UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION INVESTMENT ADVISERS ACT OF 1940 Release No. 1764 / September 29, 1998 ADMINISTRATIVE PROCEEDING File No. 3-9743 ___________________________________ : In the Matter of : ORDER INSTITUTING PUBLIC : PROCEEDINGS, MAKING : FINDINGS AND IMPOSING PROFITEK, INC. and : REMEDIAL SANCTIONS AND EDWARD G. SMITH , : CEASE-AND-DESIST ORDER : Respondents. : ___________________________________: I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that administrative proceedings be instituted pursuant to Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") against Edward G. Smith ("Smith") and Profitek, Inc. ("Profitek"). In anticipation of the institution of these proceedings, Smith and Profitek have submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purposes of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, Respondents, by their Offer, consent, without admitting or denying the findings contained herein, except that they admit that the Commission has jurisdiction over them and over the subject matter of these proceedings and the findings contained in paragraphs II.1 and II.2 of this Order, to the entry of this Order Instituting Public Proceedings, Making Findings and Imposing Remedial Sanctions and Cease-and-Desist Order ("Order"). Accordingly, IT IS ORDERED that proceedings against Respondents be, and hereby are, instituted. II. On the basis of this Order and the Offer, the Commission finds that: 1. Profitek, an Idaho corporation, is located in Charlottesville, Virginia. Profitek was registered with the Commission as an investment adviser from December 31, 1984 until July 8, 1997, when it deregistered pursuant to Section 203A of the Advisers Act. Profitek is currently registered with the Commonwealth of Virginia as an investment adviser. 2. Smith, approximately 70 years old, is the president, senior portfolio manager and co-owner of Profitek. During the relevant time period, Smith controlled every aspect of Profitek's operations. 3. From at least October 1994 through January 1996, Profitek, through Smith, directly or indirectly distributed a series of materially false and misleading advertisements, which significantly overstated Profitek's actual investment performance as well as its total assets under management. These advertisements were part of a fraudulent scheme intended to attract new clients and retain existing clients by creating the illusion that Profitek was a substantial firm which earned superior returns for its clients. In reality, Profitek was a modest firm which provided only modest returns, or even losses, for its clients. The advertisements appeared in three forms: (1) on-line data published by The Mobius Group ("Mobius") and The Concord Advisory Group, Ltd. ("Concord"), two independent reporting services; (2) Profitek marketing brochures and sales literature; and (3) a November 1994 article published in a Virginia newspaper called The Daily Progress. 4. As part of the aforementioned conduct, Profitek, through Smith, engaged in the following acts: a. Smith completed and submitted a series of questionnaires to Mobius and Concord. In these questionnaires, Smith repeatedly overstated the actual investment returns that Profitek obtained for its advisory clients, in some instances, by as much as 26 percentage points. Smith also represented to Concord and Mobius that Profitek had approximately $38 million in assets under management, when in fact it had no more than $10 million in assets under management. The data from these questionnaires, which were signed by Smith, was subsequently incorporated in Mobius' and Concord's proprietary databases, which were then made available to subscribers nationwide. Several broker- dealers, who relied upon these databases as an accurate source of information, referred clients to Profitek based on these reported returns. b. Smith incorporated performance data of Profitek model portfolios ("models") in Profitek's marketing brochures and sales literature, which were shown to actual and prospective clients. Such brochures and sales literature failed to disclose that the models were based on hypothetical stock transactions which bore no resemblance to the actual performance of Profitek client accounts. c. Smith provided false and misleading information to a newspaper called The Daily Progress. The information was subsequently reported in an article published in the newspaper and circulated in November 1994. The article falsely implied that a selection of Profitek client accounts had achieved a 22.1 percent gain on their investments. In fact, rather than gains, all Profitek client accounts had experienced losses during the period. Smith knew that the misleading information he had provided to the newspaper likely would be published in a periodical distributed to clients and prospective clients. See In the Matter of C&G Asset Management, Inc., Cartwright & Goodwin, Inc. and Stephen R. Goodwin, Advisers Act Rel. No. 1536 (Nov. 9, 1995)(section III). 5. Smith knew, or was reckless in not knowing, that the information contained in the aforementioned advertisements was materially false and misleading or omitted to disclose material facts to clients and prospective clients. 6. From at least July 1994 through July 1996, Profitek failed to maintain or make available for examination by the staff many of the most basic records required of investment advisers, including: (i) general and auxiliary ledgers; (ii) trial balances and financial statements; (iii) records reflecting distribution of disclosure statements to clients and prospective clients; (iv) documents reflecting securities transactions by employees; and (v) records or documents necessary to form the basis for or demonstrate the calculation of the performance of the models. Smith, as Profitek's control person, was responsible for ensuring that such records were maintained and made available for the staff's examination. 7. Based on the above-described conduct, Profitek willfully violated : a. Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-1(a)(5) thereunder by, among other things, through the use of the mails or means or instrumentalities of interstate commerce, directly or indirectly, (i) employing devices, schemes and artifices to defraud clients and prospective clients; and (ii) engaging in transactions, practices, and courses of business which operated as a fraud or deceit upon clients and prospective clients; (iii) engaging in acts, practices and courses or business which were fraudulent, deceptive and manipulative; and (iv) publishing, circulating and distributing advertisements which contained untrue statements of material fact and were otherwise false and misleading; and b. Section 204 of the Advisers Act and Rules 204-2(a)(2), (6), (12), (14) and (16) thereunder by, among other things, using the mails or any means or instrumentality of interstate commerce in connection with its business as an investment adviser and failing to create, maintain and/or make available for inspection, by representatives of the Commission, the records listed in subparagraph II.6. 8. Based on the above-described conduct, Smith willfully aided and abetted and caused Profitek's violations of Sections 204, 206(1), 206(2), and 206(4) of the Advisers Act and Rules 204-2(a)(2), (6), (12), (14) and (16) and 206(4)-1(a)(5) thereunder. III. On the basis of the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by Profitek and Smith and impose the sanctions specified therein. Accordingly, IT IS HEREBY ORDERED that: 1. Profitek and Smith shall cease and desist from committing or causing any violation and any future violation of Sections 204, 206(1), 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(2), (6), (12), (14) and (16) and 206(4)-1(a)(5) thereunder; 2. Profitek be, and hereby is, censured; 3. Smith be, and hereby is, barred from association with any investment adviser; 4. Profitek and Smith shall pay, jointly and severally, a civil penalty in the amount of $5,000 to be paid to the United States Treasury within thirty days of the entry of the Order. 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 Comptroller, Securities and Exchange Commission, Mail Stop 0-3, Operations Center, 6432 General Green Way, Alexandria, VA 22312; and (d) submitted under cover letter which identifies Profitek and Smith as Respondents in these proceedings, and the Commission's file number in these proceedings, a copy of which cover letter and money order or check shall be simultaneously sent to Ronald C. Long, Securities and Exchange Commission, The Curtis Center, Suite 1120E., 601 Walnut St., Philadelphia, PA 19106. By the Commission. Jonathan G. Katz Secretary