SEC Charges Aphelion Fund Management With Fraud, Freezes Assets [UPDATED]


UPDATE 07/01/15


On 18 June 2015, at the UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK, all claims that were asserted by the SEC against ( George Palathinkal)in this action were dismissed with prejudice and without costs, and waiving all rights of appeal.

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Notice of Voluntary Dismissal as to Palathinkal (FILED COPY)

The Securities and Exchange Commission has charged Aphelion Fund Management CIO Vineet Kalucha and CFO George Palathinkal with tampering with an external audit to overstate their performance, inflating their assets under management and other crimes, freezing the fund’s assets to protect the firm’s clients.

We allege that on multiple occasions, Aphelion, Kalucha, and Palathinkal intentionally overstated the success of their investment strategy,” said Robert J. Burson, associate director of the SEC’s Chicago Regional Office.  “Kalucha also has been using investor money as his own, and emergency action was necessary to protect the interests of investors.”

A 3% loss became a 30% gain

According to the SEC statement, an external audit showed that one of the accounts managed by Kalucha had lost 3% over a 15 month period using his proprietary trading strategy, and he falsified the report to make it look like he had gained 30% over an 18 month period. Palathinkal then learned of the fraud and allowed the false report to be circulated to investors, and both executives told investors that the Aphelion had $15 million in AUM in 2013, when it never had more than $5 million.

Kalucha also misled investors about his legal history. Due to a previous settlement with the US Department of Labor for breaching fiduciary responsibilities, Kalucha and Aphelion are prohibited from advising many types of retirement plans, but this information was excluded from the company’s due diligence questionnaire offering instead a “lengthy, materially misleading explanation of a civil proceeding” without specifically mentioning the Department of Labor.

Aphelion Fund resources used for personal expenses

Kalucha also put money that had been raised for operational expenses and investor proceeds to personal use to prevent foreclosure on his home, to settle a personal lawsuit for breach of contract, as a down payment on his BMW, and other personal expenses. The SEC doesn’t accuse Palathinkal of using funds for personal reasons, but he did sign off on all of Kalucha’s withdrawals. The SEC froze Aphelion’s accounts to prevent any more funds from being withdrawn.

Aphelion Fund Management, Kalucha, and Palathinkal are being accused of violating the Securities Act of 1933 and the Securities Exchange Act of 1934; Kalucha and Aphelion are also being accused of violating, and Palathinkal of aiding and abetting violations to, the Investment Advisers Act of 1940.

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