“Due Diligence” is a phrase that gets tossed around a lot in the autosurf trade. People posing as “industry” authorities — all while denying they’re pushing an “investment” — routinely tell prospects they’ve done their homework on a company.
Such was the case in the earliest days of AdSurfDaily, a Florida company federal prosecutors said was selling unregistered securities, engaging in wire fraud and money-laundering and operating a $100 million Ponzi scheme.
Today a New York company involved in mainstream investing agreed to pay more than $814,000 to settle charges that it did not perform adequate due diligence on a firm it recommended. The company it pushed turned out to be a colossal fraud.
It is a case with far-reaching implications — one that puts both Wall Street traders and people pushing illegal, underground investment programs such as autosurfs on notice that the phrase “due diligence” is not to be taken lightly.
<!–adsensestart–>The SEC said that the Hennessee Group skipped steps while subjecting Samuel Israel’s infamous Bayou fund to due diligence, relied on Bayou’s claims rather than performing independent research — and failed to spot obvious deceptions.
Bayou collapsed in 2005, costing investors more than $400 million. Even though only 40 Hennessee clients joined the fund based on the firm’s recommendation, the clients lost “millions of dollars,” the SEC said.
Not only will Hennessee have to pay $814,000 to settle false due-diligence claims, it also has to tell clients for the next two years about the settlement and provide clients and prospects copies of the settlement agreement, according to the settlement terms.
Hennessee neither admitted nor denied wrongdoing in the settlement.
“Forewarned is forearmed — investment advisers must make good on their promises or face the consequences of vigorous SEC enforcement action,” said Robert Khuzami, director of the SEC’s Division of Enforcement.
“Instead of analyzing Bayou’s results and processes through a review of Bayou’s historical trading methods to determine whether the fund was, in fact, successfully executing its purported day-trading strategy, Hennessee Group and [Charles] Gradante decided not to perform any analysis after Bayou refused to produce its trading data,” the SEC said. “They relied entirely on Bayou’s uncorroborated representations about its strategy and its purported rates of return.”
One of the deceptions Bayou used was to end a relationship with a top auditing firm and create a bogus auditing entity to sustain the fraud — something Hennessee missed during due diligence, the SEC said.
Hennessee dealt above ground, of course. But what happened to this Main Street firm sends a strong message to the autosurfing “industry,” which is infamous for recruiting prospects by making false claims of due-diligence.
Look at the screen shot above. Not only are there claims that due diligence had been completed, there are claims that ASD provided shelter from the FTC and the SEC — and that ASD deposits were insured by the FDIC.
In addition, there are claims that ASD had top management, was well-capitalized and had a powerful parent company and financial stability.