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December 11, 2014 at 11:01 AM
Among recent enforcement actions, the Department of Labor went after two fiduciaries who faked an employee benefit plan.
The SEC was also busy, bringing charges of fraud against an investment advisory firm and its two co-owners for their false statements in recommending a risky hedge fund; of accounting violations against a bank holding company; and sanctions against eight audit firms for violating auditor independence rules.
Fiduciaries Ordered to Pay $4.7 Million for Fake Health Plan
The Department of Labor has emerged the victor from a case against the two fiduciaries of the Professional Industrial Trade Workers Union Health and Welfare Fund after a federal judge ordered James Doyle and Cynthia Holloway to pay $4.7 million in restitution, plus interest, for ERISA violations.
The court found that Doyle and others used the fake Professional Industrial Trade Workers Union as a front for a scheme to operate a purported, union-sponsored employee benefit plan. To get medical benefits from the plan, employers and workers across the U.S. had to join the phony union and make payments.
But instead of paying out health care benefits and paying reasonable administration costs, Doyle diverted the money and instead used most of it to cover bogus expenses including “union dues.” For her part, Holloway failed to act as a fiduciary and allowed the scheme to continue.
The court also found that the defendants marketed and ran the health plan in violation of federal law when they failed to administer the fund’s assets for the exclusive purpose of providing benefits to the fund’s participants and beneficiaries.
Doyle and Holloway are permanently barred from serving as a fiduciary or service provider to any employee benefit plan covered by the Employee Retirement Income Security Act. The court also appointed an independent fiduciary to administer and ultimately terminate the plan, which, at its height, had approximately 2,500 participants.
SEC Charges Firm Pushing Risky Hedge Fund on Retirees With Fraud
The SEC has charged Timothy Dembski and Walter Grenda Jr., co-owners of Buffalo, New York-based investment advisory firm Reliance Financial Advisors, with fraud for making false and misleading statements to clients when recommending investments in a risky hedge fund. The hedge fund’s portfolio manager agreed to settle similar charges.
According to the agency, Dembski and Grenda steered clients toward a hedge fund managed by Scott Stephan, who had virtually no hedge fund investing experience. Instead, Stephan had spent the majority of his career collecting on past-due car loans.
Not only did Dembski and Grenda urge clients to invest in Stephan’s fund via offering materials that exaggerated Stephan’s experience, they pushed the highly speculative “investment” on clients who were retired or nearing retirement and living on fixed incomes.
In addition, the trading strategy that was allegedly described to investors was fully automated by an algorithm purportedly sought by big banks. The trading algorithm, however, did not work as intended and Stephan began placing trades manually, which led to the hedge fund’s eventual collapse.
Dembski’s clients invested approximately $4 million in Prestige Wealth Management Fund, and Grenda’s clients invested approximately $8 million. The hedge fund, which began trading in April 2011, did not generate the positive returns advertised, so Grenda withdrew his clients in October 2012. The fund lost about 80% of its value when it collapsed a couple of months later, leaving Dembski’s clients to lose the vast majority of their investments.
In addition, the SEC said that Grenda also borrowed $175,000 from two clients in late 2009 and falsely told them that he would use it as a loan to grow his investment advisory business. Instead he spent the money on personal expenses and debts.
