Hennessee Settles Bayou Charges

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.


In Depth

Q&A: Open Season For Closed-End Funds

Aug 29 2014 | 10:00am ET

When Maury Fertig and Bob Huffman, former Salomon Brothers coworkers, launched...

Lifestyle

Och Funds Women In Finance Initiative At U-M

Aug 28 2014 | 3:01pm ET

Och-Ziff Capital founder Daniel Och and his wife have made a "generous donation"...

Guest Contributor

Looking Ahead: What’s In Store For Managed Futures?

Aug 22 2014 | 12:52pm ET

The last five years were phenomenal for investors in equity indices. Will the next...

 

Editor's Note

    Get A Sneak Peak Of The Alpha Pages

    Aug 25 2014 | 11:21am ET

    As many of you know, FINalternatives was recently acquired by the owners of Futures magazine, a firm called The Alpha Pages LLC. Today marks the soft-launch of a new sister site for both publications. As its name suggests, The Alpha Pages will cover all types of alternative investments, going far beyond the more well-known ones such as hedge funds and private equity. Read more…

 

Futures Magazine

July/August 2014 Cover

The time was right

Commodities/Futures magazine launched at the precipice of a revolution in the futures industry—really a revolution in the idea of risk management—that would move it from a small niche industry to ...

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.