SEC charges Ohio adviser with custody violations, lying about client assets

A judge has frozen client assets managed by Professional Investment Management

May 5, 2014 @ 12:01 pm

By Mark Schoeff Jr.

SEC, fraud, investment management, custody violations
+ Zoom
(Bloomberg News)

The Securities and Exchange Commission has charged an Ohio investment adviser with violating rules governing custody of client funds and consistently lying about client asset totals.

The SEC alleges that Professional Investment Management Inc. of Columbus, Ohio, overstated the amount of client assets in an approximately $7.7 million money market fund by $753,535 for each of the last three months of 2013. The agency also claims that the firm maintained control of client assets but failed to arrange for independent verification of the funds.

U.S. District Court Judge Algenon L. Marbley has issued a temporary restraining order against PIM and has frozen client assets following an SEC request for emergency relief for investors.

The SEC commenced its investigation of PIM on Sept. 30, 2013, after it found that the firm had failed for four years to file a certificate regarding surprise examinations of its custodian.

Under the SEC custody rule, advisers must maintain client funds at a custodian who is subject to an annual exam by an independent public accountant who verifies client assets. The agency once again this year made custody an examination priority. The emphasis on custody has grown in the wake of the multibillion-dollar Ponzi scheme perpetrated by Bernard Madoff.

After a call from SEC staff members on Sept. 30, 2013, Douglas E. Cowgill, PIM president and chief compliance officer, withdrew PIM's SEC registration. The firm — which has approximately $120 million in assets under management and provides advisory services to about 15 retirement plans as well as 20 to 25 individuals — did not register with the state either, but continued to operate.

On Nov. 21, 2013, while SEC examiners were at PIM offices, Mr. Cowgill allegedly entered a fake sale of $753,535 in PIM's records to cover up the shortfall in the money market fund. Later that night, he reversed the trade and disguised the transactions in client accounts, according to the SEC complaint.

In a meeting with SEC staff on Jan. 23, Mr. Cowgill allegedly admitted entering the fake trade. A week later, he tried again to hide the discrepancy by wiring funds from a cash account into a securities account, leaving the former overstated by $746,087.

“Our complaint alleges that Cowgill went to extraordinary lengths to hide a significant shortfall in client assets, even providing manufactured documents to SEC staff,” Robert J. Burson, associate of the SEC's Chicago Regional Office, said in a statement.

The SEC said that the firm represents an ongoing threat to investors.

“PIM is operating without registration with any regulatory authority and has submitted false documents to the commission — with whom PIM is required to be registered,” states the SEC complaint, which was unsealed on May 2. “PIM continues to issue false account statements to clients, make redemptions requested by clients misinformed about their holdings, and charge fees to clients based on a percentage of assets under management (which assets are overstated).”

An attorney for Mr. Cowgill was not immediately available for comment.

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