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A.G. Underwood Announces Criminal Indictment Of Queens Investment Advisor For Defrauding Elderly Clients Of Nearly $5 Million

News from the New York Attorney General's Office

FOR IMMEDIATE RELEASE
May 30, 2018

Attorney General’s Press Office / 212-416-8060
nyag.pressoffice@ag.ny.gov 

A.G. UNDERWOOD ANNOUNCES CRIMINAL INDICTMENT OF QUEENS INVESTMENT ADVISOR FOR DEFRAUDING ELDERLY CLIENTS OF NEARLY $5 MILLION

Dean S. Mustaphalli — Owner And Operator of Mustaphalli Capital Partners Fund, LP — Arraigned On 99-Count Indictment Charging Securities Fraud, Grand Larceny, Forgery, and Scheme to Defraud

Underwood: Mustaphalli Deceived and Took Advantage of Clients’ Trust – Looting and Squandering Millions from Senior New Yorkers Who Relied on Those Savings

NEW YORK - Attorney General Barbara D. Underwood today announced a 99-count criminal indictment charging Queens investment advisor Dean S. Mustaphalli —  the owner and operator of Mustaphalli Capital Partners Fund, LP — with operating a multi-million dollar securities fraud scheme.  

Mustaphalli allegedly engaged in a scheme to defraud investors — many of whom were elderly and at or near retirement — out of their savings by investing them in his hedge fund without their knowledge or consent. During the relevant time period, Mustaphalli’s hedge fund collapsed, losing 92% of its value. The Attorney General’s indictment, unsealed in Queens County Supreme Court, charges Mustaphalli with Grand Larceny, Forgery, and Securities Fraud violations under the Martin Act, among other charges. If convicted, Mustaphalli faces up to 10 to 20 years in prison.

According to the Attorney General’s criminal indictment, Mustaphalli’s scheme brought in more than $5 million from 22 victims between June 2014 and March 2017 alone — including many southeast Queens residents, including a number who live in Rochdale Village, a Mitchell-Lama affordable housing complex. A separate civil lawsuit filed by the Attorney General’s office in June 2017 alleges that Mustaphalli fraudulently solicited an additional $7 million from prior investors between 2012 and 2014. In total, Mustaphalli allegedly fraudulently solicited his former clients to invest over $12 million – and lost over $11 million of their hard-earned money.

“New Yorkers should be able to trust the people they turn to for investment advice,” Attorney General Underwood said. “Yet, as we allege, Dean Mustaphalli deceived the clients that trusted him – looting and squandering millions from senior New Yorkers who relied on those savings. Our office will continue to crack down on unscrupulous financial advisors who scam and swindle New Yorkers out of their hard-earned money.”

In June 2017, after a years-long investigation, the Attorney General’s Investor Protection Bureau filed a civil complaint in New York County. In February 2017, the Attorney General’s Criminal Enforcement and Financial Crimes Bureau commenced a criminal investigation into Mustaphalli’s conduct, resulting in the 99-count criminal indictment.  

As set forth in court documents and according to statements made by prosecutors at arraignment, Mustaphalli’s scheme allegedly targeted elderly New Yorkers who had been his investment advisory clients for many years before he opened his own hedge fund, and who had very little prior investment experience.  As their investment advisor, Mustaphalli knew that these investors had relatively conservative investment objectives.   

Nevertheless, beginning in 2010, Mustaphalli allegedly moved his clients’ assets to a platform that would conceal his risky trading activity. Without explanation, and simply saying that the fund would be “better” for clients, Mustaphalli allegedly diverted his clients’ relatively safe investment portfolios to a hedge fund run solely by Mustaphalli.  

As further set forth in the civil complaint, Mustaphalli allegedly targeted his first wave of investors beginning in 2012, moving $7.1 million into his hedge fund, Mustaphalli Capital Partners Fund, LP (“MCPF”). Mustaphalli then allegedly engaged in a series of high-risk investment strategies, and by the end of that year, MCPF lost 92% of its value. In one instance, Mustaphalli allegedly 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, only $200,000 was left in the fund.  

As set forth in the criminal indictment and according to statements made by prosecutors at arraignment, after losing almost $7 million of investor monies, Mustaphalli then allegedly brought 22 new clients into his hedge fund by 2015, collecting $5 million in additional investor funds or monies’. Once again, Mustaphalli allegedly targeted mostly elderly individuals who had been his clients for many years and trusted him. To effect these transfers, Mustaphalli allegedly forged account opening documents and submitted fake email addresses for his clients, many of whom did not even know how to operate a computer. 

According to court filings and statements made by prosecutors, Mustaphalli’s clients allegedly had no idea that their retirement monies were being transferred into an extremely high-risk investment, much less to a hedge fund. To further his scheme, the defendant allegedly provided his clients with only the signature pages of fund documents, and forged his client’s initials next to the portion of the documents entitled “Accredited Investor Status,” which falsely stated the investors’ net worth was over $1 million dollars. In fact, almost none of the defendant’s clients had a net worth of over $1 million dollars; indeed, a few investors live in Rochdale Village, a Mitchell-Lama Cooperative located in Queens, which sets aside affordable housing for moderate and middle-income residents. 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.

By December 2015, MCPF had lost approximately 80% of its value, again because Mustaphalli allegedly engaged in extremely high-risk and unauthorized trading strategies, including speculative options trading.  

According to prosecutors, most of the 22 investors named in the indictment allegedly lost all or most of their retirement savings, with losses totaling over $4 million.   

Mustaphalli allegedly sought to deflect blame for the losses by telling investors that the losses were due to “oil, bad markets, and the election.” Mustaphalli allegedly promised one investor, “if Hillary wins, you’ll get your money back,” and told another that “Brexit” was to blame for the Fund’s losses.

In the aftermath of these devastating losses, Mustaphalli allegedly used shell companies that he created to divert $100,000 of the remaining fund balance to himself, leaving investors with at best 20 percent of their original investment.

The Attorney General’s 99-count criminal indictment, unsealed late yesterday in Queens Supreme Court, charges the defendant with: 18 counts of Grand Larceny in the Second Degree (a Class “C” felony); one count of Grand Larceny in the Third Degree (a Class “D” felony); 12 counts of Forgery in the Second Degree (a Class “D” felony); 23 counts of Criminal Possession of a Forged Instrument in the Second Degree (a Class “D” felony); 22 counts of  Falsifying Business Records in the First Degree (a Class “E” felony); 21 counts of securities fraud under the Martin Act (a Class “E” felony); and two counts of Scheme to Defraud in the First Degree (a Class “E” felony).

Mustaphalli was arraigned yesterday in Queens County Supreme Court before the Honorable Judge Wong. Bail was set in the amount of $2 million cash or bond, and the defendant was ordered to surrender any travel documents.

The charges are merely accusations and the defendant is presumed innocent unless and until proven guilty in a court of law.

The Attorney General thanks the Financial Industry Regulatory Authority (FINRA) and, in particular, its Criminal Prosecution Assistance Group for their valuable assistance on this case. 

The Attorney General’s criminal investigation was conducted by Investigator Brian Metz, under the supervision of Supervising Investigator Michael Leahy and Deputy Chief John McManus. Forensic accounting was performed by Forensic Auditors Alex Ozechowski and Marcos Perez. The Investigations Bureau is led by Chief Dominick Zarrella. The Forensic Audit Section is led by Chief Auditor Edward J. Keegan.

The criminal case is being handled by Assistant Attorneys General Maureen Grodidier, Kristen Bitetto, and Kenneth Haim of the Criminal Enforcement and Financial Crimes Bureau, with the assistance of Legal Analyst Rebecca Jacobson and Supervising Legal Analyst Paul Strocko. The Criminal Enforcement and Financial Crimes Bureau is led by Bureau Chief Stephanie Swenton and Deputy Bureau Chief Joseph G. D’Arrigo. The Criminal Division is led by Margaret Garnett, Executive Deputy Attorney General for Criminal Justice.

The civil case is being handled by Assistant Attorney General Tanya Trakht and Senior Enforcement Counsel Steven Glassman, with the assistance of Legal Assistant Eddie Aguilar of the Investor Protection Bureau. The Investor Protection Bureau is led by Bureau Chief Katherine C. Milgram and Enforcement Section Chief Cynthia Hanawalt.  The Investor Protection Bureau is overseen by Executive Deputy Attorney General for Economic Justice Manisha M. Sheth.