The Securities and Exchange Commission (SEC) says it obtained an emergency court order late Thursday freezing the assets of Greensboro, North Carolina-based 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, according to the SEC, 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”, including purchasing a vacation home for approximately $3.9 million. The SEC said that 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 in a press release. “He breached his responsibilities as an investment adviser in the worst manner possible.”
According to the SEC’s complaint filed 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.
The SEC said that 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 is seeking permanent injunctions, disgorgement of ill-gotten gains with pre-judgment interest, financial penalties, and a financial industry bar against Kowalewski.