FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
12/10/2014 01:30 PM EST
The Securities and Exchange Commission announced fraud charges against a Buffalo, N.Y.-based investment advisory firm and two co-owners accused of making false and misleading statements to clients when recommending investments in a risky hedge fund. The hedge fund’s portfolio manager agreed to settle similar charges.
The SEC’s Enforcement Division alleges that Timothy S. Dembski and Walter F. Grenda Jr. steered their clients at Reliance Financial Advisors to invest in a hedge fund managed by Scott M. Stephan, whose experience in the securities industry was greatly exaggerated in offering materials they disseminated. Dembski and Grenda allegedly knew that Stephan had virtually no hedge fund investing experience at all, and spent the majority of his career collecting on past-due car loans. Nevertheless, highly speculative investments in the Prestige Wealth Management Fund were recommended to clients who were retired or nearing retirement and living on fixed incomes. The trading strategy that was allegedly described to investors was fully automated by an algorithm purportedly sought by big banks. The trading algorithm, however, did not work as intended and Stephan began placing trades manually, which led to the hedge fund’s eventual collapse.
“Investment advisers owe their clients a duty of complete candor when it comes to discussing investment options,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “In this case, Dembski and Grenda allegedly violated this fundamental duty by peddling a hedge fund investment that was more risky than depicted and misleading their clients about the portfolio manager’s experience.”
According to the order instituting a proceeding before an administrative law judge, Dembski’s clients invested approximately $4 million in Prestige Wealth Management Fund and Grenda’s clients invested approximately $8 million. The hedge fund, which began trading in April 2011, did not generate the positive returns advertised, so Grenda withdrew his clients in October 2012. The fund lost about 80 percent of its value when it collapsed a couple months later, leaving Dembski’s clients to lose the vast majority of their investments.
The SEC’s Enforcement Division further alleges that Grenda borrowed $175,000 from two clients in late 2009 and falsely told them that he would use it as a loan to grow his investment advisory business. Grenda instead spent the money on personal expenses and debts.
The SEC’s Enforcement Division alleges that Dembski, Grenda, and Reliance Financial Advisors violated the antifraud provisions of the Investment Advisers Act of 1940, Securities Act of 1933, and Securities Exchange Act of 1934, and that Dembski and Grenda aided and abetted and caused violations of those same provisions by Reliance Financial and the general partner to the Prestige Wealth Management Fund.
In a separate order, Stephan agreed to settle findings that he violated the antifraud provisions of the Advisers Act, Securities Act, and Exchange Act, and aided and abetted and caused violations of those same provisions by the general partner to the Prestige Wealth Management Fund. Without admitting or denying the allegations, Stephan agreed to be permanently barred from the securities industry. Disgorgement and penalties will be determined at a later date.
The investigation by the SEC’s Enforcement Division was conducted by Tony Frouge, Alexander Janghorbani, Douglas Smith, and Steven G. Rawlings in the New York Regional Office, and the case was supervised by Sanjay Wadhwa. The litigation will be led by Michael Birnbaum and Mr. Frouge. The SEC appreciates the assistance of the Financial Industry Regulatory Authority.