OCIE Custody Exam of Adviser Reveals Fraud

May 5, 2014

The SEC brought an administrative action against Professional Investment Management, Inc. (PIM), a Columbus, Ohio-based investment adviser, and its president and chief compliance officer, Douglas Cowgill for repeatedly hiding a shortfall of more than $700,000 in client assets.

PIM manages approximately $120 million in assets for approximately 325 clients, including a significant number of retirement plans. The firm had custody of client assets through various omnibus securities and cash accounts, and therefore was required to comply with the "Custody Rule" under the Investment Advisers Act of 1940.

The SEC alleged that a shortfall in a money market fund account managed by PIM was discovered when OCIE, the SEC’s inspection arm, examined the firm to verify the existence of client assets. The SEC commenced an examination of the firm in November 2013 after learning that for four consecutive years, PIM had failed to arrange for independent verification of client assets as required by the Custody Rule, and had filed a notice withdrawing its registration with the SEC. The SEC found that PIM reported in account statements sent to clients that it held a total of approximately $7.7 million in a particular money market fund when in fact the account reflecting these investments held less than $7 million.

The SEC further alleged that Douglas Cowgill attempted to disguise this shortfall from SEC examiners by entering a fake trade in PIM's account records. The purported trade was later reversed. Cowgill allegedly provided additional falsified reports to SEC staff, and he later transferred funds from a cash account at another financial institution to eliminate the shortfall in the money market fund account. However, that cash account also was held for the benefit of clients; thus Cowgill merely moved the shortfall from one asset holding to another in an effort to avoid detection.

Click http://www.sec.gov/litigation/litreleases/2014/lr22985.htm to access the administrative order.


Investment Advisers