Ex-Sterne Agee broker faces expulsion over $6 million hedge fund

Finra said Dean Mustaphalli failed to disclose side business to his firm; unclear if clients were affected

Jul 11, 2014 @ 12:21 pm

By Mason Braswell

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A former Sterne Agee Financial Services Inc. broker could be expelled for allegedly running a $6 million hedge fund on the side.

The Financial Industry Regulatory Authority Inc. charged Dean Mustaphalli for founding and receiving commissions from his fund, Mustaphalli Capital Partners, in 2011 without informing the broker-dealer. He solicited money for the fund from at least 25 investors over six months during 2011, according to the complaint filed by Finra's department of enforcement.

(See also: Sterne Agee overhauls leadership after filing lawsuit against auditing firm KPMG)

The value of the fund, which invested in publicly traded equity and debt securities, has since declined by approximately 90%, according to Lars Soreide, an attorney who said he has filed two arbitration claims against Mr. Mustphalli and Sterne Agee.

Finra said it was not clear if any of the investors were Sterne Agee customers but Mr. Soreide said one of his clients was. Mr. Mustaphalli was not cooperating with requests to provide account statements for the hedge fund, Finra said.

“It's currently in inning one of a nine-inning ball game,” said Andrew Stoltmann, an attorney also representing investors in Mr. Mustphalli's hedge fund. “There's no question that Finra will be extraordinarily interested in what the firm did and didn't do.”

An outside spokesman for Sterne Agee, Mike Goodwin, said in an emailed statement that the firm was not aware of any investments in the fund coming through the firm.

Mr. Mustaphalli did not return a call or message left with the number listed for his registered investment advisory firm, Mustaphalli Advisory Group.

Mr. Mustaphalli managed the fund through Mustaphalli Advisory Group. Although he disclosed the existence of the RIA to Sterne Agee, he did not say he was managing the hedge fund through the firm, Finra said. Mr. Mustaphalli would receive a performance fee and his RIA received a management fee from the hedge fund, Finra said.

Under Finra rules, brokers are permitted to operate hedge funds provided they are fully disclosed, approved by the Finra member firm and supervised by the firm, according to Rule 3040.

Mr. Mustaphalli will have the opportunity to plead his case to a Finra hearing panel. If Finra's department of enforcement proves he had withheld information, he could be barred from the securities industry in addition to any action taken for failure to disclose the hedge fund.

Mr. Mustaphalli continued to solicit clients for the fund through the investment adviser after he was fired from Sterne Agee, according to Jonathan Kurta, partner at the law firm Fitapelli Kurta, who is representing investors in the Mustaphalli hedge fund.

The adviser is still licensed to do business in New York, according to the Securities and Exchange Commission's Investment Adviser Public Disclosure database.

Between April and August of 2011, Mr. Mustaphalli received approximately $41,800 in management fees, according to the complaint.

Mr. Mustaphalli had been in the industry for 14 years and had been with Sterne Agee for two years before he was terminated by the firm in 2011.

Separately, Finra has a second investigation pending against Mr. Mustaphalli for allegedly making unsuitable transactions regarding variable annuities while he was at Citigroup Global Markets Inc. from 2007 to 2009.

Mr. Mustaphalli denied those allegations on his registration records with the SEC.

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