UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 40234 /July 17, 1998 INVESTMENT ADVISERS ACT OF 1940 Release No. 1734 / July 17, 1998 ADMINISTRATIVE PROCEEDING File No. 3-9652 : ORDER INSTITUTING PROCEEDINGS, : MAKING FINDINGS, IMPOSING In the Matter of : REMEDIAL SANCTIONS AND ORDERING Brack Stanford and : RESPONDENTS TO CEASE AND Associates, Inc. and : DESIST PURSUANT TO SECTIONS Brack Stanford, : 15(b) AND 19(h) OF THE : SECURITIES EXCHANGE ACT OF Respondents. : 1934 AND SECTIONS 203(e), : 203(f) AND 203(k) OF THE : INVESTMENT ADVISERS ACT OF 1940 : I. The Securities and Exchange Commission's (Commission) deems it appropriate and in the public interest that public proceedings be, and hereby are, instituted, pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 (Exchange Act) and Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940 (Advisers Act) against Brack Stanford and Associates, Inc. (BSA) and Brack Stanford (Stanford). In anticipation of the institution of these proceedings, BSA and Stanford have submitted an Offer of Settlement (Offer) which the Commission has determined to accept. Solely for the purposes of this proceeding and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained herein, except those contained in paragraphs II. a. and b. below, which are admitted, BSA and Stanford consent to the issuance of this Order Instituting Proceedings, Making Findings, Imposing Remedial Sanctions, and Ordering Respondents to Cease and Desist (Order). II. On the basis of this Order and the Offer submitted by BSA and Stanford, the Commission makes the following findings[1]: Respondents a. BSA, an Illinois corporation headquartered in Northbrook, Illinois, was incorporated in 1987 and has been registered with the Commission as an investment adviser from December 1989 through the present. During the relevant period, BSA operated two investment advisory programs: "Galaxy of Funds" (GOF) and "Galaxy of Funds II" (GOF II). GOF and GOF II are discretionary account programs in which clients' assets are invested exclusively in shares of mutual funds. b. Stanford, age 65 and a resident of Northbrook, Illinois, has been the president of BSA since its formation and has operated GOF and GOF II since their inception. Stanford owns 75% of the shares of BSA and is also the president of Stanford Securities, Inc., a broker-dealer registered with the Commission and headquartered in Northbrook, Illinois. Related Entities c. GOF, the first of BSA's two mutual fund investment advisory programs, was established in late 1988. During the relevant period, GOF consisted of approximately 235 clients in at least 10 states with approximately $14.5 million in assets under management. GOF was segmented in accordance with the following five investment strategies: Established Growth, Flexible Growth, Balanced Growth, Global Growth, and High Grade Income. GOF clients were required to choose one of these strategies. Each strategy had separate and distinct investment objectives and invested in varying mutual funds depending on clients' preferences and needs. In 1994, BSA ceased offering GOF to new investors. d. GOF II, the second of BSA's two mutual fund investment advisory programs, was established in 1994 and was structured and operated in a manner identical to GOF. During the relevant period, GOF II consisted of approximately 14 clients with close to $1 million in assets under management. GOF II was segmented in accordance with the following three investment strategies: Domestic Growth, Growth and Income, and Global Growth. In 1995, BSA ceased offering GOF II to new investors. Facts e. Since its registration with the Commission as an investment adviser in 1989, BSA has been controlled and operated by its president, Stanford. Furthermore, Stanford has managed GOF and GOF II since their creation and was also responsible for marketing GOF and GOF II. During the relevant period, GOF clients were solicited by broker-dealer solicitors with whom BSA had solicitation agreements. GOF II clients were solicited by both broker-dealer solicitors and by BSA, through Stanford. BSA thereafter entered into advisory contracts with each GOF and GOF II client. f. From in or about 1989 through early 1995, BSA, through Stanford, disseminated false and misleading performance data in advertisements relating to GOF and GOF II. Specifically, these BSA advertisements contained GOF and GOF II performance data for periods prior to either program's existence. BSA also advertised 1990 GOF performance figures that were between 4 to 7 percentage points higher than GOF's actual performance. In addition, although BSA used model portfolio returns in both GOF and GOF II performance advertisements, BSA failed to disclose that the advertised returns were model portfolio returns and did not represent the results of actual trading using client assets. As a result, such advertising did not reflect the impact that economic and market factors could have had on BSA's investment decisions if BSA had actually been managing clients' assets. Moreover, BSA misrepresented its inception date in GOF II advertisements. g. Furthermore, GOF II advertising contained improper testimonials from unnamed persons who claimed to have benefited from BSA's services in the GOF II program. Finally, BSA failed to make and keep complete records to support GOF and GOF II model account performance which appeared in BSA advertisements. Violations h. During the relevant period, BSA willfully violated, and Stanford caused and willfully aided and abetted BSA's violations of, Sections 206(1) and 206(2) of the Adviser's Act by making use of the mails or of the means or instrumentalities of interstate commerce in connection with BSA's business as an investment adviser to, directly or indirectly: employ devices, schemes or artifices to defraud clients or prospective clients; or engage in transactions, practices or courses of business which operated as a fraud or deceit upon clients or prospective clients. As part of the aforesaid conduct, BSA, through Stanford, misrepresented and omitted to state material facts to clients and prospective clients concerning, among other things: performance data in advertisements regarding GOF and GOF II for periods prior to their operation; the use of model portfolio returns in GOF and GOF II performance advertisements; GOF's 1990 performance results shown in BSA's marketing materials and newsletters and BSA's inception date in GOF II marketing materials. i. During the relevant period, BSA willfully violated, and Stanford caused and willfully aided and abetted BSA's violations of, Section 206(4) of the Advisers Act and Rule 206(4)-1(a)(1) thereunder by making use of the mails or of the means or instrumentalities of interstate commerce to, directly or indirectly, engage in acts, practices or courses of business which were fraudulent, deceptive or manipulative by publishing, circulating or distributing advertisements which referred, directly or indirectly, to testimonials concerning BSA or concerning advice, analyses, reports or other services rendered by BSA. As part of the aforesaid conduct, BSA, through Stanford, used testimonials from unnamed persons who claimed to have benefited from BSA's services in the GOF II program. j. During the relevant period, BSA willfully violated, and Stanford caused and willfully aided and abetted BSA's violations of, Section 206(4) of the Advisers Act and Rule 206(4)-1(a)(5) thereunder, by making use of the mails or of the means or instrumentalities of interstate commerce to, directly or indirectly, engage in acts, practices or courses of business which were fraudulent, deceptive or manipulative by publishing, circulating or distributing advertisements which contained untrue statements of material fact, or which were otherwise false or misleading. As part of the aforesaid conduct, Stanford and BSA engaged in the acts and practices described above in Sections II(e), (f) and (h). k. During the relevant period, BSA willfully violated, and Stanford caused and willfully aided and abetted BSA's violations of, Section 204 of the Advisers Act and Rule 204- 2(a)(16) thereunder by making use of the mails or of the means or instrumentalities of interstate commerce in connection with BSA's business as an investment adviser while failing to make or keep true, accurate or current books or records relating to BSA's investment adviser business. Specifically, accounts, books, internal working papers or other records or documents that were necessary to form the basis for and demonstrate the calculation of the performance or rates of return of any or all managed accounts or securities recommendations in notices, circulars, advertisements, newspaper articles, investment letters, bulletins, or other communications that BSA circulated or distributed to ten or more persons as required by Rule 204-2(a)(16), including GOF and GOF II model portfolio performance that appeared in BSA's advertisements, were not maintained. III. In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions that are set forth in the Offer submitted by BSA and Stanford. Accordingly, IT IS ORDERED that: a. BSA and Stanford are censured; b. Pursuant to Section 203(k) of the Advisers Act, BSA 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)(16), 206(4)-1(a)(1) and 206(4)-1(a)(5) thereunder; c. Pursuant to Section 203(k) of the Advisers Act, Stanford 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)(16), 206(4)- 1(a)(1) and 206(4)-1(a)(5) thereunder; d. Pursuant to Section 203(i) of the Advisers Act, BSA pay a civil penalty of $25,000 to the United States Treasury within 30 days 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 Securities and Exchange Commission; (c) mailed to the Comptroller, Securities and Exchange Commission, 6432 General Green Way, Suite B, Mail Stop 0-3, Alexandria, Virginia 22312; and (d) submitted under cover letter which identifies BSA as one of the respondents in these proceedings, as well as the Commission's case number. A copy of said cover letter and money order or check shall be sent to Mary E. Keefe, Regional Director, Midwest Regional Office, Securities Exchange Commission, 500 W. Madison, Suite 1400, Chicago, Illinois 60661. e. Pursuant to Section 21B of the Exchange Act and Section 203(i) of the Advisers Act, Stanford pay a civil penalty of $15,000 to the United States Treasury within 30 days 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 Securities and Exchange Commission; (c) mailed to the Comptroller, Securities and Exchange Commission, 6432 General Green Way, Suite B, Mail Stop 0-3, Alexandria, Virginia 22312; and (d) submitted under cover letter which identifies Brack Stanford as one of the respondents in these proceedings, as well as the Commission's case number. A copy of said cover letter and money order or check shall be sent to Mary E. Keefe, Regional Director, Midwest Regional Office, Securities Exchange Commission, 500 W. Madison, Suite 1400, Chicago, Illinois 60661. f. BSA and Stanford comply with the following undertakings: (1) Within 30 days of the date of the Order, BSA shall retain, at its own expense, an independent consultant, not unacceptable to the Commission's staff, to: (a) conduct a comprehensive review of BSA's policies, practices, and procedures to determine the adequacy of such policies, practices, and procedures to reasonably detect and prevent violations of the federal securities laws; (b) provide training to relevant BSA employees designed reasonably to effect the understanding of, and compliance with, the implemented policies and procedures; (c) within 90 days of the entry of the Order, prepare a written recommendation of policies, practices, and procedures, or amendments thereto, designed reasonably to prevent and detect, insofar as practicable and deemed necessary, future violations of the federal securities laws, with a copy of such recommendation to be served simultaneously on the Commission's Midwest Regional Office (MRO) and BSA; (i) BSA shall adopt, implement, and maintain all policies, practices and procedures recommended by the consultant within 30 days of the receipt of the recommendation; provided, however, that as to any recommendation of the consultant which BSA determines is, in whole or in part, unduly burdensome, BSA may suggest an alternative procedure designed to achieve the same objective or purpose as that of the recommendation of the consultant. BSA shall set forth in an affidavit to be submitted to the consultant and the MRO such alternative procedure, and a description of how such alternative procedure achieves the same objective or purpose as the consultant's original recommendation. The consultant shall evaluate the alternative procedure proposed by BSA. However, BSA will abide by the consultant's final determination with regard thereto and adopt those recommendations which the consultant ultimately determines are appropriate. (d) Within 120 days of the issuance of the Order, BSA shall file an affidavit with the MRO setting forth the details of BSA's compliance with these undertakings and implementation of the consultant's recommendations pursuant to paragraphs (a) through (c)(i) above. (2) One year after the entry of the Order, the independent consultant shall conduct a review of BSA's policies, practices and procedures to assure continued compliance with the Order and the undertakings agreed to herein. As a result of such review, the consultant may recommend additional policies, practices and procedures or revisions to existing policies, practices and procedures, to achieve continued compliance with the objectives outlined in paragraphs (1) (a), (b) and (c) above. A report of the consultant's findings of the one year review shall then be forwarded to the MRO. With respect to any additional recommendations, BSA may suggest an alternative procedure designed to achieve the same objective or purpose as that of the recommendation of the consultant. BSA shall set forth in an affidavit to be submitted to the consultant and the MRO such alternative procedure, and a description of how such alternative procedure achieves the same objective or purpose as the consultant's original recommendation. The consultant shall evaluate the alternative procedure proposed by BSA. However, BSA will abide by the consultant's final determination with regard thereto and adopt those recommendations which the consultant ultimately determines are appropriate; (3) For a period of two years from the entry of the Order, the independent consultant shall review all advertisements and all supporting books and records made and maintained or required to be made and maintained under the Advisers Act. The independent consultant shall monitor BSA's compliance with the advertising and books and records provisions of the Advisers Act and make recommendations designed to correct any non- compliance. BSA may suggest an alternative procedure designed to achieve the same objective or purpose as that of the recommendation of the consultant. BSA shall set forth in an affidavit to be submitted to the consultant and the MRO such alternative procedure, and a description of how such alternative procedure achieves the same objective or purpose as the consultant's original recommendation. The consultant shall evaluate the alternative procedure proposed by BSA. However, BSA will abide by the consultant's final determination with regard thereto and adopt those recommendations which the consultant ultimately determines are appropriate. (4) BSA may apply to the Commission's staff for an extension of the deadlines described above before their expiration, and upon a showing of good cause by BSA, the Commission's staff may, in its sole discretion, grant such extensions for whatever time period it deems appropriate. (5) To ensure the independence of the independent consultant, BSA: (a) shall not have the authority to terminate the independent consultant without the prior written approval of the Commission's staff; (b) shall compensate the independent consultant and persons engaged to assist the independent consultant for services rendered pursuant to the Order at their reasonable and customary rates. (6) For the period of the engagement and for a period of two years from the completion of the engagement, the independent consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with BSA or Stanford, or any of their present or former affiliates, directors, officers, employees or agents acting in their capacity as such. Any firm with which the independent consultant is affiliated or of which he is a member, and any person engaged to assist the independent consultant in performance of his duties under this Order shall not, without prior written consent of the Commission staff, enter into any employment, consultant, attorney-client, auditing or other professional relationship with BSA or Stanford, or any of their present or former affiliates directors, officers, employees, or agents in their capacity as such for the period of the engagement and for a period of two years after the engagement. (7) BSA shall mail a copy of this Order, together with a cover letter, in a form acceptable to the staff of the Commission, to each of its existing GOF and GOF II clients by certified mail, return receipt requested, within thirty (30) days from the date of this Order. From the effective date of this Order until the expiration of twelve (12) months, BSA shall provide a copy of this Order to all prospective GOF and GOF II advisory clients not less than forty-eight (48) hours prior to entering into any written or oral investment advisory contract (or no later than the time entering into such contract, if the client has the right to terminate the contract without penalty within five (5) business days after entering into the contract). Also, within thirty (30) days from the date of this Order, BSA shall execute and deliver to the staff of the Commission's Midwest Regional Office an affidavit that it has provided this Order to existing GOF and GOF II clients in accordance with this Order's terms. Finally, within thirteen (13) months from the date of this Order, BSA shall execute and deliver to the staff of the Commission's Midwest Regional Office an affidavit that it has provided this Order to its prospective GOF and GOF II clients in accordance with this Order's terms. By the Commission. Jonathan G. Katz Secretary **FOOTNOTES** [1]: The findings herein are made pursuant to BSA's and Stanford's offer of settlement and are not binding on any other person or entity in this or any other proceeding.