The SEC charged a Greensboro, NC-based investment adviser and its owner with defrauding investors in 2 hedge funds by secretly diverting millions to themselves through various self-dealing transactions.  Assets of SJK Investment Management LLC and CEO Stanley Kowalewski were frozen by an emergency court order. 

    What SJK and Kowalewski Allegedly Did Wrong.   The pair raised over $65 million since mid-2009 by marketing its 2 hedge funds to various investors - including pension funds, school endowments, hospitals, non-profit foundations.  $16.5 million of that money was diverted by Kowalewski to an undisclosed, wholly-controlled, new fund he created, which he used for personal expenditures, like a vacation home.  He also did some self-dealing with the fund.  After selling his main residence to the new fund for a profit of nearly $1mn, he continued to live in the house essentially rent-free.  He also took $4 million from investors in the form of a purported "administration fee" and "salary draw." 

    How They Allegedly Carried Out the Scheme.  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.  SJK and Kowalewski never told their investors about the third fund, their complete control over it, or the self-dealing transactions.  To conceal the scheme, Kowalewski and SJK sent fraudulent monthly account statements to investors showing substantial and positive, but fictitious, investment returns.

    Sanctions Sought.   In addition to emergency relief for investors, the SEC seeks permanent injunctions, disgorgement with pre-judgment interest, financial penalties, and a financial industry bar against Kowalewski. 

    SEC Staffers.   Matthew McNamara, Michael Cates of the SEC's Atlanta Reg. Office investigated;  Dandridge Campbell, Michael Foster, Jamey Jones, John Sherrick, Satyan Singh, and Gina Bailey conducted the initial examination.  Litigation will be led by Graham Loomis and Paul Kim.   [SEC Release 11-3, 1/7]