Securities Law Blog

Just when you think you have heard it all…..a securities-related tire scam? The Securities and Exchange Commission has obtained emergency relief to stop an allegedly fraudulent scheme that raised over $7.2 million from investors who were told the money would be used in a business shredding and recycling used tires. 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 order of preliminary injunction and asset freeze was issued on July 31, 2008, by the Honorable Gerald E. Rosen of the United States District Court for the Eastern District of Michigan against Paul G. Merklinger (Merklinger) of Novi, Mich., and Encore Associated Leasing, LLC (Encore Leasing), a company formed, owned and controlled by Merklinger. An asset freeze was also issued against Merklinger's son, Brian Merklinger, a relief defendant. Previously, on July 24, 2008, Judge Rosen issued an order temporarily prohibiting Merklinger and Encore Leasing from attempting to offer securities or other investments and from transferring any assets. That order was issued under seal by the court and that seal has now been lifted.

"Paul Merklinger preyed on the goodwill of investors by telling them that they were making an investment that would be good for the environment. Unfortunately, as alleged in our complaint, the only environment Mr. Merklinger was improving was his own when he used investor funds to buy luxury automobiles, purchase posh offices, and decorate his home," said Tim Warren, Associate Regional Director of the SEC's Chicago Regional Office.

According to the SEC's complaint, from September 2006 to July 2007, Merklinger raised at least $7.2 million from five investors through the sale of investments in his purported tire recycling business. The investments consisted of an interest in a tire shredding truck that Encore Leasing would lease from the investor and purportedly use in its business operations, and a $10,000 warrant for a 1% interest in Encore Leasing.

Merklinger allegedly told investors that a working prototype of the shredding truck existed and that their trucks would be in operation shortly. He promised that Encore Leasing would pay the investors $15,000 in monthly leasing fees and investment interest, and that after five years, the investors could expect returns of up to 372% and the warrant would be worth at least $1.2 million.

However, as alleged in the SEC's complaint, there was no working prototype. Instead, Merklinger used more than $950,000 of investor funds for his own personal benefit, including payments for rent, back taxes and the purchase of luxury automobiles and watercraft and extravagant landscaping and furnishings for his home.

He also, as alleged in the SEC's complaint, spent or transferred more than $172,000 for the benefit of his son, Brian Merklinger, and used more than $134,000 to make payments to investors in one of his other companies. Further, Merklinger failed to disclose to investors that he had been barred from participating in Ontario, Canada's securities markets for ten years in connection with a prior investment scheme.

The SEC's complaint charges Merklinger and Encore Leasing with violating the antifraud provisions of the federal securities laws and seeks permanent injunctive relief, disgorgement, and civil penalties. The SEC further seeks disgorgement of all investor funds or assets acquired with investor funds from Relief Defendant Brian Merklinger.

The SEC Release can be found here: http://www.sec.gov/litigation/litreleases/2008/lr20666.htm.

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.