The Securities and Exchange Commission has accused a Chicago advisor and his firm of defrauding clients and others by promising them a private equity fund the firm managed would “beat the market."

According to a suit filed Thursday by the SEC in federal court in Chicago, what investors didn’t know was the fund was failing and the investors were being used to raise money to repay promissory notes to earlier investors.

Joseph J. Hennessy and the firm he founded in 1984, Resources Planning Group, raised more than $1.3 million by misrepresenting the Midwest Opportunity Fund as a viable private equity fund that could offer high returns, the SEC claims. 

According to the SEC, Hennessy failed to tell investors about the fund’s poor financial condition or that their investments were being used to repay the fund’s promissory notes that he had personally guaranteed.  By failing to tell investors about the fund’s poor financial condition, he misappropriated client assets, and forged client signatures, to make payments on the notes and prop up the fund, the SEC claimed in the suit. 

Hennessy used at least $641,408 to make partial payments to certain note holders, substantially reducing his personal liability on the notes, according to the commission.

Repeated calls to Hennessy’s attorney Kevin Flynn at Kevin Flynn & Associates were not returned, nor were calls to the attorney for Hennessy’s firm, James Kopecky at Kopecky, Schumacher & Bleakley. Both firms are located in Chicago.

“Private equity fund investors expect their money to be invested in viable assets that will generate positive returns,” Marshall S. Sprung, deputy chief of the SEC Enforcement Division’s Asset Management Unit, said in a statement.  “Hennessy made these promises, but betrayed his clients and others by using their money to save himself from financial ruin.”

Hennessy financed the private equity fund’s acquisition of its largest portfolio company in 2007 in part by having the fund issue $1.65 million in promissory notes, all of which he personally guaranteed, the SEC claims. When the fund’s portfolio companies were unable to pay management fees later that year, the fund lacked sufficient resources to repay the notes, according to the suit. 

From September 2007 to March 2010, Hennessy raised $1.36 million from his planning clients and other investors to make payments on the notes, while Hennessy falsely told investors that the fund was viable and offered high returns, the commission said.

The SEC further alleges that in November 2007, Hennessy raised $750,000 from three planning clients purportedly to invest in the fund.  But, instead, Hennessy used that money to redeem another client’s investment in the fund, the suit alleges. Twice in mid-2009, Hennessy forged letters of authorization from a widowed planning client to transfer $100,000 from her account to the fund in exchange for promissory notes that have yet to be repaid.

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