Registered Investment Adviser Faces Fraud Charges
The SEC filed fraud charges in a recent complaint filed in federal court against an Ohio-based investment advisory firm, Professional Investment Management (“PIM”) and its president and chief compliance officer, Douglas Cowgill, for allegedly concealing a shortfall of approximately $700,000 in client assets and then attempting to deceive the SEC’s examiners from detecting the shortfall.
During a routine examination by the SEC of the books and records of PIM, the SEC attempted to verify the existence of client assets. In account statements sent to clients by PIM, it was reported that PIM held about $7.7 million in a money market fund although only $7.0 million of client assets was actually documented as having been invested in the fund. During the SEC’s examination of the adviser, Cowgill attempted to disguise the shortfall by entering a fake trade in the firm’s account records. Cowgill falsified records he provided to the staff and apparently transferred funds from another account at a financial institution which also constituted client assets, to eliminate the shortfall in the money market account. The transfer of the shortfall amount between the accounts by Cowgill was meant to avoid detection by the staff. The SEC also asked the federal court to impose an asset freeze of the advisory firm in order to further protect client assets.
PIM currently has about 325 clients with $120 million of assets under management. It was registered with the SEC from 1978 until September, 2013 when it withdrew its SEC registration. The SEC’s examination was conducted, in part, because for the last four years, PIM had apparently not complied with the “custody rule” which required for each of those years, an independent verification of client assets.
The SEC’s complaint charges PIM and Cowgill with violating the anti-fraud, registration and custody provisions under the Investment Advisers Act of 1940. The motions made by the SEC included a request for the Court to issue a preliminary injunction.
Lifetime Bar Affirmed for Failure to Supervise
Carl M. Birkelbach, the founder and president of Birkelbach Investment Securities lost his appeal of a lifetime bar from the securities industry imposed by FINRA for failure to supervise over the trading activities of an associate at his firm. Primarily, Birkelbach based his appeal on the fact that the lifetime bar by FINRA was excessive.
A Seventh Circuit panel denied Birkelbach’s appeal in spite of Birkelbach’s arguments that FINRA’s bar was excessive which included a lifetime bar, six month suspension and $25,000 fine. The underlying conduct by the associate, who was directly supervised by Birkelbach, included trading without authorization in two customer accounts over a period of six years. During the period, FINRA ordered Birkelbach to place the associate under heightened supervision but he failed to do so. The conduct by the associate continued until 2008 when FINRA barred the associate for life from the industry and ordered him to pay disgorgement of nearly $600,000.
Birkelbach did not contest the charges of failure to supervise but argued that the lifetime bar was excessive as the punishment was not tailored to the offense. The panel disagreed citing that Birkelbach’s conduct was sufficiently egregious and that the sanction guidelines to the relevant rules contemplate a lifetime bar in all capacities in the industry.