May 27, 2014 — Investors rely on their investment firm advisors to manage their assets in a responsible and ethical manner. To ensure that they do, advisors registered with the Securities and Exchange Commission (SEC) are subject to the “Custody Rule” of the Investment Advisers Act of 1940. Those who do not comply with the Custody Rule should be reported to the financial fraud whistleblower program established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010. Informants who notify the SEC about advisory firms’ violations may be handsomely rewarded for collaborating with the agency.
Ohio Firm and Its President Allegedly Violated “Custody Rule” of Investment Advisers Act of 1940
An investment advisory firm located in Columbus, Ohio and its president have been charged by the SEC for continuously concealing a $700,000 shortfall in client assets. The firm, Professional Investment Management (PIM), manages $120 million in assets on behalf of 325 clients, many of whom are invested in retirement plans.
Between 1978 and 2013, PIM was a registered investment adviser with control over its clients’ assets through a number of cash accounts and omnibus securities. As a result, PIM was subject to the client protections outlined in the Custody Rule of the Investment Advisers Act of 1940.
Under the Custody Rule, investment advisers are required to schedule an independent verification of client assets on an annual basis.
After learning that PIM had not arranged for an independent verification for four years in a row and that the firm had filed a notice withdrawing its investment adviser registration, the SEC conducted an investigation in November 2013 to verify the presence of customer assets. In account statements sent out to clients, the firm represented that it held $7.7 million in a certain money market fund, though in reality that account contained less than $7 million.
Douglas Cowgill, PIM’s president and chief compliance officer, allegedly tried to hide the missing funds from the SEC through fake trades, falsified reports and repeated cash transfers from one account to another.
Not only has PIM been charged by the SEC, but its assets have been frozen to protect client assets from further alleged misconduct.
Tipsters Alert SEC to Investment Firm Misconduct
Investment firm employees who uncover Custody Rule violations should make sure they understand the Dodd-Frank whistleblower program before stepping forward. With offices in Los Angeles, Dallas and the Washington D.C. area, Waters & Kraus has the experience it takes to protect whistleblowers’ interests in cases of financial fraud. Contact us by email or call our qui tam attorneys at 855.784.0268 to discuss how we can assist you.
