Corporate & Securities Law

SNSFE Investigates The SEC's Sanctioning Of Hennessee Group For Its Failure To Conduct Adequate Due Diligence, To Monitor And To Otherwise Protect Clients From The Bayou Fraud

By James Eccleston

The Securities and Exchange Commission has announced that it has charged New York-based investment adviser Hennessee Group and its principal Charles Gradante with securities law violations for failing to perform their advertised review and analysis before recommending that their clients invest in the Bayou hedge funds that were later discovered to be a fraud.

In a settled administrative proceeding, the Commission issued an order finding that Hennessee Group and Gradante did not perform key elements of the due diligence that they had represented they would conduct prior to recommending investments in the Bayou hedge funds.  The SEC also finds that they failed to conduct a reasonable investigation into red flags concerning Bayou.  Hennessee Group and Gradante routinely represented to clients and prospective clients that they would not recommend investments in hedge funds that did not satisfy all phases of their due diligence evaluation.

"As the Commission found, these investment advisers failed to honor the representations they made to their clients and did not disclose these material departures from their advertised services," said Antonia Chion, Associate Director of the SEC's Division of Enforcement. "The advice that clients receive from hedge fund consultants is especially critical when the hedge funds are neither regulated nor transparent."

According to the Commission's order, approximately 40 clients invested millions of dollars in the Bayou hedge funds from February 2003 through August 2005 after the Hennessee Group recommended those investments.  Most of the money was lost through trading or dissipated by Bayou's principals, who defrauded their investors by fabricating Bayou's performance in client account statements and year-end financial statements.  The SEC charged the managers of the Bayou hedge funds with fraud in 2005.

The Commission's order finds that Hennessee Group and Gradante failed to conduct the portfolio and trading analysis that it had advertised to clients.  Instead of analyzing Bayou's results and processes through a review of Bayou's historical trading methods to determine whether the fund was, in fact, successfully executing its purported day-trading strategy, Hennessee Group and Gradante decided not to perform any analysis after Bayou refused to produce its trading data.  They relied entirely on Bayou's uncorroborated representations about its strategy and its purported rates of return.

The Commission's order also finds that despite conflicting reports from Bayou about the identity of their independent auditor, Hennessee Group and Gradante failed to verify Bayou's relationship with its auditor.  In fact, the accounting firm that purportedly conducted Bayou's annual audit was a non-existent entity fabricated by one of Bayou's principals, who was identified in publicly available state accountancy board records as the registered agent for the bogus accounting firm.

According to the Commission's order, Hennessee Group and Gradante also failed to respond to red flags concerning Bayou that came to their attention while they were monitoring Bayou on behalf of their clients.  In particular, they failed to inquire or investigate when Bayou provided contradictory responses regarding the identity of its auditor or to adequately inquire about a rumor that one of Bayou's principals was affiliated with Bayou's purported outside auditing firm.

The Commission's order finds that Hennessee Group and Gradante violated Section 206(2) of the Advisers Act.  The order requires Hennessee Group and Gradante to pay $814,644.12 in disgorgement and penalties, and to cease and desist from committing or causing further violations.  The parties also are required to adopt policies to ensure adequate disclosures in the future and to provide copies of the Commission's Order to all current and prospective clients for a period of two years.

SNSFE continues to investigate this matter and would be interested in conferring with investors who suffer at the hands of Hennessee Group's shortcomings.

Source:  SEC Press Release

Full post as published by FinancialCounsel on April 24, 2009 (boomark / email).