Reuters reports U.S. District Judge Colleen McMahon of the U.S. District Court for the Southern District of New York said South Cherry failed to prove Hennessee knew the fund was a fraud. South Cherry invested $1.15 million in Bayou in 2003 and 2004 at Hennessee’s suggestion, the news report said.
In its suit, South Cherry accused the adviser of a breach in fiduciary duty and listed several accusations to support its claim that Hennessee failed to adequately advise the firm. Hennessee claimed it performed a rigorous, five-step due diligence review before recommending clients invest in any hedge fund, but South Cherry said the facts “clearly demonstrate” that the adviser either never conducted the due diligence or did a “woefully inadequate job,” according to Reuters.
McMahon pointed out Hennessee was not alone in being fooled by the hedge fund saying, “Hennessee Group’s failure to discover the fraud merely places it alongside the SEC, the IRS and every other interested party that reviewed Bayou’s finances,” McMahon wrote, according to Reuters.
Bayou filed bankruptcy and filed numerous suits against investors in a move to recover profits that it paid out before its collapse (See Hedge Fund Firm Charged with Fraud Files Bankruptcy ). The hedge fund was charged with fraud that included the overstatement of investment gains, the understatement of losses, reporting gains to investors when there were actually losses, and creating a bogus accounting firm to certify its false financial statements. Company founders Daniel Marino and Samuel Israel III pleaded guilty to conspiracy, investment advisor fraud, mail fraud, and wire fraud.