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======