Sunday, October 18, 2020

Attorney General James Announces Criminal Conviction and Civil Judgment Against Queens Investment Advisor for Defrauding Elderly Clients of Over $11 Million

 

Owner and Manager of Mustaphalli Capital Partners Fund, LP Sentenced to 3 to 9 Years in Prison

Mustaphalli Pays $260,000 in Restitution and Is Permanently Barred from Securities Industry

 New York Attorney General Letitia James announced the conviction of former investment advisor Dean S. Mustaphalli — the owner of the now defunct Mustaphalli Capital Partners Fund, LP (MCPF) — for operating a multi-million-dollar securities fraud scheme aimed at defrauding over 50 investors — many of whom were elderly and at or near retirement. Mustaphalli invested much of these 50 individuals’ monies in his hedge fund without their knowledge or consent, bringing in more than $11 million between 2011 and 2016, and resulting in many of his victims losing their life savings. Today, in Queens County State Supreme Court — upon his guilty pleas to 22 felony charges, including Grand Larceny and Securities Fraud under the Martin Act — Mustaphalli was sentenced to 3 to 9 years in prison; paid $260,000 in criminal restitution; and signed confessions of judgment in favor of the victims named in the indictment, totaling more than $2.3 million dollars. As part of a separate civil order filed by the Office of the Attorney General (OAG) in New York County State Supreme Court, Mustaphalli entered into an additional judgment in favor of his victims in the amount of $6 million, and he is permanently barred from engaging in any business related to the issuance or sale of securities in New York.

“Dean Mustaphalli stripped numerous New Yorkers of their independence and security when he invested millions from their retirements in high-risk ventures without their consent,” said Attorney General James. “In just four years, Mustaphalli’s massive fraud drove immigrants and individuals nearing retirement into the poorhouse and left them with pennies on the dollar, forcing many back into the workforce. We will not allow this greed to go unchecked in New York, which is why we will continue to use every resource at our disposal to pursue all who attempt to defraud and take advantage of those most vulnerable.”

Mustaphalli’s brazen scheme primarily targeted elderly New Yorkers, most of whom were immigrants or female, and who had been his clients for many years. These victims had very little investment experience and relied upon his advice. As their investment advisor, Mustaphalli knew his victims’ conservative investment objectives and that many of them were planning for retirement. Nevertheless, without their knowledge and consent, Mustaphalli diverted his victims’ safe investment portfolios into MCPF, a hedge fund he solely controlled. Many of these illicit transfers were made at his victims’ most vulnerable moments, such as after the loss of a child or spouse, during a divorce, or while battling an illness.

Mustaphalli targeted his first wave of over 20 investors in 2011, by moving $7.1 million of their money into his hedge fund, MCPF. Mustaphalli then engaged in a series of high-risk investment strategies, and, by the end of 2012, MCPF lost 92 percent of its value. In one instance, Mustaphalli bet $2.5 million on the volatility of the price of Mastercard stock, which lost his clients over $2 million in a single trade. By 2014 — just three years after the initial investments — the fund only had $200,000 of the $7.1 million left in it.  

After losing almost $7 million of his investors’ life savings, Mustaphalli transferred the savings of 30 more clients into his hedge fund by 2015, collecting an additional $5 million in investor funds. Again, Mustaphalli targeted mostly elderly individuals who had been his clients for many years and who trusted him. By December 2015, history repeated itself, with this second wave of investors also falling victim to Mustaphalli’s scheme and losing 80 percent of their investments. What had taken these victims a lifetime to save, Mustaphalli lost in a matter of months. In the aftermath of these devastating losses, Mustaphalli used shell companies that he created to divert $100,000 of the remaining hedge fund balance to himself, leaving investors with, at most, 20 percent of their original investment.

To further his scheme and conceal MCPF’s unsuitability for his elderly clients from investment platforms, Mustaphalli created fake email accounts for his clients, many of whom had never even used a computer. He also forged his clients’ initials next to the portion of the documents entitled “Accredited Investor Status,” which falsely stated that each investor’s net worth was over $1 million, when, in reality, almost none of Mustaphalli’s clients had a net worth of over $1 million. Notably, it is a requirement that hedge fund investors meet the definition of an “accredited investor,” which is a person whose net worth exceeds $1 million.

This massive securities fraud scheme was uncovered by the OAG’s Investor Protection Bureau. In September 2016, the Investor Protection Bureau obtained an order pursuant to General Business Law § 354, which preliminarily restrained Mustaphalli and his related entities from making withdrawals from any bank account in the name of his various businesses affiliated with MCPF. In May 2017, the Investor Protection Bureau obtained a second order pursuant to General Business Law § 354, preliminarily freezing assets of various shell entities used by Mustaphalli to divert money from MCPF. And in June 2017, the Investor Protection Bureau filed a 49-page civil complaint against Mustaphalli in New York County State Supreme Court, alleging numerous violations of New York statutes and laws, including the Martin Act and common law fraud. 

Knowing that he was the target of an OAG investigation still did not deter Mustaphalli from continuing his unlawful activity. Instead, Mustaphalli tried to thwart both the OAG’s investigation and an investigation by the Financial Industry Regulatory Authority (FINRA) by concealing his criminal activities and continuing to fraudulently solicit new victims. 

Mustaphalli subsequently became the target of a criminal investigation by the OAG’s Criminal Enforcement and Financial Crimes Bureau. In May 2018, Mustaphalli was arrested on a 99-count criminal indictment, charging him with Grand Larceny in the Second and Third Degrees, Forgery in the Second Degree, Criminal Possession of a Forged Instrument in the Second Degree, Falsifying Business Records in the First Degree, felony Securities Fraud under the Martin Act, and Scheme to Defraud in the First Degree.  

Last December, Mustaphalli pleaded guilty to 25 felony counts of the OAG’s criminal indictment — including Grand Larceny in the Second Degree, Scheme to Defraud, Falsifying Business Records, and felony Securities Fraud under the Martin Act — before the Honorable Gene Lopez in Queens County State Supreme Court. Earlier this year, in February, the court heard victim impact statements from multiple investors, who shared the devastating impact that Mustaphalli’s crimes continue to have on their lives. Many victims worked multiple jobs to save money for their retirement, but now have had to re-enter the work force or must rely on their children for financial support. Multiple victims testified that Mustaphalli robbed them of more than just their financial independence, but also of their goal of leaving something for their children and grandchildren. The devastating financial impact of the coronavirus disease 2019 (COVID-19) has hit many of these victims, who lost a lifetime of savings particularly hard. Two victims have passed away since Mustaphalli pleaded guilty from other causes.

Today, Mustaphalli was sentenced to 3 to 9 years in prison, having paid $260,000 in criminal restitution to the victims named in the indictment. Mustaphalli also executed confessions of judgment in favor of the victims named in the indictment, totaling over $2.3 million. 

In addition to the criminal conviction, as part of a separate civil order and judgment filed in New York County State Supreme Court in August 2020, Mustaphalli forfeited the approximately $50,000 remaining in his corporate account and confessed judgment in the amount of $6 million in favor of all of his victims. The OAG’s civil order also permanently bars Mustaphalli from engaging in any business related to the issuance or sale of securities in New York.

The OAG wishes to thank FINRA and, in particular, its Criminal Prosecution Assistance Group, for their valuable assistance on this case. 

The criminal case is being handled by Assistant Attorneys General Maureen Grosdidier and Kristen Bitetto of the Criminal Enforcement and Financial Crimes Bureau and Assistant Attorney General Kenneth Haim of the Investor Protection Bureau, with the assistance of Legal Analysts Lyncee Stroman and Sabrina Farahani, and Supervising Legal Analyst Paul Strocko. Forensic accounting was performed by Forensic Auditor Marcos Perez and Principal Forensic Auditor Investigator Jason Blair, under the supervision of Chief Auditor Kristen Fabbri and Deputy Chief Auditor Sandy Bizzarro of the Forensic Audit Section. The Criminal Enforcement and Financial Crimes Bureau is led by Bureau Chief Stephanie Swenton and Deputy Bureau Chief Joseph G. D’Arrigo.

The criminal investigation was conducted by Investigator Brian Metz, under the supervision of Supervising Investigator Michael Leahy and Deputy Chief John McManus. The Investigations Bureau is led by Chief Oliver Pu-Folkes and Deputy Chief John Reidy. Both the Criminal Enforcement and Financial Crimes Bureau and the Investigations Bureau are part of the Division for Criminal Justice, which is overseen by Chief Deputy Attorney General Jose Maldonado.

The civil case is being handled by Assistant Attorney General Tanya Trakht, with the assistance of Legal Assistant Eddie Aguilar — both of the Investor Protection Bureau. The Investor Protection Bureau is led by Bureau Chief Peter Pope and Deputy Bureau Chief Kevin Wallace. The Investor Protection Bureau is part of the Division for Economic Justice, which is overseen by Chief Deputy Attorney General Chris D’Angelo. 

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