UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
INVESTMENT ADVISERS ACT OF 1940
Release No. 1644 / July 18, 1997
ADMINISTRATIVE PROCEEDING
File No.3-9348
: ORDER INSTITUTING PUBLIC
In the Matter of : PROCEEDINGS PURSUANT TO
: SECTIONS 203(e) AND 203(k)
LBS CAPITAL MANAGEMENT, INC., : OF THE INVESTMENT ADVISERS
: ACT OF 1940, MAKING
Respondent. : FINDINGS AND IMPOSING
: REMEDIAL SANCTIONS AND
: CEASE-AND-DESIST ORDER
I.
The Securities and Exchange Commission ("Commission") deems it
appropriate and in the public interest that public administrative and
cease-and-desist proceedings be instituted against LBS Capital Management,
Inc. (the "Adviser") pursuant to Sections 203(e) and 203(k) of the
Investment Advisers Act of 1940 (the "Advisers Act").
In anticipation of the institution of these proceedings, the Adviser
has submitted an Offer of Settlement (the "Offer") 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 to which the
Commission is a party, and without admitting or denying any of the findings
contained herein, except as to the jurisdiction of the Commission over it
and over the subject matter of these proceedings, which is admitted, the
Adviser consents to the entry of this Order Instituting Public Proceedings
Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of
1940, Making Findings and Imposing Remedial Sanctions and Cease-and-Desist
Order (the "Order") by the Commission.
Accordingly, IT IS HEREBY ORDERED that proceedings pursuant to
Sections 203(e) and 203(k) of the Advisers Act be, and hereby are,
instituted.
======END OF PAGE 1======
II.
On the basis of this Order and the Adviser's Offer, the Commission
finds that:
1. The Adviser is a Florida corporation with offices located in
Clearwater, Florida. The Adviser has been registered with the Commission
as an investment adviser since July 16, 1986. The Adviser is a
quantitative money management firm that uses multiple investment management
computer systems to select stocks and mutual funds and to generate trading
signals. The Adviser has approximately 5,000 clients, two-thirds of whom
are retail clients, and manages approximately $600 million in assets.
2. The Adviser advertises its services primarily through mailings to
registered representatives and principals of broker-dealer firms. In
addition, the Adviser publishes advertisements in trade journals and
similar publications, and occasionally disseminates advertisements directly
to prospective clients.
3. In 1994, the Adviser generated and developed "MAXIMIZER," a
mutual fund timing and selection service,<(1)> by using historical
financial data from the period 1983 through 1986. The Adviser then tested
the quantitative validity of MAXIMIZER by applying it retroactively to a
different period of time, from 1987 through 1993, and thereby derived
simulated performance results for MAXIMIZER for those years.<(2)> The
Adviser offered MAXIMIZER only to its retail clients and prospective retail
clients beginning in January 1994. The Adviser did not offer MAXIMIZER to
any institutional clients or prospective institutional clients.
4. During May through September 1994, the Adviser distributed a
printed advertisement to retail broker-dealers, existing retail clients,
and to prospective retail clients who requested information about
MAXIMIZER. The advertisement contained the "model" or simulated
performance results for MAXIMIZER. The advertisement disclosed in a
footnote that (a) the results were "pro-forma"; (b) "model" performance was
"no guarantee of future results"; (c) MAXIMIZER "went live" in January
<(1)> In MAXIMIZER, the Adviser invests its clients' monies in
three of 17 unaffiliated, no-load equity mutual funds based on
timing signals received from the Adviser's market timing model
called "OMNI." Generally, when OMNI registers a "sell" signal,
the fund shares are redeemed and the proceeds are reinvested into
a money market fund; when OMNI registers a "buy" signal, client
monies are reinvested equally in three equity mutual funds.
<(2)> This process is known as "out-of-sample" testing. In such
a test, a quantitatively derived model is created using
historical data from a sample period of time (also known as the
"in-sample" period). The model is then applied retroactively to
a subsequent period of time (the "out-of-sample" period) to
determine the quantitative validity of the model and to derive
simulated performance results.
1994; and (d) "actual results" were "available upon request."<(3)>
5. Under these particular facts and circumstances, the advertisement
was materially misleading because it failed to disclose with sufficient
prominence or detail that the advertised performance results of MAXIMIZER
did not represent the results of actual trading using client assets but
were achieved by means of the retroactive application of a model.
6. In concluding that the advertisement was materially misleading,
the Commission also has considered the fact that the advertisement was
distributed by the Adviser to retail clients and prospective retail clients
without regard for their investment sophistication or acumen. As the
Commission previously has stated:
In appraising advertisements [by investment advisers] such as
those now before us we do not look only to the effect that they
might have had on careful and analytical persons. We also look
to their possible impact on those unskilled and unsophisticated
in investment matters.
In the Matter of Spear & Staff, Inc., Investment Advisers Act Release No.
188 (March 25, 1965); see also SEC v. C.R. Richmond & Co., 565 F.2d 1101,
1104 (9th Cir. 1977) (an adviser's advertising "must be measured from the
viewpoint of a person unskilled and unsophisticated in investment
matters"). Thus, although the advertisement disclosed in a footnote that
the advertised results were "pro-forma" and that "actual results" were
available upon request, that disclosure, under the facts and circumstances
of this case, was inadequate to (a) convey that the advertised performance
results of MAXIMIZER were achieved by means of the retroactive application
of a model, or (b) dispel the misleading suggestion of the advertisement
that the advertised performance results represented the results of actual
trading. Cf. In the Matter of Jesse Rosenblum, Investment Advisers Act
Release No. 913 (May 17, 1984) (an investment adviser's advertisement that
contained materially misleading statements was "not cured by the
disclaimers buried in the [smaller print] text [of the advertisement]").
7. By reason of the foregoing, the Adviser willfully violated,
committed, or caused the violation of Section 206(4) of the Advisers Act
and Rule 206(4)-1(a)(5) thereunder, in that, by use of the mails or any
means or instrumentality of interstate commerce, directly or indirectly,
the Adviser engaged in acts, practices, or courses of business which were
fraudulent, deceptive or manipulative by, directly or indirectly,
publishing, circulating, or distributing an advertisement which was
misleading.
III.
<(3)> The advertisement stated that the performance results
of MAXIMIZER were "calculated on a time-weighted basis with
reinvestment of dividends and capital gains plus returns from
cash."
======END OF PAGE 3======
On the basis of the foregoing, the Commission deems it appropriate and
in the public interest to impose the sanctions and cease and desist order
specified in the Offer submitted by the Adviser, and to order the Adviser
to comply with its undertakings contained in the Offer. In determining to
accept the Adviser's Offer, the Commission considered remedial acts
undertaken and to be undertaken by the Adviser and cooperation afforded the
Commission staff.
ACCORDINGLY, IT IS HEREBY ORDERED THAT:
1. Pursuant to Section 203(k) of the Advisers Act, the Adviser shall
cease and desist from committing or causing any violation or future
violation of Section 206(4) of the Advisers Act and Rule 206(4)-1(a)(5)
thereunder;
2. Pursuant to Section 203(i) of the Advisers Act, the Adviser
shall, within fifteen (15) days from the entry of this Order, pay a civil
money penalty in the amount of twenty-five thousand dollars ($25,000) to
the United States Treasury. 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) mailed to the Comptroller, Securities and Exchange Commission, Mail
Stop 0-3, 450 Fifth Street, N.W., Washington, D.C. 20549; and (d) submitted
under cover letter that specifies LBS Capital Management, Inc. as the
Respondent in these proceedings, the file number of these proceedings, a
copy of which cover letter and money order or check shall be sent to
Russell C. Weigel III, Branch Chief, Securities and Exchange Commission,
Southeast Regional Office, 1401 Brickell Avenue, Suite 200, Miami, Florida
33131;
3. The Adviser shall comply with its undertaking to retain an
independent consultant or attorney familiar with the Advisers Act
("Consultant"), who is not unacceptable to the staff of the Commission, to
review, for a period of two years following the entry of this Order, all of
the Adviser's performance advertisements, prior to their publication,
circulation or distribution, for compliance with the Advisers Act;
4. The Adviser shall comply with its undertaking to obtain from the
Consultant, within 60 days from the date of this Order, such
recommendations for the implementation, modification or retention of such
practices and procedures as the Consultant shall deem appropriate to ensure
future compliance with the provisions of
======END OF PAGE 4======
Section 206(4) of the Advisers Act and Rule 206(4)-1(a)(5) thereunder; and
5. The Adviser shall comply with its undertaking to implement and
maintain all such practices and procedures recommended by the Consultant,
provided that if the Adviser thereafter determines to modify such practices
and procedures, it may do so only if the Consultant first determines that
such modifications are designed to ensure the Adviser's compliance with
Section 206(4) of the Advisers Act and Rule 206(4)-1(a)(5) thereunder.
By the Commission.
Jonathan G. Katz
Secretary
======END OF PAGE 5======