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Ohio Registered Investment Adviser Charged with Federal Securities Fraud

Meyer Wilson

By Chad M. Kohler

The Securities & Exchange Commission (SEC) last week filed a lawsuit against Douglas E. Cowgill and his company, Professional Investment Management, Inc. (PIM), a longtime Columbus, Ohio-based registered investment adviser, alleging that Mr. Cowgill and his firm consistently issued false account statements to customers that materially overstated the value of their assets managed by the firm.

Financial Adviser Fraud

The lawsuit asserts numerous violations of federal securities laws and describes various steps that Mr. Cowgill undertook to try to deceive SEC staff during on-site examinations at PIM's offices. The SEC seeks preliminary and permanent injunctive relief; disgorgement of ill-gotten advisory fees that customers paid based on improperly inflated asset values; civil penalties; and the appointment of a receiver.

According to the Complaint filed in the U.S. District Court for the Southern District of Ohio, PIM maintained direct possession, or custody, of customer assets as defined under the Investment Advisers Act of 1940, a federal law that establishes fiduciary standards for investment advisers. Rule 206(4)-2 under the Investment Advisers Act (the "custody rule"), as amended effective March 12, 2010, requires investment advisers with custody of customer assets to implement policies and procedures designed to protect assets from loss, misappropriation, misuse, or the adviser's insolvency.

The SEC alleges that Mr. Cowgill and PIM violated the custody rule by not arranging for customers to receive quarterly account statements from a qualified custodian. Instead, PIM's customers' securities holdings were commingled and held in a single securities account at SEI Transfer Agency, Inc., an affiliate of SEI Investments Company, an investment operations and processing provider. The securities account consisted of different SEI mutual funds. PIM's customers' cash holdings were commingled in a bank account at Fifth Third Bank. Neither SEI nor Fifth Third Bank provided separate account statements to PIM customers.

The SEC also alleges that Mr. Cowgill and PIM violated the custody rule by failing to engage an independent public accountant to conduct an annual surprise exam to verify the existence of customer assets and file papers with the SEC describing the nature and extent of the exam conducted. In fact, PIM filed no documents with the SEC relating to any independent surprise exams for the years 2010, 2011, 2012 and 2013.

According to the SEC, on September 30, 2013, SEC staff contacted Mr. Cowgill regarding PIM's failure to conduct any independent surprise exams the last several years. Mr. Cowgill reportedly dismissed this as an administrative oversight on his part and stated that he intended to switch his firm's registration from the SEC to the State of Ohio.

Later that same day, Mr. Cowgill filed papers with the SEC withdrawing PIM's registration, but no subsequent registration with Ohio was ever filed. As a consequence, the SEC says that from that point forward PIM was operating illegally as an investment adviser without proper federal or state registration.

In November 2013, SEC staff visited PIM's offices to conduct an on-site investigation of PIM's handling of its customers' assets. As part of this exam, the SEC says it compared records from SEI with account statements that Mr. Cowgill prepared on his own and sent to PIM customers. This review showed that PIM consistently overstated clients' account values, sometimes in excess of $1 million or more in aggregate. PIM's customers were charged advisory fees based on these inflated account values.

The SEC alleges that during the onsite exam and in subsequent communications with SEC staff, Mr. Cowgill actively tried to conceal his misconduct. In one instance, he surreptitiously transferred money between cash and securities accounts to try to cover up an apparent shortfall. Mr. Cowgill also manipulated customer data by booking fake sales transactions to conceal prior misconduct and provided SEC staff with false reports.

In their Answer filed with the court on May 5, 2014, Mr. Cowgill and PMI assert the Fifth Amendment privilege against self-incrimination in response to each and every allegation in the SEC's Complaint.

The case is pending before U.S. District Court Judge Algenon L. Marbley in Columbus.

Last week, Judge Marbley issued a temporary restraining order against Mr. Cowgill and PIM and freezing customer assets held at SEI, Fifth Third Bank, and State Street Bank & Trust.

A preliminary injunction hearing is scheduled for May 12.