Madoff suits - South Cherry Bayou fraud appeal
significant
By Neil Behrmann
March, 2009:- Lawyers are waiting for South Cherry Street’s appeal following the dismissal of its case against Hennessee Group. The outcome of the appeal will be used as a precedent in cases in New York State and potentially Federal courts attempting to recover money lost by feeder funds and advisors who placed money with Bernie Madoff.
In 2007, Federal Judge Colleen McMahon dismissed South Cherry Street’s case against advisor Hennessee Group which had recommended that South Cherry Street invest in the Bayou Group. Bayou, which once managed over $400 million, collapsed in 2005 after the discovery of a fraudulent Ponzi scheme by its managers Sam Israel III and Daniel Marino.
South Cherry alleged that Hennessee represented that it conducted “a rigorous five-step due diligence review” of hedge funds. It further alleged that positive reports issued by Hennessee regarding Bayou “clearly demonstrate that the Group did not conduct promised due diligence on Bayou Accredited, or did so in a deficient manner.”
In a 30 page judgement, the Judge granted Hennessee’s motion for dismissal. Here are some key reasons why the Judge dismissed the South Cherry claim against Hennessee Group and Elizabeth Lee Hennessee and Charles J. Gradante who head the firm:
* “The allegation that Hennessee Group promised to conduct a uniquely comprehensive brand of due diligence but failed to do so, is insufficient to establish the requisite strong inference of conscious recklessness. ‘It is….unfair to use professionals’ self imposed standards, which may exceed industry standards, against then to try and prove fraud……This violates public policy which encourages the highest standards, in order to protect the public.”
* “Even South Cherry’s alternative allegation that Hennessee Group failed to perform due dilligence commensurate with industry standards, is inadequate to plead scienter (intent or knowledge of wrong doing)”…..An investment advisor is retained to suggest appropriate investments for its clients, but is not required to assume the role of accountant or private investigator and conduct a thorough investigation of the accuracy of the facts contained in documents that it analyzes for the purposes of recommending an investment.”
* “The failure to conduct due diligence is not the same thing as knowing of or closing one’s eyes to a known ‘danger’ or participating in the fraud. Where third-party advisors are concerned, to meet such a standard, the allegations must approximate an actual intent to aid in the fraud.”
* “Indeed, South Cherry alleges no facts that suggest Hennessee Group, knowing or suspecting that Bayou was a Ponzi schemne, intended to deceive South Cherry into believing Bayou was a sound investment. Without alleging such facts, the mere allegation that Hennessee Group failed to follow through on its promise to conduct due diligence (which I assume to be true) falls short of providing a sufficiently strong inference of recklessness.”
* Hennessee Group’s failure to discover the fraud merely places it alongside the SEC, the IRS and every other interested party that reviewed Bayou’s finances.”
* “Hennessee’ Group’s purported misrepresentations regarding the soundness” of Bayou over the years in which South Cherry invested, “ merely provide the context against which plaintiff has attempted to draw a strong inference of recklessness.”
The fallout from the banking and financial market crises, the Madoff Fraud and growing numbers of fraudulent schemes that are being outed since the credit bubble imploded, could encourage judges to be more conducive to damaged investors, contends Nathan Finch of Caplan & Drysdale.
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