Former Hedge Fund Manager Indicted for Defrauding Investors and Obstructing SEC

GAINESVILLE—Stanley J. Kowalewski has been arrested in South Carolina after being indicted by a federal grand jury in Atlanta for defrauding investors of hedge funds of up to $8 million and for obstructing the U.S. Securities and Exchange Commission’s subsequent investigation of his activities.
“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.”
Mark F. Giuliano, Special Agent in Charge, FBI Atlanta Field Office, stated, “Investment fraud cases such as this remain a focus of the FBI’s criminal investigators in that these cases generate many victims and large loss amounts. The FBI will continue to work with its many law enforcement partners in an effort to hold accountable those individuals who would victimize unsuspecting investors by diverting their funds for personal gain.”
“Theft of employee benefit assets jeopardizes the benefits of workers. This case reaffirms the Labor Department’s commitment to protect workers’ benefits by identifying criminal activity wherever and whenever it occurs,” said Isabel Colon, Regional Director of EBSA’s Atlanta Regional Office.
According to United States Attorney Yates, the charges, and other information presented in court, Kowalewski was the sole owner and chief executive officer of SJK Investment Management LLC in Greensboro, North Carolina. Beginning in 2009, Kowalewski solicited investment money from pension funds, school endowments, hospitals, non-profit foundations, and other investors that he placed in two SJK “hedge fund of funds,” an onshore fund and an offshore fund called the Absolute Return Funds. Almost immediately after receiving the first investor money, Kowalewski began diverting the proceeds to pay for personal and business overhead 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.
On March 30, 2010, the SEC initiated a proceeding to determine whether there had been violations of the federal securities laws in connection with SJK. As part of its investigation, the SEC subpoenaed Kowalewski to testify under oath. During his sworn testimony, Kowalewski 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 chief financial officer 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 Kowalewski’s 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. The leases were not created and signed at the time of the homes’ sales but in November 2010, a few weeks before Kowalewski testified. Kowalewski provided the fraudulent leases to the SEC as part of the investigation and then testified falsely about them to conceal his actions and obstruct the SEC’s investigation. 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.
The indictment charges Kowalewski, 41, of Pawleys Island, South Carolina, with 22 counts of wire fraud, one count of conspiracy, and one count of obstructing the SEC proceeding. Each wire fraud count carries a maximum sentence of 20 years in prison. The conspiracy and obstruction charges each carry a maximum sentence of five years in prison. On April 19, 2013, Fulcher pleaded guilty to one count of conspiring with Kowalewski to obstruct the SEC proceeding, which charge carries a maximum sentence of five years in prison. Each of these charges carries a fine of up to $250,000. Fulcher’s sentencing date has not yet been scheduled. In determining the actual sentence, the court will consider the United States Sentencing Guidelines, which are not binding but provide appropriate sentencing ranges for most offenders.
Members of the public are reminded that the indictment contains only allegations. The defendant is presumed innocent of the charges, and it will be the government’s burden to prove the defendant’s guilt beyond a reasonable doubt at trial.
This case is being investigated by special agents of the Federal Bureau of Investigation, investigators with the Atlanta Regional Office of the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA), and special agents of the Atlanta Regional Office of the U.S. Department of Labor’s Office of the Inspector General. The Atlanta Division Office of the U.S. Securities and Exchange Commission previously brought a civil action against Kowalewski. In that case, Kowalewski was ordered to pay over $16 million in disgorgement and civil penalties.
Assistant United States Attorneys Stephen H. McClain and Russell Phillips are prosecuting the case.
For further information please contact the U.S. Attorney’s Public Affairs Office at USAGAN.Presse-mails@usdoj.gov or (404) 581-6016. The Internet address for the U.S. Attorney’s Office for the Northern District of Georgia Atlanta Division is http://www.justice.gov/usao/gan/.

Philadelphia Woman Pleads Guilty to Defrauding Paymate

SAN JOSE, CA—Vernina Adams pleaded guilty in federal court in San Jose yesterday to one count of wire fraud and one count of aggravated identity theft, United States Attorney Melinda Haag announced.
In pleading guilty, Adams admitted that, beginning in March 2010 and continuing to approximately June 2010, she carried out a scheme to defraud Paymate, a credit card processing company located in Woodside, California that processes payments for individuals who buy and sell goods on the Internet. Adams admitted that she created several fictitious businesses on the Internet using the names of other individuals, several of whom she knew to be real people. The fictitious businesses included slickmix.net, opened in the name of victim M.T.; and nicksonrental.com, opened in the name of victim T.N. In order to give the appearance of legitimacy to the fictitious Internet businesses, Adams opened e-mail accounts in those victims’ names with Internet service providers such as Yahoo.
In addition, Adams admitted that she opened Paymate and bank accounts with MetaBank for each fictitious business in the victims’ true names and, using their identities, linked those bank accounts to designated Paymate accounts. For example, Adams admitted that she knew that victim T.N. was a real person, and she used T.N’s true name, Social Security number, and date of birth to open a Paymate account that was linked to the fictitious business nicksonrental.com. After opening Paymate and bank accounts, Adams admitted that she used her own debit and credit cards as well as debit and credit cards belonging to her relatives and friends to pretend to purchase goods and services in amounts ranging from $1,000 to $7,000 from the fictitious businesses.
Adams admitted that, after Paymate deposited funds from the fictitious sales into the bank accounts associated with the businesses, she immediately withdrew the fraudulently-acquired funds from various automated teller machines in Pennsylvania. After several weeks, she contacted the credit card companies for the credit card that she used to initiate the fraudulent transaction to report that she had not received the goods or services. She also instructed her friends and relatives to report to credit card companies for the cards that were used to initiate the fraudulent transactions that they had not received the goods or services. The credit card companies then initiated a charge-back on the credit cards. When Paymate attempted to reclaim the funds from the bank accounts associated with the fictitious businesses, there were insufficient funds in the accounts because Adams had withdrawn all of the money from the purported sales.
Furthermore, Adams admitted using e-mail accounts linked to the fictitious businesses to communicate with Paymate regarding, among other things, payments from fictitious sales. Specifically, on July 7, 2010, she posed as victim M.T., whose name she had used to create the fictitious business slickmix.net, and e-mailed Paymate employee G.Q. using e-mail address mortazamix@yahoo.com. Adams admitted making false statements in the e-mail to induce Paymate to make payments on fraudulent transactions associated with slickmix.net.
Finally, Adams admitted that she conducted approximately 15 other fraudulent transactions involving Paymate and agreed that the loss to Paymate was over $70,000 but less than $120,000.
Adams, 31, of Philadelphia, Pennsylvania, was indicted by a federal grand jury on July 25, 2012. She was charged with five counts of wire fraud, in violation of 18 U.S.C. § 1343, and two counts of aggravated identity theft, in violation of 18 U.S.C. §§ 1028A(a)(1)(A) and 1028A(c)(5). Under the plea agreement, Adams pled guilty to one count of wire fraud and one count of aggravated identity theft.
The sentencing of Adams is scheduled for April 24, 2013, before Judge Lucy H. Koh in San Jose. The maximum statutory penalty for each count of wire fraud, in violation of 18 U.S.C. § 1343 is 20 years in prison, and a fine of $250,000 plus restitution. The maximum statutory penalty of each count of aggravated identity theft, in violation of 18 U.S.C. §§ 1028A(a)(1)(A) and 1028A(c)(5) is a mandatory consecutive sentence of two years in prison and a fine of $250,000 plus restitution. However, any sentence following conviction would be imposed by the court after consideration of the U.S. Sentencing Guidelines and the federal statute governing the imposition of a sentence, 18 U.S.C. § 3553.
Susan Knight is the Assistant U.S. Attorney who is prosecuting the case with the assistance of legal techs Elise Etter and Kamille Singh. The prosecution is the result of a one-year investigation by the Federal Bureau of Investigation.
A copy of this press release may be found on the U.S. Attorney’s Office’s website at www.usdoj.gov/usao/can.