Hennessee Lawsuit Dismissal Upheld

Jul 17 2009 | 1:35am ET

An investor cannot sue alternative investments adviser and hedge fund index provider the Hennessee Group, a federal appeals court has ruled.

The U.S. Second Circuit Court of Appeals in New York affirmed a lower court’s decision to toss South Cherry Street’s lawsuit against Hennessee. South Cherry accused Hennessee of breach of fiduciary duty in 2006, alleging that the consulting firm either failed to conduct sufficient due diligence on Connecticut-based Bayou Group or did a “woefully inadequate job.” South Cherry invested $1.15 million with Bayou between 2003 and 2004. Bayou collapsed a year later in a scandal that cost investors more than $450 million; four of the firm’s former executives have since gone to prison for fraud.

But U.S. District Judge Colleen McMahon—who also presided over the trial of Bayou’s Samuel Israel—threw out Cherry Street’s lawsuit two years ago, finding the claims without merit.

The higher court agreed.

“There is no factual allegation in the complaint that, prior to that announcement in July 2005, there were obvious signs of fraud, or that the danger of fraud was so obvious that Hennessee Group must have been aware of it,” the three-judge panel ruled.

“We are delighted with the Second Circuit’s decision that finds all claims of breach of contract and securities fraud against Hennessee are without merit,” Hennessee’s lawyer, Bennett Falk, said. “Bayou’s Ponzi scheme caused many unfortunate events, but the Court’s decision establishes that Hennessee was not a participant on any level.”

Hennessee and principal Charles Gradante earlier this year settled similar charges of due diligence failures filed by the Securities and Exchange Commission. Neither the firm nor Gradante admitted any wrongdoing.

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