By Bryan Rafie, Spring 2016 Student Intern
So much of the market today operates on trust. When an investor reads a prospectus, they expect to find accurate representations of the investment’s costs and risk profile. Then, based on those representations, investors make investment decisions that best fit their portfolio. Unfortunately, the average retail investor does not rely on the prospectus to make these decisions. In fact, most retail investors rely on what their broker or investment adviser tells them about the investment they are considering. The investor trusts the advice is accurate.
FINRA has barred two brokers, Timothy S. Dembski and Walter F. Grenda, from the securities industry for misrepresenting the risks of a hedge fund to investors and lying about their background. The brokers told investors the hedge fund was a “growth” fund that relied on a computer algorithm to prevent significant losses. None of this was true. The fund was actually completely controlled by a manager, the company’s CIO. The brokers also misrepresented the CIO’s experience. They distributed materials saying, “he had 14 years of experience,” and had “co-managed a portfolio of $500 million in assets.” This wasn’t true either. Subsequently, the fund lost 80% of its value in the last month it traded, costing investors a lot of money.
The point of highlighting this action by FINRA is to point out the importance of truthful information to a retail investor. Unfortunately accessing this information takes effort on the investor’s part. An investor should read the investment’s prospectus that was filed with the SEC, use FINRA’s Broker Check for information about your broker or investment adviser, and not just blindly rely on what a broker or adviser says.