When their brokerage statements arrived, the wealthy investors thought their holdings were going gangbusters with profits. Soon, they ponied up another $4 million for the Orlando-based hedge funds managed by their brokers.
The problem? It was all a mirage. They had actually lost millions of dollars already; and only a fraction of their holdings were left, regulators say.
Now officials at an Altamonte Springs-based stock brokerage face allegations of misconduct stemming from the $23 million hedge-fund operation – much of it involving penny stocks — that used falsified account statements to bilk clients, according to a regulatory complaint.
Securities regulators alleged that two now-former brokers with Merrimac Corporate Securities Inc. used bogus statements and other tactics to raise millions of dollars for their outside hedge funds while Merrimac's top executives Stephen D. Pizzuti and David W. Matthews did nothing to stop them.
The Financial Industry Regulatory Authority complaint alleges civil fraud by the former Merrimac brokers – John W. DuBrule and Kevin A. Tuttle — and seeks restitution of all gains. Their clients' identities were not disclosed in the complaint.
DuBrule and Tuttle deny any wrongdoing in their hedge fund activity that took place from 2007 to 2010 as the financial crisis caused the stock market to plummet, said their lawyer, Russel L. Forkey of Fort Lauderdale.
"We will vigorously defend against these claims, and we expect to be vindicated," he said. "The documents my clients provided investors clearly spell out the hedge funds' investment strategy and its risks.''
FINRA's complaint alleges the brokers systematically misled their clients, in some cases massively inflating the value of their accounts and pocketing management fees based on the fake asset values.
In 2008 and 2009 alone, DuBrule and Tuttle misappropriated over $141,000 in investors' funds, the complaint said.
Financial experts say the case is a cautionary tale for investors: the riskiness of investing in dubiously valued penny stocks, which aren't traded on any major exchange, and the risk of dealing with brokers who send out client statements, instead of using an independent third-party vendor.
"It should raise red flags on both counts," said Dennis Nolte, president of the Financial Planning Association of Central Florida. "The penny stocks can be so easily manipulated, you can quickly lose everything you invest.''
FINRA also alleged securities-related misconduct by Pizzuti involving misleading promotion of his outside financial advice firm, Evaluvest LLC. The complaint said Pizzuti has made get-rich-quick claims about his investment system, but failed to provide investors with any evidence to substantiate his claims.
Pizzuti disputes the allegations, said his lawyer Richard M. Nummi of Tampa.
"Mr. Pizzuti is not at liberty to discuss matters under pending FINRA review but looks forward to vigorously defending both his personal integrity and that of his firm," Nummi said in an email.
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