The Securities Exchange Commission charged the co-owners of Buffalo, N.Y.-based Reliance Financial Advisors with fraud for allegedly misleading clients about risks associated with a hedge fund managed by a former debt collector.

Scott Stephan sought to manage the Prestige Wealth Management Fund but had spent most of his career collecting overdue car loans and had no investment experience.

The SEC began cease-and-desist proceedings last week against Reliance Financial and co-owners Timothy Dembski and Walter Grenda Jr., charging both men with violating anti-fraud provisions of the Investment Advisers Act, the Securities Act and the Securities Exchange Act.

Dembski and Grenda reportedly promoted Stephan's "fully automated trading algorithm" strategy to their clients while downplaying the risks. The algorithm did not work as hoped, prompting Stephan to begin trading manually. The hedge fund collapsed, and large sums of clients' holdings disappeared.

According to the SEC, the hedge fund began trading in April 2011. Grenda moved his clients out of the fund in October 2012. Dembski did not follow suit and his clients lost the majority of their investments. Dembski's clients had invested roughly $4 million in the fund; Grenda's clients had positions of around $8 million, the SEC reports.

"Investment advisors owe their clients a duty of complete candor when it comes to discussing investment options," Andrew Calamari, director of the SEC's New York regional office, said in a statement. "In this case, Dembski and Grenda allegedly violated this fundamental duty by peddling a hedge fund investment that was more risky than depicted and misleading their clients about the portfolio manager's experience."

The SEC further claims Grenda borrowed $175,000 from two clients in 2009, wrongly informing them he planned to use it as a loan to grow his investment advisory business. Instead, Grenda spent the money to repay debts and for other personal expenses.

Stephan previously settled similar SEC charges without admitting guilt and accepted a lifetime ban from the securities industry.

Officials at Reliance Financial could not be immediately reached for comment.

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