SEC Toe Tags Another Hedge Fund

The Securities and Exchange Commission charged New York-based investment adviser Hennessee Group LLC and its principal, Charles J. Gradante, with securities law violations on April 22nd. They settled on charges of 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 failed to perform appropriate due diligence before recommending investments in the Bayou hedge funds. The SEC also found that they failed to conduct a reasonable investigation into red flags concerning Bayou despite routine assertions 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.”

The order states that some 40 clients invested millions of dollars in the Bayou hedge funds from February 2003 through August 2005 on Hennessee Group’s recommendations. Money that wasn’t lost through trading was used by Bayou’s principals, who then fabricated statements to hide the fraud.

The Commission also found that Hennessee Group and Gradante failed to verify Bayou’s relationship with its auditor, which turned out to be a non-existent accounting firm fabricated by one of Bayou’s principals.

Hennessee Group and Gradante consented to the entry of the Commission’s order without admitting or denying the findings.

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