Hedge Fund Consultant Sanctioned for Not Conducting Proper Due Diligence
An investment adviser and its principal that recommended hedge funds agreed to pay over $800,000 in disgorgement and penalties for failing to conduct its advertised due diligence process, ignoring red flags, and investing in various Bayou funds that ultimately failed. According to the SEC, the adviser, a purported hedge fund consultant, advertised its rigorous 5-step due diligence process. However, the SEC alleges, the adviser never reviewed Bayou’s investment portfolio utilizing prime brokerage statements or contacted the outside auditor, even after receiving information suggesting misrepresentations about the outside audit firm. The SEC said that the adviser “had a duty to investigate by virtue of its representations to its clients that it would conduct on-going monitoring.”
OUR TAKE: These facts were easy for the SEC because the adviser did not perform functions that it specifically advertised to undertake. The open question is the level of due diligence required when recommending underlying investments.