The SEC recently announced fraud charges against Reliance Financial Advisors, an SEC-registered investment advisory firm located in Buffalo, New York, and its two co-owners, Timothy S. Dembski and Walter F. Grenda, Jr. According to the SEC’s allegations, Messrs. Dembski and Grenda recommended to their clients to invest in a hedge fund managed by Scott M. Stephen. Stephen’s background and experience in managing the assets of a hedge fund were misrepresented and overstated to clients as prospective investors in the fund. Although Stephen had no prior experience or track record in managing assets of a hedge fund, the fund was pitched as an investment suitable for clients who were predominantly of retirement age. Although the fund’s trading strategy was supposed to be fully automated by an algorithm, it turned out that trades were placed manually by Stephen for the most part.
The fund’s investments turned out to be unsuccessful, and its investors lost all or a majority of their investments in the fund. Collectively, clients of Dembski and Grenda invested about $12 million in the fund. In addition, the SEC alleges that Grenda borrowed $175,000 from two of his clients with the promise that the funds would be used to grow his investment advisory business. Instead, Grenda used those funds to pay for personal expenses.
The SEC’s complaint alleges that the advisory firm and its two co-owners violated the anti-fraud provisions of the Investment Advisers Act of 1940, the Securities Act of 1933, and the Securities Exchange Act of 1934 as they made fraudulent statements to induce clients to invest in the fund and to make personal loans to Grenda.
Separately, Stephen, the hedge fund manager also accused by the SEC of anti-fraud fund violations, has agreed to be permanently barred from the securities industry.