UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 38754 / June 23, 1997 INVESTMENT ADVISERS ACT OF 1940 Release No. 1640 / June 23, 1997 INVESTMENT COMPANY ACT OF 1940 Release No. 22723 / June 23, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9335 In the Matter of GEORGE W. MEYERS, GREGORY W. MEYERS, TAX EXEMPT FUND, MUNICIPAL FUND, and FOX, REUSCH & CO., INC., Respondents ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTIONS 15(b), 19(h) and 21C OF THE SECURITIES EXCHANGE ACT OF 1934, SECTION 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940 AND SECTION 9(f) OF THE INVESTMENT COMPANY ACT OF 1940, MAKING FINDINGS, IMPOSING REMEDIAL SANCTIONS AND ORDERING RESPONDENTS TO CEASE AND DESIST I. The Commission deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be instituted pursuant to Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"), Section 203(k) of the Investment Advisers Act of 1940 ("Advisers Act"), and Section 9(f) of the Investment Company Act of 1940 ("Investment Company Act") against George W. Meyers ("George Meyers"), Gregory W. Meyers ("Gregory Meyers"), the Tax Exempt Fund, the Municipal Fund (collectively "The Funds") and Fox, Reusch & Co., Inc. ("Fox Reusch") (collectively, the "Respondents"). In anticipation of the institution of these administrative and cease- and-desist proceedings, the Respondents have submitted an Offer of Settlement, which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to jurisdiction and the findings contained in Section III. 1. herein, which are admitted, the Respondents consent to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934, Section 203(k) of the Investment Advisers Act of 1940, and Section 9(f) of the Investment Company Act of 1940, Making Findings, Imposing Remedial Sanctions and Ordering Respondents to Cease and Desist ("Order"). II. Accordingly, it is ordered that administrative and cease- and-desist proceedings pursuant to Sections 15(b), 19(h) and 21C of the Exchange Act, Section 203(k) of the Advisers Act, and Section 9(f) of the Investment Company Act be, and hereby are, instituted. III. On the basis of this Order and the Offer of Settlement submitted by the Respondents, the Commission makes the following findings:<(1)> 1. RESPONDENTS (a) George Meyers, a resident of Cincinnati, Ohio, is associated with Fox Reusch, a broker dealer registered with the Commission. George Meyers is also the sole general partner for the Tax Exempt Fund and is the president and sole shareholder of Fox Reusch. George Meyers is not registered as an investment adviser with the Commission. (b) Gregory Meyers, a resident of Cincinnati, Ohio, and the son of George Meyers, is the sole general partner of the Municipal Fund. Gregory Meyers is not registered as an investment adviser with the Commission. (c) The Tax Exempt Fund was formed as a limited partnership by George Meyers, its only general partner, in 1983. The Tax Exempt Fund is not registered as an investment company with the Commission even though it holds itself out as being, and was, in the business of investing, reinvesting, or trading in securities. (d) The Municipal Fund was formed as a limited partnership by Gregory Meyers in 1994. It holds itself out as being, and was, in the business of investing, reinvesting, or trading in securities. (e) Fox Reusch, located in Cincinnati, Ohio, has been registered with the Commission as a broker dealer from 1975 through the present. 2. OFFER AND SALE OF PARTNERSHIP INTERESTS (a) As of July 31, 1994, over $19,000,000 in limited partnership interests in the Tax Exempt Fund had been raised from investors. George Meyers used the means or instruments of transportation or communications in interstate commerce or the mails to offer and sell these interests. (b) As of July 31, 1994, over $1,500,000 in limited partnership interests in the Municipal Fund had been raised from investors. Gregory <(1)> The findings herein are made pursuant to the Respondents' Offer of Settlement and are not binding on any other person or entity named as a respondent in this or any other proceeding. ======END OF PAGE 2====== Meyers used the mails and interstate communication to offer and sell these interests. (c) The partnership agreements for The Funds provided, in part, that 80% of the investors' funds would be invested in municipal bonds while the remaining 20% would be placed in "short term accounts" to serve as the first source of liquidity for investors. However, the partnership agreements did not disclose that a significant portion of the money destined for "short term accounts" would be lent to George Meyers, his family and entities that he controlled. In addition, investors were not provided with or afforded access to relevant financial information concerning the entities and individuals that received these funds. The Funds, therefore, engaged in a public offering of securities. 3. UNREGISTERED INVESTMENT COMPANIES (a) Section 3(a)(1) of the Investment Company Act defines an investment company as any issuer which "is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities ..." Both Funds were engaged primarily in investing in municipal bonds. Therefore, each Fund was an investment company as defined under the Investment Company Act. (b) Section 7(a)(1) of the Investment Company Act prohibits any investment company, unless registered pursuant to Section 8 of the Investment Company Act, to offer for sale or sell securities by use of the mails or any means or instrumentality of interstate commerce. Each Fund sold limited partnerships to investors through the means of interstate commerce; because neither Fund was registered as an investment company under Section 8 at that time, The Funds violated Section 7(a)(1) of the Investment Company Act. (c) The Tax Exempt Fund does not qualify for a statutory exclusion from the definition of investment company. Section 3(c)(1) of the Investment Company Act provides an exclusion from that definition for an issuer whose outstanding securities are beneficially owned by not more than 100 persons and which is not making or proposing to make a public offering of its securities. The Tax Exempt Fund had more than 100 limited partners in 1993 and, as discussed in Section III 2. above, made a public offering of its limited partnership interests. In addition, the Municipal Fund cannot rely on Section 3(c)(1) of the Investment Company Act because it engaged in a public offering of its securities. (d) Finally, The Funds cannot rely on the exception contained in Section 3(c)(1) of the Investment Company Act because, based on their similarities, they should be integrated. As integrated, The Funds had more than 100 investors, making the exception in Section 3(c)(1) unavailable. Integration of The Funds is based on a number of factors, including the fact that the limited partnership interests in both Funds were not materially different. The Funds' respective limited partnership agreements contained the same terms and conferred upon the limited partners the same ======END OF PAGE 3====== rights and interests. Both partnership agreements provided that: (1) securities might be purchased from Fox Reusch; (2) the general partner was to receive the gains and reimburse the partnership for any losses upon the sale of investments; (3) 80% of the limited partners' funds were to be invested in municipal bonds and the interest earned thereon was to be paid to the limited partners; (4) the remaining 20% of the limited partners' investment was to be maintained in short term accounts and any profits received from investing these monies was to be paid to the general partner; and (5) the limited partners could sell their interests back to each Fund at their cost on demand. The investment objectives of both the Municipal Fund and the Tax Exempt Fund were to provide the limited partners "with tax exempt return with liquidity and diversification." Furthermore, the portfolio of the Municipal Fund was originally acquired from the Tax Exempt Fund; the portfolio of each Fund consisted solely of low-risk, relatively long-term municipal bonds. Also, the Municipal Fund and the Tax Exempt Fund were both organized by George Meyers who also advised his son Gregory regarding the investments of the Municipal Fund. The Funds also were designed for the same type of investors; in fact, all of the Municipal Fund's initial limited partners originally were limited partners of the Tax Exempt Fund. Those investors had exchanged their interest in the Tax Exempt Fund for an investment in the new Municipal Fund after the Tax Exempt Fund had more than 100 investors. (e) In conclusion, based upon the similar portfolio composition, the similarities in the potential risks and return on the partnership investment, the common sponsor, and the close ties between the respective general partners of The Funds, a reasonable investor would not consider the interests in the respective Funds to be materially different. Accordingly, The Funds should be integrated to determine the aggregate number of beneficial owners of each Fund for purposes of Section 3(c)(1) of the Investment Company Act. After integration, The Funds had more than 100 beneficial owners and could not rely on the exclusion in Section 3(c)(1) of the Investment Company Act. (f) Because The Funds were not registered, the Tax Exempt Fund and the Municipal Fund willfully violated Section 7(a) of the Investment Company Act. (g) George Meyers had control over the operations of the Tax Exempt Fund and Gregory Meyers had control over the Municipal Fund. Both knew, or should have known, that their actions in managing the limited partnerships would contribute to these violations, and therefore were a cause of the violations. As a result, George Meyers and Gregory Meyers willfully aided and abetted and caused the violations of Section 7(a) of the Investment Company Act by their respective Funds. 4. INVESTING CONTRARY TO REPRESENTATIONS MADE (a) George Meyers and Gregory Meyers invested a portion of the assets of The Funds contrary to the representations contained in The Funds' respective partnership agreements by utilizing some of the Funds' monies for investments other than municipal bonds and short-term accounts. In ======END OF PAGE 4====== addition, George and Gregory Meyers failed to disclose to investors in The Funds the conflict of interest between their position as investment advisers to The Funds and their lending of investor monies to entities in which one or both individuals had an interest. As a result, George Meyers, from at least 1988 to July 1994, and Gregory Meyers, from at least January to July 1994, by use of the mails and any means or instrumentality of interstate commerce willfully violated Sections 206(1) and 206(2) of the Advisers Act by employing a device, scheme or artifice to defraud a client and by engaging in a transaction, practice, or course of business which operates as a fraud or deceit upon a client. 5. CUSTODY AND POSSESSION VIOLATIONS (a) Section 206(4) authorizes the Commission to adopt rules which prescribe means reasonably designed to prevent acts, practices and courses of business which are fraudulent, deceptive, or manipulative. The Commission has adopted Rule 206(4)-2(a)(5) which, among other things, requires advisers that maintain custody of client assets to have an independent public accountant verify client funds and securities by actual examination at least once during each calendar year on a surprise basis. (b) Both George Meyers and Gregory Meyers had custody and possession of the cash and securities belonging to The Funds. Both Meyers failed to arrange for the Funds to have an examination by an independent public accountant. (c) Accordingly, George Meyers and Gregory Meyers willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-2(a) thereunder. 6. BROKER-DEALER VIOLATIONS (a) Fox Reusch borrowed funds which, at least in part, had been commingled with funds from investors in the Tax Exempt Fund and the Municipal Fund. Fox Reusch recorded its liability in an account in the name of George Meyers. In fact, the liability was payable, in part, to the Tax Exempt Fund and the Municipal Fund. (b) Section 17(a)(3) of the Exchange Act and Rule 17a-3(a)(9) require the name of the beneficial owner of each account. The records maintained by Fox Reusch, under the control of George Meyers, failed to disclose the true owner of the George Meyers' account. (c) Accordingly, Fox Reusch willfully violated, and George Meyers willfully aided and abetted and caused violations of, Section 17(a)(3) of the Exchange Act and Rule 17a-3(a)(9) thereunder. (d) Further, Fox Reusch failed to consider the liability described above in the reserve computation required by Rule 15c3-3(e)(1) promulgated under Section 15(c) of the Exchange Act and failed to make deposits in the Special Reserve Bank Account for the Exclusive Benefit of Customers as required. ======END OF PAGE 5====== (e) Accordingly, Fox Reusch willfully violated, and George Meyers willfully aided and abetted and caused violations of, Section 15(c) of the Exchange Act and Rule 15c3-3(e)(1) thereunder. IV. In view of the foregoing, it is in the public interest to impose the sanction specified in the Offer of Settlement. Accordingly, IT IS ORDERED: 1. That George Meyers shall cease and desist from committing or causing any violation, and committing or causing any future violation, of Sections 15(c) and 17(a)(3) of the Exchange Act and Rules 15c3-3 and 17a-3 thereunder, Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-2(a) promulgated thereunder, and Section 7(a) of the Investment Company Act; 2. That, within ten days of the entry of the Order, George Meyers shall pay a civil penalty of $50,000 to the United States Treasury, pursuant to Section 21B of the Exchange Act. 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 Exchange Commission; (c) hand-delivered to the Comptroller, Securities and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549; and (d) submitted under cover letter which identifies George Meyers as the respondent in these proceedings, as well as the Commission's case number, a copy of which 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; 3. That Gregory Meyers shall cease and desist from committing or causing any violation, and committing or causing any future violation, of Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-2(a) promulgated thereunder, and Section 7(a) of the Investment Company Act; 4. That the Tax Exempt Fund shall cease and desist from committing or causing any violation, and committing or causing any future violation, of Section 7(a) of the Investment Company Act; 5. That within 90 days of the entry of this Order, the Tax Exempt Fund and George Meyers make an accounting to the Commission of the funds received from and owed to limited partners, including interest to which limited partners are entitled; 6. That within 120 days of the entry of this Order, the Tax Exempt Fund shall liquidate and distribute ======END OF PAGE 6====== all assets owed to existing limited partners; 7. That the Municipal Fund shall cease and desist from committing or causing any violation, and committing or causing any future violation, of Section 7(a) of the Investment Company Act; 8. That within 90 days of the entry of this Order, the Municipal Fund and Gregory Meyers make an accounting to the Commission of the funds received from and owed to limited partners, including interest to which the limited partners are entitled; 9. That within 120 days of the entry of this Order, the Municipal Fund shall liquidate and distribute all assets owed to existing limited partners; 10. That Fox Reusch shall cease and desist from committing or causing any violation, and committing or causing any future violation, of Sections 15(c) and 17(a)(3) of the Exchange Act and Rules 15c3-3(e)(1) and 17a-3(a)(9) thereunder: and, 11. That George Meyers and Fox Reusch are hereby censured. By the Commission. Jonathan G. Katz Secretary ======END OF PAGE 7======