Four years ago, Buffalo investment adviser Walter F. Grenda Jr. faced a federal fraud investigation related to misleading sales of a hedge fund to clients.
So he sold his business and existing client base to Grenda Group LLC, led by his son, Gregory Grenda. And a year later, the Securities and Exchange Commission barred him from the industry.
But that apparently didn't stop him, the federal agency now claims. In a lawsuit filed in federal court here Thursday, the SEC accused Gregory Grenda and the firm of allowing the elder Grenda to continue associating with them, failing to tell clients about the ban against Walter Grenda, and misleading clients who inquired about Grenda's status.
Despite the earlier bar imposed against him, the SEC alleged that Walter Grenda met with a prospective client and current clients in the firm's offices, and made "discretionary changes to clients' investment accounts."
Moreover, the SEC accused Walter Grenda of impersonating a firm client on a call to Grenda Group's broker-dealer and repeatedly pretending to be his son on other calls. That prompted the broker-dealer to end its relationship with Grenda Group. The regulator also asserted that Grenda Group and Gregory Grenda "later made misleading statements" to clients and didn't "disclose material facts" about why that relationship ended.
The agency charged both Grendas and the firm with fraud, aiding and abetting fraud, and other violations of federal securities law, and accused the elder Grenda of violating his ban. The SEC is seeking unspecified penalties and permanent injunctions to prevent them from repeating the actions.
“Associational bars are designed to protect retail investors from those the SEC has deemed unfit to provide advisory services,” Marc P. Berger, director of the SEC’s New York Regional Office, said in a news release. “Here, we allege that bar was circumvented, and took action to ensure investors are protected.”
Attorneys representing both Grendas and the firm rejected the accusations.
"I intend to fully contest these charges and defend them in federal court," said April J. Orlowski, the attorney for Walter Grenda.
"Neither the Grenda Group nor Gregory Grenda have done anything wrong, and we intend to vigorously and fully defend these charges," said Joseph G. Makowski, who represents Gregory Grenda and the firm.
Walter Grenda and his former partner, Timothy S. Dembski, ran Reliance Financial Advisors when they tried to promote a hedge fund called Prestige Wealth Management Fund LP to their local clients – many of whom were at or nearing retirement age and not sophisticated investors, according to the SEC's original case four years ago. Dembski and Grenda claimed that the fund was run by an experienced manager with 14 years of experience in the industry, who used a special computer program – the "Algorithm" – to achieve results.
In fact, that manager – Scott M. Stephan of Hamburg – was a friend with little financial experience other than debt collection, having joined Reliance in 2007 in a telemarketing job. He and Dembski founded and co-owned the fund, which opened in April 2011, and puffed up Stephan's resume. And the algorithm just consisted of preprogrammed, quick-hit day trades that ultimately didn't work well.
Yet they persuaded 19 of Dembski's clients and 23 of Grenda's clients to invest nearly $12 million in the fund. Not happy with the performance, Stephan abandoned the algorithm after just five months and took over manual trades without telling the clients. But he didn't do any better. He then switched to investing in stock options in late 2012, but that strategy backfired and the fund lost 80 percent of its value.
Grenda had already pulled his clients out in October 2012, after they suffered $320,000 in total losses. But the SEC, in accusing Grenda and Dembski of making false and misleading statements, had also charged that Grenda borrowed $175,000 from a client to "grow his business," when he actually used much of it to pay debts and personal expenses.
In addition to the SEC action, the two brokers were also barred from the industry for life in 2016 by the Financial Industry Regulatory Authority.