SEC Obtains Emergency Asset Freeze Against SJK Investment Management LLC and its CEO Stanley Kowalewski for Fraudulent Misuse of Fund Assets

Source- http://www.sec.gov/news/press/2011/2011-3.htm

Washington, D.C., Jan. 7, 2011 — The Securities and Exchange Commission has charged a Greensboro, N.C.-based investment adviser firm and its owner with defrauding investors in two hedge funds by secretly diverting millions of dollars to themselves through various self-dealing transactions.

The SEC obtained an emergency court order late yesterday freezing the assets of SJK Investment Management LLC and its CEO Stanley Kowalewski, alleging that they raised more than $65 million since summer 2009 through marketing two hedge funds to various investors including pension funds, school endowments, hospitals and non-profit foundations. However, unbeknownst to these investors, Kowalewski placed $16.5 million of their money in an undisclosed, wholly-controlled, new fund that he created, and then misused it in a number of ways. For example, he purchased a vacation home for approximately $3.9 million. He also sold his personal home to the fund for nearly $1 million more than the price he paid for it, and then continued to live in the house essentially rent-free.

"Kowalewski treated these funds like his own personal bank account and siphoned off millions of dollars that his clients entrusted to him," said William P. Hicks, Associate Regional Director of Enforcement in the SEC's Atlanta Regional Office. "He breached his responsibilities as an investment adviser in the worst manner possible."

According to the SEC's complaint filed yesterday in federal court in Atlanta, SJK and Kowalewski began diverting investor money in August 2009 — almost immediately after receiving the first investor proceeds — to pay their personal and business overhead expenses under the pretense that they were "start-up" expenses for the funds.

The SEC alleges that SJK and Kowalewski never advised investors of the existence of the third fund, much less their complete control over it, the large amounts "invested" into it, or the existence and nature of their self-dealing transactions and misuses of investor money. To further perpetuate the scheme, Kowalewski and SJK sent fraudulent monthly account statements to investors showing substantial and positive — but illusory — investment returns.

According to the SEC's complaint, among other transactions, Kowalewski sold his personal home to the fund in February 2010 for $2.8 million, almost $1 million more than its 2006 purchase price. Kowalewski used approximately $3.9 million of investor money in May 2010 to buy his vacation house on Pawley's Island, S.C. In October 2010, SJK took $4 million of investor money in the form of a purported "administration fee" and "salary draw." Throughout last year, Kowalewski used investor money to pay personal expenses and SJK's rent and other overhead, in stark contrast to how he represented those monies would be used.

The Honorable Timothy C. Batten, Sr., U.S. District Judge for the Northern District of Georgia granted the SEC's request for an emergency asset freeze, temporary restraining order, and other remedies against Kowalewski and SJK Investment Management. In addition to the emergency relief for investors, the SEC seeks permanent injunctions, disgorgement of ill-gotten gains with pre-judgment interest, financial penalties, and a financial industry bar against Kowalewski.

The SEC's complaint alleges that Kowalewski violated Section 17(a) of the Securities Act of 1933, Sections 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, Section 206(1), (2) and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder.


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