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FINRA Permanently Bars Two Brokers Who Ran Fraudulent Hedge Fund

By Erwin J. Shustak, Esq.  of Shustak Reynolds & Partners, P.C. posted on Monday, February 22, 2016.

Clients who invested more than $12 million into a  hedge fund that promoted itself as a safe investment based on a proprietary  computer algorithm have lost almost all of their money. Two financial advisors, Timothy S. Dembski and Walter F. Grenda, misrepresented the fund to the investors telling them the fund’s investments were based on a computer algorithm that had been tested and included automatic sto-losses. They assured their investors that the fund would sell off individual stock positions daily when the share price rose by 3% or dropped by 1% before 3 pm each day.

Two advisors allegedly misled their clients into investing in a fund that they created which then went disastrously south, losing 80% of its value in a single month, according to FINRA, which permanently barred the advisors from the industry last week. The fund they operated- the Prestige Wealth Management Fund- in which client began investing in March, 2011- was not based on any algorithm; there never was any testing of the non-existent program and, in fact, the bogus fund’s chief investment officer had complete discretion over investments, making disastrous investments all on his own.

The Buffalo N.Y.-based advisors recommended the fund to clients who had limited investing experience; some of those clients used retirement assets or surrendered variable annuities in order to invest in the fund, FINRA says. Dembski's clients invested approximately $4 million while Grenda's clients invested another $8 million, according to the SEC, which filed charges against the advisors last year.

The fund failed to deliver the positive returns as advertised, leading Grenda to withdraw his clients in October 2012, according to the SEC. In November 2012, the fund's total assets stood at about $3.4 million, according to FINRA. A month later, the assets dropped to approximately $644,000.

FINRA says that the marketing materials created by Dembski and Grenda were also misleading. The materials described the CIO, who was not named by FINRA, as a professional with 15 years of experience and as someone who managed a portfolio of $500 million – neither of which were true.

During the time of alleged wrongdoing, both advisors were registered with Mid Atlantic Capital, a Pittsburgh-based broker-dealer with more than 500 registered representatives. The firm did not respond to requests for comment.  Dembski and Grenda neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

Shustak Reynolds & Partners, P.C. focuses its practice on the securities industry and matters affecting broker-dealers, registered representatives and the financial services sector. For more information, contact Erwin J. Shustak, managing partner, at [email protected], or call 800.496.5900 for a free consultation.

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