Monday, 8 February 2016
Last updated 2 days ago
Apr 23 2009 | 7:45am ET
The Hennessee Group, the alternative investments adviser and hedge fund index provider, has settled charges of due diligence failures in recommending a fraudulent hedge fund to its clients.
New York-based Hennessee and principal Charles 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 Securities and Exchange Commission alleged. Connecticut-based Bayou Group collapsed in 2005, with investors defrauded of some $400 million. About $56 million of that came from 40 clients that were steered to Bayou by Hennessee.
Three former Bayou executives have been sent to prison for their role in the scheme; a fourth man, the brother of the hedge fund’s former CFO, was sentenced to almost two years in prison for knowing about the fraud yesterday.
Hennessee and Gradante agreed to pay more than $800,000 in disgorgement and penalties without admitting or denying the SEC’s findings.
“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 SEC, Hennessee did not conduct portfolio or trading analyses on Bayou because the hedge fund refused to produce its trading data, and failed to look into red flags surrounding Bayou’s independent auditor, which turned out to be phony.
For his part, Gradante said he is focusing on the positives.
“I now have a platform, so to speak, to have the recommendations I have been making to the SEC and other regulators since 1998 considered in better focus,” he said.
Gradante offered a three-pronged fraud prevention system that “could eliminate or substantially reduce the incidence of fraud.” He called on Congress and the SEC to mandate that hedge funds have fraud audits conducted by a forensic accountancy, such as Kroll, “an inexpensive and simple mandate at no cost to taxpayers that would have caught” Bernard Madoff’s $65 billion Ponzi scheme.
He also called for “gatekeepers”—lawyers, prime brokers, accountants and administrators—that would be held responsible for the veracity of different aspects of hedge fund disclosures.
Finally, Gradante said onshore hedge funds should be more like offshore hedge funds, with required monthly net asset value calculations.
“The are far fewer offshore frauds than onshore frauds, because offshore frauds perform monthly NAV calculations,” he said.