UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES ACT OF 1933
Release No. 7469 / October 9, 1997
SECURITIES EXCHANGE ACT OF 1934
Release No. 39226 / October 9, 1997
INVESTMENT ADVISERS ACT OF 1940
Release No. 1678 / October 9, 1997
ADMINISTRATIVE PROCEEDING
File No. 3-9477
______________________________
: ORDER INSTITUTING PUBLIC
: ADMINISTRATIVE PROCEEDINGS,
In the Matter of : MAKING FINDINGS, IMPOSING
LAWRENCE A. KRAUSE : CEASE-AND-DESIST ORDER,
KW FINANCIAL SERVICES, INC. : AND IMPOSING REMEDIAL
KW SECURITIES CORP. : SANCTIONS
LAWRENCE A. KRAUSE :
& ASSOCIATES, INC. :
:
:
I.
The Securities and Exchange Commission ("Commission") deems it
appropriate and in the public interest that public administrative
proceedings be, and hereby are, instituted against:
A. Lawrence A. Krause ("Krause") pursuant to Section 8A of the
Securities Act of 1933 ("Securities Act"), Sections 15(b)(6), 19(h) and 21C
of the Securities Exchange Act of 1934 ("Exchange Act") and Sections 203(f)
and (k) of the Investment Advisers Act of 1940 ("Advisers Act");
B. KW Financial Services, Inc. ("KW Financial") pursuant to Section
8A of the Securities Act and Section 21C of the Exchange Act;
C. KW Securities Corp. ("KW Securities") pursuant to Section 8A of
the Securities Act, Sections 15(b)(4), 19(h) and 21C of the Exchange Act;
and
D. Lawrence A. Krause & Associates, Inc. ("LAKA") pursuant to Section
8A of the Securities Act, Section 21C of the Exchange Act and Sections
203(e) and 203(k) of the Advisers Act.
II.
In anticipation of the institution of these proceedings, and prior to
a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. 201
et seq., Krause, KW Financial, KW Securities and LAKA (collectively, the
"Respondents") submitted an Offer of Settlement ("Offer"), which the
Commission 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 or other matters contained herein, except that
Respondents admit the jurisdiction of the Commission over them and over the
subject matter of these proceedings, Respondents consent to the issuance of
this Order Instituting Public Administrative Proceedings, Making Findings,
Imposing Cease-and-Desist Order and Imposing Remedial Sanctions ("Order")
and to the entry of the findings and to the imposition of the relief set
forth below.
III.
On the basis of this Order and the Respondents' Offer, the Commission
finds as follows:
A. FACTS
1. Respondents
Lawrence A. Krause, age 57, is a resident of Foster City, California.
Krause has been a registered representative of various broker-dealers since
1970. He has been an associated person of a registered investment adviser
since 1979. In 1982, the NASD found that Krause violated the Rules of Fair
Practice by entering into an improper compensation arrangement. He was
fined $1,000 and suspended for 15 days. In 1992, pursuant to a letter of
Acceptance, Waiver and Consent, Krause and KW Securities Corp., without
admitting or denying the existence of the alleged events or any violative
activity, and solely for the purpose of disposing of the matter, consented
to a censure and a fine of $5,000 and findings that, in connection with an
offering of limited partnership interests, they violated the NASD's Rules
of Fair Practice in that they failed to record the transactions on the
books and records of KW Securities Corp., received investor funds without
depositing them in an escrow account, and released investor funds prior to
reaching the prescribed minimum investment.
KW Financial Services, Inc. is a California corporation located in San
Francisco, California. It is owned by the Krause Family Trust and operated
by Krause.
KW Securities Corp. is a California corporation that has been
registered with the Commission as a broker-dealer since May 14, 1980. KW
Securities is an introducing broker clearing on a fully-disclosed basis.
KW Securities is wholly owned by KW Financial.
Lawrence A. Krause & Associates, Inc. is a California corporation that
has been registered with the Commission as an investment adviser since
September 28, 1979. LAKA is compensated by retainers and on an hourly fee
======END OF PAGE 2======
basis. LAKA has approximately 125 clients. LAKA is wholly owned by KW
Financial.
2. Organization Of KW Securities and LAKA.
KW Financial is the parent of, and a holding company for, KW
Securities and LAKA. Krause controls KW Financial, KW Securities and LAKA.
KW Securities and LAKA transfer the majority of their revenue to KW
Financial, which pays their payroll and overhead expenses. This is
disclosed in annual audited financial statements filed with LAKA's Form ADV
and KW Securities' Form BD. KW Financial, KW Securities and LAKA share the
same office space.
3. Partnership Offerings and Disclosure.
A portion of Krause's business consisted of forming limited
partnerships or similar entities in which KW Financial and/or Krause was
the general partner or controlling person. Krause marketed the partnership
interests through his broker dealer, KW Securities. He also recommended
the investments to some of LAKA's investment advisory clients.
Between March 1991 and March 1994, Krause, through his various
entities, raised approximately $3,497,000 from a total of 57 investors who
purchased limited partnership interests in IAB Investors, Fertility Center
Partners and Blue Grass Brass. Krause marketed the partnership interests
through his broker dealer, KW Securities. Acting through his investment
adviser, LAKA, Krause advised many of his high net worth advisory clients
to purchase the interests. Most of the investors in these partnerships
were clients of KW Securities or LAKA.
The private placement memoranda for each of the limited partnerships,
which Krause reviewed and approved, represented that investors' proceeds
would be used towards stated projects. The memoranda also represented that
a portion of the proceeds would be held in reserve. There were no
disclosures that the general partner was authorized to borrow funds from
the partnerships from time to time. Nor were there any disclosures that
could be interpreted as authorizing any such loans. In addition, none of
the partnership agreements or subscription forms signed by the individual
investors disclosed any potential borrowings by the general partner for its
own uses or the uses of KW Securities or LAKA from the partnership assets.
The represented use of investors' proceeds notwithstanding, Krause,
without disclosure, caused KW Financial to borrow monies from the
partnership proceeds that were held in reserve. KW Securities offered and
sold the partnership interests pursuant to the representations in the
offering materials, and LAKA recommended the investments to its advisory
clients based on those representations. The proceeds of the loans were
used primarily as working capital for KW Securities and LAKA. KW Financial
made some repayments during each year and repaid the balance of the
borrowings at each partnership fiscal year end. In addition, KW Financial
======END OF PAGE 3======
paid interest on the borrowings at three percent (3%) over prime.<(1)>
The maximum amounts outstanding at any one time from these three
partnerships were $22,300 in 1991, $37,000 in 1992, $113,000 in 1993 and
$164,500 in 1994. During these years, the total of borrowings and
reborrowings, all of which were repaid, was $406,800. When the Commission
staff commenced an examination of KW Securities in March 1994, Krause
immediately repaid all of the borrowings outstanding at that time.
There were no promissory notes documenting the borrowings. However,
the borrowings were properly accounted for and clearly reflected in the
accounting records for each entity. Repayments were reflected by reverse
accounting entries.
At the time of the staff's examination in March 1994, KW Financial had
outstanding $186,000 in borrowings from four partnerships. After he became
aware of the staff's interest, Krause and KW Financial immediately repaid
the $186,000 plus interest. Krause subsequently notified investors about
the borrowings in writing and apologized for his conduct.
Based on the foregoing, the Commission finds that:
1. Krause willfully violated Section 17(a) of the Securities Act,
Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and
willfully aided and abetted and caused violations of Sections 206(1) and
206(2) of the Advisers Act;
2. KW Financial violated Section 17(a) of the Securities Act,
Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder;
3. KW Securities willfully violated Section 17(a) of the Securities
Act, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated
thereunder;
4. LAKA willfully violated Section 17(a) of the Securities Act,
Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and
Sections 206(1) and 206(2) of the Advisers Act.
IV.
Based upon the foregoing, the Commission deems it appropriate and in
the public interest to impose the sanctions specified by the Respondents in
their Offer of Settlement.
Accordingly, IT IS HEREBY ORDERED that:
<(1)> There were isolated instances where interest had not
been paid. KW Financial subsequently repaid interest in those
instances on a compound basis.
======END OF PAGE 4======
A. effective immediately, Lawrence A. Krause shall cease and desist
from committing or causing violations of, and from committing or causing
any future violations of, Section 17(a) of the Securities Act, Section
10(b) of the Exchange Act, Rule 10b-5 promulgated thereunder, and Sections
206(1) and 206(2) of the Advisers Act;
B. within thirty days of the date of this Order, Lawrence A. Krause
shall pay civil penalties in the amount of $15,000 by United States postal
money order, certified check, bank cashier's check, or bank money order,
made payable to the Securities and Exchange Commission and transmitted to
the Comptroller, Securities and Exchange Commission, 450 Fifth Street,
N.W., Stop 0-3, Washington, D.C. 20549, with a cover letter that
identifies the Respondents, the name and administrative proceeding number
of this matter and with a copy of the cover letter sent simultaneously to
David B. Bayless, District Administrator, Securities and Exchange
Commission, 44 Montgomery Street, Suite 1100, San Francisco, CA 94104;
C. effective the second Monday after the date of this Order,
Lawrence A. Krause shall be suspended from association with any broker,
dealer, municipal securities dealer, investment company or investment
adviser for a period of twelve months;
D. Krause shall comply with his undertaking in his Offer of
Settlement to file with the San Francisco District Office of the
Commission, at the conclusion of the twelve month suspension ordered, an
affidavit in form satisfactory to the San Francisco District Office
demonstrating that he has complied fully with the stated suspension;
E. effective immediately, KW Financial Services, Inc. shall cease
and desist from committing or causing violations of, and from committing or
causing any future violations of, Section 17(a) of the Securities Act,
Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder;
F. KW Securities Corp. is hereby censured;
G. effective immediately, KW Securities Corp. shall cease and desist
from committing or causing violations of, and from committing or causing
any future violations of, Section 17(a) of the Securities Act, Section
10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder;
H. Lawrence A. Krause & Associates, Inc. is hereby censured;
I. effective immediately, Lawrence A. Krause & Associates, Inc.
shall cease and desist from committing or causing violations of, and from
committing or causing any future violations of, Section 17(a) of the
======END OF PAGE 5======
Securities Act, Section 10(b) of the Exchange Act, Rule 10b-5 promulgated
thereunder and Sections 206(1) and 206(2) of the Advisers Act;
By the Commission.
Jonathan G. Katz
Secretary
======END OF PAGE 6======