov/litigation/admin/ia-2308.htm


Modified: 09/30/2004