FINRA Bars Two Brokers from the Industry for Fraud Related to Hedge Fund Sales

By Michael Williford, Spring 2016 Student Intern

On February 11, 2016, the Financial Industry Regulatory Authority (FINRA) announced it was barring two brokers based in Buffalo, New York for material misrepresentations and omissions connection with their sales pitch to investors that the Prestige Wealth Management Fund was a “growth” fund driven by sophisticated computer algorithms designed to minimize risk.

The reality is the fund was managed by Chief Investment Officer for the fund, and the fund was not required to use the software investors were told it relied on. The sales materials stated the CIO had over 14 years of experience in the investment business, had managed more than $500 million in assets, and was a “Vice President of Investments for a New York based investment company.” None of the claims were true, and the pair knew it when they pitched the fund exclusively to longtime clients of the firm, taking advantage of the trust relationship they had with their clients

We have discussed the dangers of hedge funds before; here, here, and here. The message, whether from the Investor Advocacy Clinic, FINRA, or the SEC, is always the same: hedge funds’ potential for a greater return comes at price. Hedge funds often seek to increase profits by leveraging (borrowing money) their positions. The practices are often speculative, and can lead to huge downside exposure if the fund is not well managed or the market takes an unforeseen turn for the worse.

Then there are brokers like these two that engage not in risky strategies, but in out and out fraud.

Hedge funds can be useful investment tools for the right investors. For those whose portfolios can tolerate the high level kind of risk inherent in hedge funds, they may be appropriate. Unfortunately, most investors cannot afford to have their nest eggs wrapped up in highly speculative investments in industries with a great deal of exposure to small movements in things like interest rates. A fund can be decimated when those things occur. Take Prestige Wealth Management, for example. In the last month of the funds life, it lost over 80% of its value.

Before investing in a hedge fund, do your homework. The SEC has a checklist of items every investor should consider before committing their hard-earned dollars to complicated investment vehicles like hedge funds. You can see the SEC’s advice here.