UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION ADMINISTRATIVE PROCEEDING File No. 3-9532 SECURITIES ACT OF 1933 Release No. 7496 / January 20, 1998 SECURITIES EXCHANGE ACT OF 1934 Release No. 39560 / January 20, 1998 INVESTMENT ADVISERS ACT OF 1940 Release No. 1695 / January 20, 1998 INVESTMENT COMPANY ACT OF 1940 Release No. 23003 / January 20, 1998 : ORDER INSTITUTING PUBLIC In the Matter of: : ADMINISTRATIVE AND CEASE-AND- : DESIST PROCEEDINGS PURSUANT TO BRIAN D. SCHRAUGER and : SECTION 8A OF THE SECURITIES QUESTOR GROUP, INC. : ACT OF 1933, SECTIONS 15(b)(6) : AND 21C OF THE SECURITIES : EXCHANGE ACT OF 1934, SECTIONS : 203(e), (f), AND (k) OF THE : INVESTMENT ADVISERS ACT OF 1940 Respondents : AND SECTION 9(b) OF THE : INVESTMENT COMPANY ACT OF 1940, : MAKING FINDINGS AND IMPOSING : REMEDIAL SANCTIONS AND A CEASE- : AND-DESIST ORDER I. The Securities and Exchange Commission (the "Commission") deems it appropriate and in the public interest to institute public administrative and cease-and-desist proceedings 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(e), (f), and (k) of the Investment Advisers Act of 1940 ("Advisers Act") and Section 9(b) of the Investment Company Act of 1940 ("Company Act") against Brian D. Schrauger ("Schrauger") and Questor Group, Inc. ("Questor") (collectively, "Respondents"). ======END OF PAGE 1====== II. In anticipation of the institution of these proceedings, Respondents have submitted an Offer of Settlement ("Offer") to the Commission, 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 in which the Commission is a party, without admitting or denying the findings, except those contained in paragraphs III. A. and B. and the jurisdiction of the Commission over them and the matters set forth in this Order, which they admit, Respondents consent to the institution of public administrative and cease-and-desist proceedings, to the entry of the findings and the imposition of remedial sanctions and a cease-and-desist order as set forth below. Accordingly, IT IS ORDERED that administrative and cease and desist proceedings be, and hereby are, instituted. III. On the basis of this Order and the Offer submitted by Respondents, the Commission finds<(1)> that: A. Questor (File No. 801-28426), a Texas corporation with its principal place of business in Duncanville, Texas, has been registered with the Commission as an investment adviser since March 20, 1987. Questor is wholly-owned and operated by Schrauger. Questor provided non-discretionary investment advisory services, including asset management and portfolio planning, to approximately 28 clients, and had approximately $25 million in assets under management; B. Schrauger, age 41, and a resident of Duncanville, Texas, is the sole shareholder, president and sole director of Questor. Until April 30, 1997, he was also a registered representative associated with a Dallas based broker-dealer; C. From at least 1992 through 1995, Schrauger and Questor willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, in connection with conduct described in paragraphs E. through G. below; and Section 207 of the Advisers Act with conduct described in paragraph K. below; D. Additionally, Questor, willfully aided and abetted by Schrauger, willfully violated Sections 206(1) and 206(2) of the Advisers Act by engaging in conduct described in paragraphs E. through H. below; and Sections 204 and 206(4) of the Advisers Act and Rules 204-1(b), 204-2(a)(3) <(1)> The findings herein are made pursuant to Respondents' Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. ======END OF PAGE 2====== and (12), 204-3 and 206(4)-2 thereunder, by engaging in conduct described in paragraphs I. through M. below; E. Questor and Schrauger made misrepresentations and omitted to state material facts to certain clients regarding the investment strategy employed by Questor, including, but not limited to: 1. Questor utilized a conservative investment strategy, when in fact, many of the investments recommended to clients were high risk, speculative investments; 2. Questor's investment strategy conservatively controlled investment risk by insuring diversification between three investment categories and by diversifying the investment portfolio within each category. However, several clients' portfolios were not diversified between or within the categories; and 3. Schrauger misclassified high risk securities as cash equivalents and classified the same securities differently for different clients in order to give the appearance of conformity with Questor's purported investment strategy. F. Questor and Schrauger misrepresented to clients and prospective clients Questor's primary source of income including, but not limited to: 1. Questor was a fee-based oriented investment adviser, when in fact, it rarely ever collected fees. The majority of Questor's revenues were derived from commissions generated from Schrauger's execution of his recommendations to Questor's clients through his associated broker-dealer; and 2. Questor, due to its fee-based orientation, gave preference to commission-free investment option, when in fact, most of the products recommended by Questor were commission bearing products offered by Schrauger's associated broker-dealer. G. Questor and Schrauger made unsuitable investment recommendations to Questor's clients. Schrauger's investment recommendations were primarily limited to investments in high risk privately placed debentures and limited partnership interests. Schrauger generally recommended the same investments to clients with limited funds and low risk tolerance as he did to clients with greater resources and higher risk tolerance; H. Questor, aided and abetted by Schrauger, breached the fiduciary duty owed to clients by failing to disclose numerous conflicts of interests including, but not limited to, the fact that Schrauger acted as a paid consultant to issuers whose securities were recommended to Questor's clients. In one instance, Schrauger entered into a consulting agreement, pursuant to which he received $18,500 in fees, with an issuer whose securities he had previously recommended, and continued to recommend, to clients, without disclosing that he was a paid consultant. ======END OF PAGE 3====== I. Questor, aided and abetted by Schrauger, violated Section 206(4) of the Advisers Act and Rule 206(4)-(2) thereunder, by failing to maintain proper custody of client funds. Although Questor had custody of client assets, it failed to obtain annual surprise audits of the funds in its custody, and never filed Forms ADV-E, as required by the Advisers Act. Schrauger was responsible for arranging for such surprise audits and for filing Forms ADV-E and failed to do so; J. Questor, aided and abetted by Schrauger, violated Section 204 of the Advisers Act and Rule 204-1(b) thereunder, by failing to amend its Form ADV to correct information that had become inaccurate. Questor's Form ADV and Forms ADV-S falsely stated that the firm did not have custody of client funds and failed to include audited balance sheets. Questor failed to amend its Form ADV to disclose its custody of client funds; K. Questor and Schrauger violated Section 207 of the Advisers Act by making false filings with the Commission. Questor's Form ADV and Forms ADV-S failed to disclose that Schrauger received certain compensation from issuers whose securities were recommended to Questor's clients as a result of clients having purchased certain securities recommended by Schrauger. Questor also failed to disclose the conflicts of interest discussed herein in Part II of its Form ADV. Schrauger prepared each of Questor's filings with the Commission; L. Questor, aided and abetted by Schrauger, violated Section 204 of the Advisers Act and Rule 204-3 thereunder, by failing to provide clients with Part II of its Form ADV or a written document containing the information required by Part II of Form ADV. Questor provided clients with its own disclosure document, which failed to disclose the conflicts of interest discussed herein. Schrauger was responsible for preparing and disseminating Part II of Questor's Form ADV or a written document containing the same information; M. Questor, aided and abetted by Schrauger, violated Section 204 of the Advisers Act and Rules 204-2(a)(3) and (a)(12) thereunder, by failing to maintain several books and records required by the Advisers Act including, but not limited to, order memoranda, personal securities transactions records and brochure delivery records. Schrauger was responsible for maintaining, preparing and updating such books and records; and N. Respondents' have submitted sworn financial statements and other evidence and have asserted their financial inability to pay civil penalties. The Commission has reviewed the sworn financial statements and other evidence provided by Respondents and has determined that Respondents do not have the financial ability to pay civil penalties. IV. In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions set forth in the Offer submitted by Respondents. ======END OF PAGE 4====== Accordingly, IT IS ORDERED THAT: A. Brian D. Schrauger be, and hereby is, barred from association with any broker, dealer, municipal securities dealer, investment adviser or investment company, with the right to reapply for association after three years from the date of the Order to the appropriate self-regulatory organization, or if there is none, to the Commission; B. the registration of Questor Group, Inc. as an investment adviser be, and hereby is, revoked; C. pursuant to Section 8A of the Securities Act, Section 21C of the Exchange Act, and Section 203(k) of the Advisers Act, Respondents cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 204, 206(1), 206(2), 206(4) and 207 of the Advisers Act and Rules 204-1(b), 204-2(a)(3) and (12), 204-3 and 206(4)-2 thereunder; and D. the Division of Enforcement ("Division") may at any time following the entry of the Order, petition the Commission to: (1) reopen this matter to consider whether Respondents provided accurate and complete financial information at the time such representations were made; (2) determine the amount of civil penalties to be imposed; and (3) seek any additional remedies that the Commission would be authorized to impose in these proceedings if Respondents' Offer had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by Respondents was fraudulent, misleading, inaccurate or incomplete in any material respect, the amount of civil penalties to be imposed and whether any additional remedies should be imposed. Respondents may not, by way of defense to any such petition, contest the findings in the Order or the Commission's authority to impose any additional remedies that were available in the original proceedings. By the Commission. Jonathan G. Katz Secretary ======END OF PAGE 5======