On April 22, the Securities and Exchange Commission issued an Order Instituting Administrative Cease-And-Desist Proceedings in the matter of Hennessee Group LLC and its principal, Charles Gradante, in connection with Hennessee’s recommendations to clients to invest in the Bayou funds. Although Hennessee did perform certain parts of the due diligence review that it represented that it would undertake, the SEC found that Hennessee and Mr. Gradante made misrepresentations to clients and thereby violated their fiduciary duties and Section 206(2) of the Investment Advisers Act of 1940 by failing to conduct a portfolio-trading analysis and to verify Bayou’s relationship with its purported independent auditor. In addition, the SEC found that Hennessee and Mr. Gradante failed to adequately respond to information casting doubt on the auditor’s identity and suggesting a conflict of interest between the auditor and a Bayou principal, including by failing to investigate inconsistencies in various documents provided by Bayou to Hennessee.
Click here to read the SEC press release and click here to access the SEC Administrative Proceeding Release. See also the April 10, 2009, edition of Corporate and Financial Weekly Digest, covering certain lawsuits against advisors of “feeder funds” (conduits for investment) associated with Bernard Madoff, based in part on alleged failures to perform due diligence and ignoring warning signs of fraud.