The Securities and Exchange Commission has settled securities law violations charges against New York-based investment adviser Hennessee Group and its principal Charles J.
The Securities and Exchange Commission has settled securities law violations charges against New York-based investment adviser Hennessee Group and its principal Charles J. Gradante 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.
The commission issued an order finding that Hennessee Group and Gradante (pictured) 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 and failed to conduct a reasonable investigation into red flags concerning Bayou.
Hennessee Group and Gradante, who the SEC says 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, consented to the order without admitting or denying the findings, paying more than USD800,000 in disgorgement and penalties.
‘Forewarned is forearmed – investment advisers must make good on their promises or face the consequences of vigorous SEC enforcement action,’ says Robert Khuzami, director of the SEC’s division of enforcement.
‘These investment advisers failed to honour the representations they made to their clients and did not disclose these material departures from their advertised services,’ adds the division’s associate director Antonia Chion. ‘The advice that clients receive from hedge fund consultants is especially critical when the funds are neither regulated nor transparent.’
According to the order, approximately 40 clients invested millions of dollars in the Bayou hedge funds from February 2003 through August 2005 after they were recommended by the Hennessee Group.
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 Bayou managers with fraud in 2005.
The order finds that Hennessee Group and Gradante failed to conduct the portfolio and trading analysis that it had advertised to clients. Instead of analysing Bayou’s results and processes through a review of Bayou’s historical trading methods to determine whether the fund was successfully executing its purported day-trading strategy, they decided not to perform any analysis after Bayou refused to produce its trading data, instead relying entirely on uncorroborated representations about Bayou’s strategy and its purported rates of return.
The SEC order also finds that despite conflicting reports from Bayou about the identity of their independent auditor, Hennessee Group and Gradante failed to verify the firm’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, 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 investigate when Bayou provided contradictory responses regarding the identity of its auditor or to adequately inquire about a rumour that one of Bayou’s principals was affiliated with the purported external auditor.
The order finds that Hennessee Group and Gradante violated Section 206(2) of the Advisers Act. The order requires Hennessee Group and Gradante to pay USD814,644.12 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 order to all current and prospective clients for a period of two years.
