NY Investment Advice Firm Charged With Fraudulent Sale of Bayou Hedge Funds

A New York-based investment advising firm and its principal owner have been charged with failing to do their homework on Bayou hedge funds before recommending that their clients purchase the investments, which later turned out to be frauds.

The Securities and Exchange Commission today filed a civil complaint against Hennessee Group LLC and its owner, Charles J. Gradante, who are accused of failing to perform their due diligence about the investments while lying to clients about having conducted audits of the funds prior to recommending them as investments.

The advising firm also failed to follow up on “red flags” that appeared in the Bayou hedge funds, the SEC said.

Financial Adviser Fraud, a Growing Problem

Fraud, deception, and other illegal and unethical conduct by investment advisers is a growing problem as the nation grapples with an historic economic downturn. Millions of investors have been duped by unscrupulous financial advisors, brokers, and agents who mishandle client investment accounts or pitch investments that are either too risky or otherwise unsuitable for the investor.

The SEC, in announcing the charges against Hennessey, vowed to crack down on such illegal conduct in the future.

“Forewarned is forearmed — investment advisers must make good on their promises or face the consequences of vigorous SEC enforcement action,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

Dozens of Clients Lost Millions

About 40 Hennessee clients had invested millions of dollars in the Bayou hedge funds from February 2003 through August 2005 after the firm recommended them, the SEC said. Hennessee officials attempted to cover up losses by creating fake client account statements and year-end financial statements, prosecutors said.

Several Hennessee Group managers who handled the Bayou hedge funds were charged with fraud in 2005 for lying to investors through the fictitious account statements.

Crucial Analysis Was Skipped

The Hennessee Group also is accused of skipping critical portfolio review and trading analysis that it had promised clients would be conducted with regards to their investments. Instead of looking independently at Bayou’s results, Hennessee relied entirely on Bayou’s own representations of the performance of the funds and purported rates of return, according to the SEC.

Hennessee also failed to follow up when Bayou gave contradictory responses about the identity of its purported auditor or to investigate rumors that a Bayou principal was affiliated with the firm’s outside auditor, federal regulators said.

Gradante and Hennessee are accused of violating federal law for financial advisers. The agency is seeking the return of improperly earned income and financial penalties totaling $814,644 as well as measures designed to prevent future abuses of investors.

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