Investment adviser Hennessee Group LLC and its principal, Charles Gradante, have been charged with securities law violations by the SEC for failing to perform an advertised review and analysis before recommending Bayou Management LLC hedge funds that were later discovered to be a fraud.
Investment adviser Hennessee Group LLC and its principal, Charles Gradante, have been charged with securities law violations by the SEC for failing to perform an advertised review and analysis before recommending Bayou Management LLC hedge funds that were later discovered to be a fraud.
In a settled administrative proceeding, Hennessee and Mr. Gradante were ordered to pay $814,644 in disgorgement and penalties, and to stop committing further violations of securities law.
New York-based Hennessee also must adopt policies to ensure adequate disclosures and provide copies of the Securities and Exchange Commission’s order to current and prospective clients for two years.
Hennessee Group had $518.6 million under management, according to its 2008 ADV disclosure form.
The firm and Mr. Gradante consented to the settlement without admitting or denying the findings. The firm’s lawyers could not be reached for comment.
About 40 clients invested millions of dollars in the Bayou hedge funds, based in Stamford, Conn., from February 2003 through August 2005 after Hennessee Group recommended the investments, according to a SEC statement.
Bayou was later found to have defrauded their investors by fabricating performance in client account statements. Bayou managers were charged with fraud in 2005 by the SEC.
Hennessee did not perform any analysis of Bayou’s results after Bayou refused to produce its trading data, the SEC said in the release.
“Investment advisers must make good on their promises or face the consequences of vigorous SEC enforcement action,” Robert Khuzami, director of the SEC’s Division of Enforcement, said in the release.
“We need to do something about fraud audits,” Mr. Gradante said. “We need to outsource the SEC’s fraud audits to third parties that specialize in forensic accounting and have the experience in uncovering fraud. It is quite obvious that fraud detection is extremely difficult,” he said.
Congress should mandate that fraud audits be performed by third party experts, Mr. Gradante said.
