U.S. Securities and Exchange Commission
Litigation Release No. 21800 / January 7, 2011
SEC v. Stanley J. Kowalewski and SJK Investment Management, LLC, Civil Action No. 1:11-cv-0056-TCB (N.D. Ga.)
SEC Charges Stanley J. Kowalewski and SJK Investment Management, LLC with Securities Fraud and Court Orders Entry of Temporary Restraining Order
On January 6, 2011, the Securities and Exchange Commission filed a civil injunctive action in U.S. District Court for the Northern District of Georgia, charging Stanley J. Kowalewski ("Kowalewski") and SJK Investment Management, LLC ("SJK"), a registered investment adviser, with violations of the federal securities laws for defrauding investors in two hedge funds managed by SJK.
The Commission's Complaint alleges that, beginning in the summer of 2009, SJK and Kowalewski, the firm's CEO, raised a total of $65 million for two hedge funds, the SJK Absolute Return Fund, LLC, and the SJK Absolute Return Fund, Ltd. (collectively, the "Absolute Return Funds") and represented to investors that: (1) "substantially all" of the monies invested in the Absolute Return Funds would be invested in "unaffiliated" underlying hedge funds pursuing complex investment strategies, (2) no single underlying fund would be allocated more than 15% of the Absolute Return Funds' monies, and (3) as compensation for its services, SJK would receive no more than a 1% annual asset management fee and a 10% profits incentive fee. Contrary to these representations, Kowalewski and SJK formed a new, undisclosed fund, the Special Opportunities Fund, LP (the "Special Opportunities Fund"), which they used to divert to themselves millions of dollars through various self-dealing transactions, including having the Special Opportunities Fund: (1) buy Kowalewski's personal home for $2.8 million, almost $1 million more than its 2006 purchase price, (2) purchase a vacation home for Kowalewski for $3.9 million, (3) pay approximately $1 million of Kowalewski and SJK's personal and business expenses, and (4) pay SJK an unfounded $4 million "administration" fee, which Kowalewski then paid himself as a "salary draw."
In its Complaint, the Commission alleges that Kowalewski and SJK violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act ("Advisers Act") and Rule 206(4)-8 thereunder.
On January 6, 2011, the Honorable Timothy C. Batten, Sr., United States District Judge for the Northern District of Georgia, entered an order temporarily restraining the defendants from violations of the federal securities laws identified above, instituting an asset freeze, and ordering other relief.