A former hedge fund manager and high school football coach in South Carolina was indicted in defrauding clients out of $8 million and obstructing an investigation by the US Securities and Exchange Commission.
Stanley J. Kowalewski, founder and operator of SJK Fund, is charged with stealing funds from clients ranging from hospitals, school endowments, pension funds, non-profits and foundations, and other investors. According to news reports, those funds were placed in two SJK hedge fund of funds, an onshore fund and an offshore fund called the Absolute Return Funds in 2009. Almost immediately after receiving the first investor money, Kowalewski began diverting the proceeds to pay for personal and business overhead expenses.
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“Kowalewski is charged with stealing from the investors who trusted him and then repeatedly lying to them and the SEC about his self-dealing,” said United States Attorney Sally Quillian Yates . “The victims of his greed include pension funds, schools, hospitals, and other non-profits who lost over $8 million in hard-earned money, which Kowalewski diverted to his own personal use.”
According to the FBI, Kowalewski almost immediately used client funds to pay for a lavish lifestyle and business expenses:
In December 2009 , Kowalewski formed a new SJK fund called the Special Opportunities Fund , which he did not disclose to investors. He diverted millions from the Absolute Return Funds to the Special Opportunities Fund without disclosing the transfers to investors. After he secretly transferred the funds, Kowalewski diverted millions from the Special Opportunities Fund to himself through various self-dealing transactions, including having the Special Opportunities Fund buy three homes that Kowalewski owned and in which his family, his parents, and his brother-in-law’s family lived. Kowalewski also bought a multi-million-dollar beach house and directed that the Special Opportunities Fund pay him $4 million as a fee to which he was not entitled. Kowalewski created and altered documents in an effort to make these transactions appear legitimate.
Also as part of the scheme, Kowalewski overvalued the assets held by the Special Opportunities Fund and used those fraudulent valuations to calculate the returns for investors in the Absolute Return Funds. As a result, the monthly statements distributed to SJK investors showed fraudulently inflated returns. Investors lost over $8 million as a result of Kowalewski’s fraudulent scheme.
The SEC began investing Kowalewski on March 30, 2010. The SEC subpoenaed Kowalewski to testify under oath, where he testified that, after the Special Opportunities Fund had purchased his three homes, the fund had leased the properties to him and his relatives, each for a yearly rental payment.
He testified further that Michael J. Fulcher, the CFO of SJK, had drafted and Kowalewski had signed the leases at or near the time of the homes sales. According to the indictment, however, Kowalewski and his relatives had never leased the homes back from the Special Opportunities Fund. Prior to Kowalewskis sworn testimony, Kowalewski and Fulcher conspired to obstruct the SEC proceeding by creating the leases and backdating them, in an effort to document the claimed lease relationships and to conceal the self-dealing transactions by Kowalewski, according to the FBI website.
The indictment also alleges Kowalewski lied in his sworn testimony when he testified that he had disclosed the Special Opportunities Fund to investors and that attorneys and other professionals had approved of his self-dealing transactions, according to the website.
Theft of employee benefit assets jeopardizes the benefits of workers. This case reaffirms the Labor Departments commitment to protect workers benefits by identifying criminal activity wherever and whenever it occurs, said Isabel Colon, Regional Director of EBSAs Atlanta Regional Office.
Read the FBI announcement in full here.
