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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. 1961 / August 9, 2001

INVESTMENT COMPANY ACT OF 1940
Release No. 25107 / August 9, 2001

ADMINISTRATIVE PROCEEDING
File No. 3-10264


In the Matter of

Charles G. Dyer,
Hawthorne Investment Trust,
Hawthorne Associates, Inc.

Respondents.


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ORDER MAKING FINDINGS
AND IMPOSING REMEDIAL
SANCTIONS AND CEASE-AND-
DESIST ORDER PURSUANT
TO SECTIONS 9(b) AND 9(f)
OF THE INVESTMENT
COMPANY ACT OF 1940
AND SECTIONS 203(f) AND
203(k) OF THE INVESTMENT
ADVISERS ACT OF 1940

I.

On August 8, 2000, the Securities and Exchange Commission ("Commission") instituted public administrative and cease-and-desist proceedings pursuant to Sections 9(b) and 9(f) of the Investment Company Act of 1940 ("Company Act") and Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") against Respondents Charles G. Dyer ("Dyer"), Hawthorne Investment Trust ("Hawthorne") and Hawthorne Associates, Inc. ("Associates").

II.

Respondents Dyer, Hawthorne and Associates have submitted Offers of Settlement ("Offers") 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, and prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. §201.100 et. seq., and without admitting or denying the findings contained in this order, except as to the jurisdiction of the Commission over them and over the subject matter of these proceedings, which they admit, Respondents Dyer, Hawthorne and Associates consent to the entry of the findings and the imposition of the remedial sanctions and cease-and-desist orders set forth below.

III.

On the basis of this Order Making Findings and Imposing Remedial Sanctions and Cease-and-Desist Order Pursuant to Sections 9(b) and 9(f) of the Investment Company Act of 1940 and Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 and the Offers of Settlement submitted by the Respondents, the Commission finds that:

SETTLING RESPONDENTS

A. Dyer, age 61, of Manchester, Massachusetts, is the president and sole trustee of Hawthorne, the sole owner and principal of Associates, and the sole owner and principal of another affiliated investment adviser (the "Affiliated Adviser"). Dyer is not registered as an investment adviser.

B. Hawthorne (File No. 811-5982), a Massachusetts business trust, registered with the Commission as an open-end, diversified management investment company in 1989. From at least 1997, Dyer has been Hawthorne's sole trustee. Hawthorne had two portfolios, the Sea Fund, an equity portfolio, and the Bond Fund, a fixed-income portfolio. On December 8, 2000, Hawthorne filed an application with the Commission pursuant to Section 8(f) of the Company Act, seeking to withdraw its registration as an investment company. Hawthorne's application for withdrawal of its registration is pending. Upon approval of its withdrawal, Hawthorne will remain in business for the sole purpose of liquidating shareholder assets. According to its December 8, 2000 filing, Hawthorne's remaining assets under management are just $3,000.

C. Associates (File No. 801-26536) is a Delaware corporation that was an investment adviser registered with the Commission from 1986 until 2000. Associates is located in Boston, Massachusetts. Associates was the investment adviser to Hawthorne for most of the period from 1989 until January 2000. Since 1995, Associates had between two and four employees. Dyer has been the sole owner, chairman, chief executive officer and treasurer of Associates since 1986. On January 31, 2000, the Commission canceled Associates' registration for failure to file Schedule I to Form ADV.

RELEVANT ENTITY

D. The Affiliated Adviser was an investment adviser registered with the Commission from May 8, 1996 through May 28, 1999, when it withdrew its registration. It was also registered as an investment adviser with the State of Maine from February 1998 until its registration lapsed in December 1999. At the time the Affiliated Adviser filed its registration application with the State of Maine in February 1998, it reported 12 clients and $6 million in assets under management. Throughout the relevant period, Dyer was the sole owner and principal of the Affiliated Adviser. Dyer continues to act as investment adviser to the Affiliated Adviser's former clients.

FACTS

Summary

E. This matter involves Dyer's flagrant disregard of the rules and regulations governing investment advisers and investment companies. From at least 1995 through 2000, Dyer and the entities controlled by him repeatedly failed to comply with the custody, audit, books and records and reporting requirements of the Company Act and the Advisers Act. As a result of Dyer's failures, Hawthorne, formerly a registered investment company of which Dyer is the sole officer and trustee, and Associates, an investment adviser owned and controlled by Dyer, violated numerous provisions of the Acts. For example, from April 1995 through December 8, 2000, Hawthorne failed to file semi-annual reports on Form N-SAR and annual amendments to its registration statement on Form N-1A. During this period, Hawthorne also failed to transmit to its shareholders and file with the Commission semi-annual financial reports, and it entered into investment advisory contracts without a vote of approval by a board of trustees. Since 1997, Hawthorne failed to maintain a fidelity bond.

F. Beginning in 1996, Associates and the Affiliated Adviser committed numerous books and records violations, failed to file required annual amendments to Form ADV and failed to offer Part II of their Forms ADV or a disclosure document containing the information required by Part II to advisory clients on an annual basis. Associates also failed to comply with certain conditions required of investment advisers with custody of client funds. In addition, the Affiliated Adviser never provided clients with Part II of its Form ADV or a disclosure document containing the information required by Part II.

G. By this conduct, Hawthorne willfully violated the filing, contract, board of trustees, and bond requirements of the Company Act, and Associates willfully violated the books and records, filing, Form ADV delivery rules and the requirements concerning custody of client funds of the Advisers Act and the written advisory contract requirement of the Company Act. Dyer willfully aided and abetted and caused these violations as well as related violations by the Affiliated Adviser.

Background

H. Dyer, a former Eastern Airlines pilot, formed Associates in 1986. In 1989, Dyer created Hawthorne, and Associates became Hawthorne's investment adviser. Until 1991, the Eastern Airlines pension fund account was Associate's largest client, accounting for 90% of its revenues. In December 1992, the Eastern Airlines pilots' pension fund terminated its contract with Associates. Thereafter, Associates gradually lost clients. In early 1996, Dyer formed the Affiliated Adviser and transferred Associates' remaining individual clients to the Affiliated Adviser.

Hawthorne's Conduct

Forms N-1A, Annual and Semi-Annual Reports,
Forms N-SAR and Fidelity Bond

I. Rule 8b-16(a) promulgated under Section 8(b) of the Company Act requires every registered investment company to amend its registration statement (Form N-1A) within 120 days after the close of its fiscal year. Section 30(b) of the Company Act and Rule 30b1-1 thereunder require registered investment companies to file annual and semi-annual reports with the Commission not more than 60 calendar days after the close of each fiscal year and fiscal second quarter. Section 30(e) of the Company Act requires registered investment companies to transmit to shareholders semi-annual reports containing specified information. Rule 30d-1 requires registered investment companies to transmit to shareholders, at least semi-annually, a report containing financial statements, and to transmit such reports within 60 days after the close of the period for which the report was made. Rule 30b2-1 requires registered investment companies to submit copies of financial reports to the Commission within 10 days of sending such reports to shareholders.

J. Beginning in 1995, Hawthorne became deficient in meeting the filing and governance requirements of the Company Act. From 1995 through 2000, Hawthorne failed to file amendments to its registration statement (Form N-1A), failed to file copies of annual and semi-annual reports, failed to file any Forms N-SAR (required semi-annually) and failed to provide shareholders with annual and semi-annual reports and financial statements.

K. Rule 17g-1(a) promulgated under Section 17(g) of the Company Act requires that registered investment companies maintain a fidelity bond covering each officer and employee who has access to securities or funds of the investment company. On January 4, 1997, Hawthorne allowed its fidelity bond to expire, and has never renewed it.

Composition of Board of Trustees

L. Section 10(a) of the Company Act prohibits a registered investment company from having a board comprised of more than 60% interested persons of the registered investment company. Section 2(a)(19) of the Company Act defines "interested person" of an investment company to include, among other things, an affiliated person of the investment adviser to a registered investment company. From at least November 1995 through January 2000, Dyer was an affiliated person of Associates, the adviser to Hawthorne, and therefore an interested person of Hawthorne. As a result, during that period, Hawthorne's board was comprised of 100% interested persons.

Failure to Approve Investment Advisory Contract by Board of Trustees

M. Section 15(c) of the Company Act makes it unlawful for any registered investment company having a board of directors to enter into, renew or perform an investment advisory contract or agreement unless the terms of the contract or agreement have been approved by a majority of the directors who are not parties or interested persons of any party to the contract or agreement. From at least 1996 until it deregistered, Dyer was Hawthorne's sole trustee. As a result, Hawthorne's board had no disinterested members. Accordingly, during that period, Hawthorne's investment advisory contract with Associates was not approved by a majority of its board of trustees, who were not interested persons of a party to the contract.

Associates' and the Affiliated Adviser's Conduct
Brochure Rule and Filing Violations

N. Rule 204-1(a)(1) promulgated under Section 204 of the Advisers Act, requires a registered investment adviser to file with the Commission within 90 days of the end of its fiscal year a Schedule I to Form ADV, declaring eligibility for SEC registration on the basis of assets under management and certain other criteria. Rule 204-1(b) requires registered advisers to file within 90 days of the end of its fiscal year an amendment on Form ADV updating specified information, together with Schedule I.

O. In 1996, Dyer transferred Associates' clients to the Affiliated Adviser by sending them an investment advisory contract for the Affiliated Adviser. However, he failed to provide the Affiliated Adviser's new clients with a copy of Part II of the Affiliated Adviser's Form ADV or with a disclosure statement containing equivalent information. From 1996 through 1999, neither Associates nor the Affiliated Adviser filed an amendment on Form ADV, even though both advisers lost clients and the amount of assets they managed varied year to year. Neither adviser ever filed a Schedule I to Form ADV, as required annually. As a result, Associates violated Rules 204-1(b) and 204-1(a)(1).

P. From 1996 through 1999, Associates and the Affiliated Adviser failed to make an annual offer of Part II of Form ADV or an equivalent disclosure brochure to clients as required by Rule 204(3), promulgated under Section 204 of the Advisers Act. The Affiliated Adviser never provided or offered in writing to provide to clients Part II of its Form ADV or an equivalent disclosure brochure, as required by Rule 204(3).

Books and Records

Q. Section 204 of the Advisers Act and Rule 204-2(a) thereunder require registered advisers to make and keep for a prescribed period, true, accurate and current books and records relating to their business, as follows:

Advisers Act RuleBooks and Records
204-2(a)(3) a memorandum of each order given by the investment adviser for the purchase or sale of any security, containing specified information
204-2(a)(6) trial balances and financial statements
204-2(a)(7) originals of all written communications received and copies of all written communications sent by the adviser relating to any recommendation made or proposed to be made and advice given or proposed to be given
204-2(a)(12) records of personal securities transactions of advisory representatives.

R. During their respective periods of registration with the Commission, Associates and the Affiliated Adviser failed to create and maintain the following required books and records: (1) order memoranda containing required information; (2) trial balances and financial statements; (3) written communications with clients, and (4) records of advisory representatives' personal securities transactions. Associates and the Affiliated Adviser therefore violated Sections 204-2(a)(3), (6), (7) and (12) of the Advisers Act.

S. Rule 204-2(e)(1) promulgated under Section 204 of the Advisers Act requires advisers to maintain certain books and records of the adviser in an easily accessible place for a period of not less than five years, the first two years in an appropriate office of the adviser. Associates failed to maintain the books and records identified in Section III.R., above, in accordance with this rule. Therefore, Associates violated Section 204 of the Advisers Act and Rule 204-2(e)(1) thereunder.

Books and Records Relating to Custody of Client Funds

T. Section 206(4) of the Advisers Act and Rule 206(4)-2(a) thereunder make it a fraudulent, deceptive or manipulative act, practice or course of business for any registered investment adviser that has custody or possession of client funds or securities to take any action with respect to such client funds or securities, unless the adviser complies with certain conditions. The rule was designed to ensure that investment advisers with custody of client funds or securities maintain them so as to protect them from, among other things, (1) unlawful activities of the adviser or its employees, and (2) financial reverses, including insolvency, of the adviser. Under certain circumstances, an adviser is deemed to have custody of client funds if it bills a third party custodian holding client assets for its advisory fees. See Investment Advisers; Uniform Registration, Disclosure, and Reporting Requirements; Staff Interpretation, Advisers Act Rel. No. IA-1000 (Dec. 3, 1985) SEC LEXIS 213. Between 1996 and 1999, Associates billed the custodian directly for its fees without meeting the conditions set forth in Rule 206(4)-2(a), including obtaining an annual surprise audit by an independent public accountant and failing to provide clients with a quarterly itemized statement of their accounts. Therefore, Associates violated Rule 206(4)-2(a).

U. Rule 204-2(b) promulgated under Section 204 of the Advisers Act requires registered advisers that have custody or possession of client funds to maintain certain records, including client journals and ledgers. From at least 1996 though January 2000, Associates failed to maintain client journals and ledgers. Therefore, Associates, which is deemed to have custody of client funds, also violated Rule 204-2(b).

Approval of Written Advisory Contract

V. Section 15(a) of the Company Act makes it unlawful for any person to serve as the investment adviser to a registered investment company, except pursuant to a written contract. Section 15(a)(2) provides that long-term contracts must be approved annually by the board of directors or by a vote of a majority of the outstanding shareholders. From at least 1996 until January 2000, Associates functioned as Hawthorne's investment adviser without annual approval by a board of directors or by vote of a majority of its shareholders. Therefore, Associates violated Section 15(a)(2) of the Company Act.

Dyer's Responsibilities

W. As president and sole trustee of Hawthorne, Dyer was responsible for ensuring its compliance with the federal securities laws. Likewise, as the sole owner and principal of Associates, Dyer was responsible for its compliance with the federal securities laws. As the sole person responsible for directing the activities of Hawthorne and Associates, Dyer not only knew about and substantially assisted but caused each of the above violations. Therefore, Dyer aided and abetted and caused Hawthorne's and Associates' violations. Dyer was also the sole owner and principal of the Affiliated Adviser and was responsible for its compliance with the federal securities laws. Accordingly, the Affiliated Adviser's non-compliance was a direct result of Dyer's inaction. Therefore, Dyer aided and abetted and caused the Affiliated Adviser's violations.

VIOLATIONS

X. As a result of Dyer's actions:

    1. Hawthorne willfully violated Sections 8(b), 10(a), 15(c), 17(g), 30(b) and 30(e) of the Company Act and Rules 8b-16(a), 17g-1(a), 30b1-1, 30b2-1 and 30d-1 thereunder;

    2. Associates willfully violated Sections 204 and 206(4) of the Advisers Act and Rules 204-1(a), 204-1(b), 204-2(a)(3), (6), (7) and (12), 204-2(b), 204-2(e)(1), 204-3 and 206(4)-2(a) thereunder, and Section 15(a)(2) of the Company Act;

    3. Dyer willfully aided and abetted and caused Hawthorne's and Associates' violations of Sections 8(b), 10(a), 15(a)(2), 15(c), 17(g), 30(b) and 30(e) of the Company Act and Rules 8b-16(a), 17g-1(a), 30b1-1, 30b2-1 and 30d-1 thereunder; and Sections 204 and 206(4) of the Advisers Act and Rules 204-1(a), 204-1(b), 204-2(a)(3), (6), (7) and (12), 204-2(b), 204-2(e)(1), 204-3 and 206(4)-2(a) thereunder, and the Affiliated Adviser's violations of Section 204 of the Advisers Act and Rules 204-1(a), 204-1(b), 204-2(a)(3), (6), (7), and (12), and 204-3 thereunder.

IV.

In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in the Offers of Settlement of Respondents Dyer, Hawthorne and Associates.

Accordingly, IT IS ORDERED:

A. pursuant to Section 9(f) of the Company Act and Section 203(k) of the Advisers Act, that Dyer cease and desist from causing any violation and any future violation of Sections 8(b), 10(a), 15(a)(2), 15(c), 17(g), 30(b) and 30(e) of the Company Act and Rules 8b-16(a), 17g-1(a), 30b1-1, 30b2-1 and 30d-1 thereunder; and Sections 204 and 206(4) of the Advisers Act and Rules 204-1(a), 204-1(b), 204-2(a)(3), (6), (7) and (12), 204-2(b), 204-2(e)(1), 204-3 and 206(4)-2(a) thereunder;

B. pursuant to Section 9(f) of the Company Act, that Hawthorne cease and desist from committing or causing any violation and any future violation of Sections 8(b), 10(a), 15(c), 17(g), 30(b) and 30(e) of the Company Act and Rules 8b-16(a), 17g-1(a), 30b1-1, 30b2-1 and 30d-1 thereunder;

C. pursuant to Section 9(f) of the Company Act and Section 203(k) of the Advisers Act, that Associates cease and desist from committing or causing any violation and any future violation of Sections 204 and 206(4) of the Advisers Act and Rules 204-1(a), 204-1(b), 204-2(a)(3), (6), (7) and (12), 204-2(b), 204-2(e)(1), 204-3 and 206(4)-2(a) thereunder, and Section 15(a)(2) of the Company Act;

D. pursuant to Section 9(b) of the Company Act, that Dyer be, and hereby is, prohibited for a period of twelve months from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor or principal underwriter;

E. pursuant to Section 203(f) of the Advisers Act, that Dyer be, and hereby is, suspended from association with any investment adviser for a period of twelve months, effective on the second Monday following the entry of this Order;

F. pursuant to Section 203(i) of the Advisers Act, that Dyer and Associates together pay a civil penalty in the amount of $25,000 to the United States Treasury within sixty days of the date of the entry of this 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 U.S. Securities and Exchange Commission; (C) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter which identifies Dyer and Associates as 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 Juan Marcel Marcelino, District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont Street, Suite 600, Boston, MA 02108; and

G. that Dyer comply with his undertaking to provide, within thirty days after expiration of the prohibition and suspension described in paragraphs IV.B and C, above, an affidavit via certified mail to Juan Marcel Marcelino, District Administrator, Securities and Exchange Commission, Boston District Office, 73 Tremont Street, Suite 600, Boston, MA 02108, setting forth with particularity the details of his compliance with the prohibition and suspension.

By the Commission.

Jonathan G. Katz
Secretary


http://www.sec.gov/litigation/admin/ia-1961.htm


Modified: 08/10/2001