(Ed. Note: This article has been updated to include the recent dismissal of charges against George Palathinkal.)
Among recent enforcement actions by the SEC were fraud charges against an Ohio-based investment advisory firm and its president for concealing a $700,000 shortfall in client assets; charges against a Toronto consultant and four associates in a reverse merger scheme involving China-based companies; and charges against a hedge fund advisory firm and two of its executives for falsified results, as well as an asset freeze to protect client assets.
SEC Charges Advisory Firm, President for Hiding Asset Shortfall
The SEC has filed fraud charges and obtained an asset freeze after Professional Investment Management (PIM), an Ohio-based investment advisory firm, and its president, Douglas Cowgill, hid a shortfall of $700,000 in client assets.
According to the agency, Cowgill, who was also the firm’s chief compliance officer, went to great lengths to conceal the absence of the missing funds after the SEC found the shortfall in a money market account the firm managed.
Account statements that the firm sent to its clients had said that it had $7.7 million in that particular money market account, but in actuality there was less than $7 million in the account. Cowgill manufactured a fake trade, which he later reversed, and even moved money from another account at a different financial institution to cover the gap—but that account was also held for clients, so it just moved the shortfall from one place to another.
PIM manages approximately $120 million in assets for approximately 325 clients, a significant number of which are retirement plans. From 1978 till Sept. 30, 2013, PIM was registered with the SEC, but last September the firm pulled its registration.
The SEC examined the firm in November after it learned that for four years straight PIM had failed to have client assets independently verified, as required by the Custody Rule, and had withdrawn its registration. The investigation found the shortfall, and in addition to filing charges, the SEC obtained an emergency freeze to protect client assets.
SEC Fines Reverse Merger Scheme Perpetrators $9 Million
Toronto-based consultant S. Paul Kelley and four associates were charged by the SEC with conducting illegal reverse merger schemes to bring a pair of China-based companies into the U.S. markets so they could manipulate trading and make millions.
According to the agency, Kelley and three of the associates acquired controlling interests in two U.S. public shell companies so they could put together reverse mergers with China Auto Logistics Inc. and Guanwei Recycling Corp. They then hired stock promoter Shawn Becker of Overland Park, Kansas, and others to tout the two companies’ unregistered stock to investors.
The schemes involving China Auto and Guanwei Recycling occurred in 2008 and 2009. Becker, Roger Lockhart of Holiday Island, Ark., and George Tazbaz of Oakville, Ontario orchestrated manipulative trading in a third China-based issuer, Kandi Technologies, in 2009 and 2010.
The SEC said that Kelley, Tazbaz, Lockhart and Robert Agriogianis of Florham Park, N.J., reached secret oral agreements with management at China Auto and Guanwei Recycling in which they covered all of the costs to take the companies public in the U.S. in exchange for approximately 30% to 40% of the resulting stock. Kelley and his associates then acquired controlling interests in the two U.S. public shell companies that they used to conduct the reverse mergers with China Auto and Guanwei. They hid their controlling interest in the public shell companies and the reverse merger transactions by having others create at least nine Hong Kong-based companies to hold their shares. Nevertheless, the SEC, with assistance from the Ontario Securities Commission, was able to obtain documents and testimony concerning the scheme.
Kelley and his associates manipulated trading in various ways so that they could drive up the price and volume of the two stocks, then dumped their shares at a profit.