In the Matter of Hennessee Group LLC
Securities and Exchange Commission
Investment Advisers Act Release No. 2871 (2009)
- Written by Craig Scheer, JD
Facts
Hennessee Group LLC, an investment adviser registered with the Securities and Exchange Commission (SEC), specialized in recommending and monitoring hedge-fund investments for its clients. Hennessee Group and its principal, Charles J. Gradante, made representations to clients about the quality and rigor of Hennessee Group’s multilevel due-diligence process for evaluating hedge funds and maintained that Hennessee Group would not recommend a fund that did not satisfactorily complete all levels of that process. In December 2002, Hennessee Group began recommending that its clients invest in several hedge funds run by Bayou Management, LLC, without completing two aspects of Hennessee Group’s due-diligence process: a detailed analysis of Bayou’s portfolio and trading records and verification of Bayou’s relationship with its independent auditor. Hennessee Group was unable to complete the portfolio/trading analysis because Bayou refused to provide the necessary reports from its prime broker. Despite being presented with conflicting information about the identity of Bayou’s independent auditor, Hennessee Group failed to adequately investigate these discrepancies. Hennessee Group and Gradante also failed to adequately investigate a rumor that Bayou’s chief financial officer was affiliated with Bayou’s independent audit firm, a potential conflict of interest. Hennessee Group never told its clients about these shortcomings in its due-diligence review of Bayou. In August 2005, after Bayou announced that it was shutting down and liquidating its funds, it was revealed that Bayou’s principals had defrauded investors in the Bayou funds by falsifying Bayou’s performance and issuing financial statements that included a fake independent-auditor opinion created by Bayou’s chief financial officer. Hennessee Group clients had invested a total of more than $56 million in the Bayou funds, most of which was lost. The SEC brought an administrative proceeding against Hennessee Group and Gradante for violations of § 206(2) of the Investment Advisers Act of 1940 (Advisers Act).
Rule of Law
Issue
Holding and Reasoning ()
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