Hennessee pays fine for Bayou advice

Date: Thursday, April 23, 2009
Author: Deborah Brewster, Financial Times

Hennessee Group, which advised clients to invest in the Bayou hedge funds that were later discovered to be fraudulent, has agreed to pay $814,644 in fines to settle charges that it failed to properly investigate the funds.

The US Securities and Exchange Commission on Wednesday charged Hennessee and its principal, Charles Gradante, with violating securities laws by failing to perform their advertised review and analysis before recommeding clients to invest in the Bayou fund.

The move, which comes more than four years after the Bayou fraud was uncovered, might indicate that the SEC could be working on a similar case against some of the advisers who put investors’ money into Bernard Madoff’s “ponzi” scheme.

The Madoff fraud came to light just four months ago and presents similar themes. Sam Israel, the founder and manager of Bayou, fabricated his funds’ returns, as Mr Madoff has also been convicted of doing.

Robert Khuzami, the director of the SEC’s division of enforcement, said: “Forewarned is forearmed – investment advisers must make good on their promises or face the consequences of vigorous SEC enforcement action.”

The SEC said 40 Hennessee clients had invested millions of dollars in the Bayou hedge funds from 2003 to 2005 after Hennessee recommended them.

The regulator said: “Hennessee Group and Gradante failed to conduct the portfolio and trading analysis that it had advertised to clients . . . [they] 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.”

Hennessee also failed to verify Bayou’s auditor, and failed to respond to red flags that arose, such as contradictory information about the auditor and rumours that one of Bayou’s principals was affiliated with Bayou’s purported outside auditing firm, the regulator said.

Hennessee paid the fine without admitting or denying the findings.

Mr Gradante said that the SEC and Congress should mandate that fraud audits should be conducted on all hedge funds by Kroll, the investigative firm. The audits would be paid for by the hedge fund investors and managers, he said.

The $50bn Madoff fraud has heightened concerns about fraudulent money managers. In recent weeks, more than 200 investors who put money with Mr Madoff have been asked to return money they withdrew from the Madoff funds in the six years before his firm collapsed in December.

Irving Picard, the trustee for Mr Madoff’s firm, is charged with recovering assets for investors and is attempting to “claw back” $735m in money withdrawn.