Hennessee Group and co-founder settle with SEC over Bayou due diligence
When a well-known investment advisor gave the Securities and Exchange Commission some unsolicited advice this week about protecting investors in hedge funds, he had already been talking to the agency about his own behavior.
About half an hour before Charles J. Gradante issued a public call Wednesday for the SEC to “reduce fraud and systemic risk” in the hedge fund industry, the SEC charged him with failure to perform due diligence on the Bayou hedge funds -- one of the industry’s biggest scams in recent years.
The SEC accused Gradante and his firm, Hennessee Group, of “failing to perform their advertised review and analysis” of Bayou and failing “to conduct a reasonable investigation into red flags concerning Bayou.”
Hennessee and Gradante agreed to pay $814,644 to resolve the case, which dealt with investments made from 2003 to 2005, the SEC said.
Hennessee and Gradante settled without admitting or denying the SEC’s findings.
Gradante, 63, followed the SEC’s announcement with his own news release, headlined “Outsource the SEC.” He described it as a re-release of his previous recommendations for regulatory changes that he said would better protect hedge fund investors from fraud. Among his ideas: Have fraud audits of funds conducted by private investigative firms such as Kroll Inc., and put in place a system to monitor banks’ lending to the funds.
“The ‘Gradante Gatekeeper Concept’ simply states that all gatekeepers should have a vested interest in ensuring the integrity of the hedge fund industry for investors,” the release says.
Gradante said in an interview that he didn’t believe the SEC case against him undercut his credibility in weighing in on the fraud-prevention issue. In fact, he said, his new notoriety gave him a better “platform” from which to be heard.
“I purposely did it because I want to contribute to the process,” Gradante said. “I’m not trying to do anything other than contribute to the process and make a bad into a good. Am I happy I had to pay $800,000? No, I’m not. But the positive of this whole thing is that there’s some good that can come out of this.
“The benefit to me is somebody now [might] wake up and listen,” Gradante said. He said he had been “shouting in the dark” about reforms for years.
Gradante wouldn’t discuss the specifics of the SEC’s case. The SEC declined to comment on Gradante’s suggestions.
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