A Detroit federal appeals court has frozen the assets of a Livonia, Mich.-based tire recycling firm, its president and his son, pending the outcome of a federal agency's fraud accusations.
The Securities and Exchange Commission (SEC) alleges that Paul Merklinger, president of Encore Associated Leasing L.L.C., bilked five investors out of at least $7.2 million between September 2006 and July 2007, promising nonexistent profits through the leasing and operation of bogus tire shredding technology.
Based on an SEC complaint, Judge Gerald Rosen of the U.S. District Court for the Eastern District of Michigan temporarily prohibited Encore and Mr. Merklinger from offering securities or other investments and from transferring any assets.
One week later, on July 31, Judge Rosen issued a preliminary injunction and asset freeze against Encore and Mr. Merklinger, as well as an asset freeze against Mr. Merk-linger's son, Brian Merklinger.
According to charges by the SEC, Paul Merklinger offered investors an interest in a tire shredding truck that Encore would lease from the investors and use in its tire recycling business, as well as a $10,000 warrant for a 1-percent interest in Encore.
Paul Merklinger told his investors he had a working prototype of the truck, the SEC said in an Aug. 1 press release. He allegedly promised each investor $15,000 a month in leasing fees and investment interest. After five years, he allegedly said, the investors could expect returns of at least 372 percent and a value of at least $1.2 million for each warrant.
``However, as alleged in the SEC's complaint, the tire shredding equipment did not work, there was no reasonable basis for Merklinger's income and return figures, and the investors never received a dime from their investment,'' the agency said in its press release.
Paul Merklinger instead used more than $950,000 of investor funds to rent offices, pay back taxes and buy luxury items such as cars, boats, furniture and landscaping for himself, the SEC said.
He also allegedly gave more than $172,000 to Brian Merklinger; used more than $134,000 to pay investors in one of his other companies; and failed to tell investors that he was banned from participating in Ontario's securities markets for 10 years because of a previous investment scheme.
The SEC seeks a permanent injunction, disgorgement of investor funds and civil penalties against Paul Merklinger, as well as disgorgement of funds against Brian Merklinger.
Tim Warren, associate regional director for the SEC's Chicago office, declined to discuss the events that led the agency to investigate Encore. The next action in the case, Mr. Warren said, would be Paul Merklinger's reply to the SEC's charges.
Encore Tire Recovery, a subsidiary of Encore Associated Leasing, announced its founding in June 2007, claiming that its ``T2'' tire collection and shredding vehicles would parade down southwestern Michigan highways June 21. The vehicles, according to the company statement, resembled compacting garbage trucks but had a tire shredding capacity of 500 tires per hour.
A telephone number for Encore Associated Leasing listed on the Web site of the Michigan Department of Environmental Quality was not in service. An attorney named as the lawyer for Encore and Paul Merklinger on the SEC press release said he had nothing to do with the case.