Clients of an advisory firm lost millions when a hedge fund -- managed by an investment novice and debt collector -- went bad, according to the SEC.
The co-owners of Buffalo, N.Y.-based Reliance Financial Advisors were hit with fraud charges, the commission said this week, for allegedly misleading clients about the risks associated with the hedge fund they were recommending, and dramatically overstating the experience of the fund manager, Scott Stephan, who has agreed to settle similar charges with the agency.
The SEC is instituting cease-and-desist proceedings against Reliance Financial Advisors and co-owners Timothy Dembski and Walter Grenda Jr., charging both men with violations of the antifraud provisions of the Investment Advisers Act, the Securities Act and the Securities Exchange Act.
Stephan, the SEC alleges, had spent most of his career collecting overdue car loans, but was seeking to manage the Prestige Wealth Management Fund through a fully automated trading algorithm, a strategy Dembski and Grenda are said to have promoted to their clients while downplaying the risks. When the algorithm did not work as hoped, Stephan began trading manually. The hedge fund collapsed, and large sums of clients' holdings evaporated.
"Investment advisors owe their clients a duty of complete candor when it comes to discussing investment options," Andrew Calamari, director of the SEC's New York regional office, says in a statement. "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."
There was no answer at the phone number listed on Reliance Financial Advisors' website, and the firm did not immediately respond to a request for comment submitted through a form on that site. Efforts to reach attorneys for the defendants were unsuccessful.
By the SEC's timeline, the hedge fund in question began trading in April 2011. The returns were not as promised, and Grenda moved his clients out of the fund in October 2012. Dembski did not, and his clients lost the "vast majority of their investments" once the fund collapsed, according to the SEC. Dembski's clients had invested roughly $4 million in the fund; Grenda's clients had positions of around $8 million, the commission says.
The SEC is also claiming that Grenda borrowed $175,000 from two clients in 2009, telling them that he would use the loan to expand his advisory business, but spent the money on repaying other debts and personal expenses.
The proceeding is pending before an administrative judge within the commission.
Stephan settled similar charges with the SEC without admitting or denying guilt, and accepted a lifetime ban from the securities industry.
Register or login for access to this item and much more
All Financial Planning content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access