How to avoid hedge fund fraud, from firsthand experience
This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.
Charles J. Gradante, a well-known New York-based advisor to investors in hedge funds, issued a public call Wednesday for the Securities and Exchange Commission to ‘reduce fraud and systemic risk’ in the hedge fund industry.
That sounded righteous enough. But about half an hour earlier, the SEC had charged Gradante with failure to perform due diligence before recommending that clients invest in the Bayou hedge funds -- one of the industry’s biggest scams of a few years back.
The SEC said Gradante and his firm, Hennessee Group, agreed to pay $814,644 to resolve an agency probe into their role in steering clients toward the Bayou funds from 2003 to 2005.
Hennessee and Gradante settled without admitting or denying the SEC’s findings, as is customary in such cases.
The Bernard Madoff Ponzi scheme revealed how some investment consultants failed to perform even basic screening of Madoff’s funds to make sure their clients’ money was being invested as Madoff promised.
That also was an issue in the 2005 collapse of hedge fund firm Bayou Management, which became one of the industry’s worst black marks when its co-founders pleaded guilty to running a massive investment fraud.
The SEC accused Hennessee and Gradante of ‘failing to perform their advertised review and analysis’ of Bayou and failing ‘to conduct a reasonable investigation into red flags concerning Bayou.’
Gradante, 63, followed the SEC’s announcement Wednesday with his own press release, headlined ‘Outsource the SEC.’ He described it as a ‘re-release’ of his previous recommendations for regulatory changes that he says 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, he issued his press release specifically because the notoriety from the SEC action 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 has been ‘shouting in the dark’ about reforms for years.
Gradante refused to discuss the specifics of the SEC’s case. The SEC declined to comment on Gradante’s suggestions.
-- Walter Hamilton and Tom Petruno