Bayou Mess Could Taint Consulting Firms

The collapse of Bayou Management has put a number of high-net-worth financial consultants, including the prominent hedge fund adviser Hennessee Group, in an uncomfortable position, according to a report late last week from The Wall Street Journal.

Bayou, a Stamford, Conn.-based hedge fund abruptly announced in July that it would shut down its operations and ceased contact with its investors. Its CEO, Samuel Israel III, has been charged with fraud and millions of dollars in investors' funds are missing. As state and federal authorities try to piece together exactly what happened, the consultants that vet hedge funds for wealthy investors in exchange for a fee from the money manager are coming under scrutiny.

But the New York-based Hennessee Group, which has long been an advocate of the loosely regulated investment vehicles, defends the due diligence it did for investors that it guided into Bayou funds.

"There was no credibility problem in our fact-checking," said Lee Hennessee, who visited Israel last year after he had back surgery. "I wanted to look at his face and see if he was back and looking strong. He looked great."

Lee Hennessee's partner and husband, Charles Gradante, said, "We stand behind the due diligence. We don't think we could have done anything different or better."

Israel's investment acumen, however, was questionable, according to other financial services experts.

Robert Schulman, CEO of Rye, N.Y.-based Tremont Capital Management got out of Bayou back in 2002, he told The Wall Street Journal, because "we became uncomfortable" with some of Israel's trading.

Robert Keck, a managing director at the Princeton, N.J.-based fund-of-funds 6800 Capital Group, told WSJ that his firm also did thorough due diligence, but he became so worried about Israel's personal problems last year that he tried to get his money out of Bayou. The money was not forthcoming, he said.

An unidentified client of 6800 Capital disclosed that the firm had 10% of its assets in Bayou and that he coughed up 10% of his assets for the firm to perform due diligence on prospective hedge funds.

"It appears that all these managers dropped the ball," the client said.

It also appears, however, that many consultants took solace in a 2003 investigation into Bayou by the NASD. The NASD found no wrongdoing, but it only looked at the firm's brokerage dealings, not it hedge fund books.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.