Opinion ID: 1448459
Heading Depth: 2
Heading Rank: 2

Heading: South Cherry's Investment in Bayou Accredited

Text: One of the hedge funds recommended to South Cherry by Hennessee Group was Bayou Accredited, whose principals included Samuel Israel III and Daniel Marino ( see Complaint ¶ 9). Hennessee Group presented to South Cherry a `Biography' of Israel representing that from 1992 to 1996, Israel had been `head trader for Omega Advisors,' .... one of the hedge fund industry's largest and most successful funds, and had `manag[ed] assets exceeding $4 billion for Leon Cooperman,' who was widely described as a `legendary' trader. ( Id. ¶ 29.) Hennessee Group represented that at Omega, Israel was responsible for all equity and financial futures execution, and shared responsibility for hedging the portfolio using futures and options. ( Id. (internal quotation marks omitted).) In 1996, Israel and Marino formed Bayou Fund, LLC (Bayou Fund); in or about January 2003, Israel and Marino replaced Bayou Fund with several Bayou Family Funds, including Bayou Accredited. ( See id. ¶ 23.) In recommending an investment in Bayou [Accredited] to South Cherry, Hennessee Group represented in writing to Groothuis and South Cherry, among other things, that the predecessor[,] Bayou Fund[,] ... had a greater than 19% annualized return since inception, that it was profitable in 78% of the months since its inception, and that it had accomplished all of this at relatively low risk relative to the broader marketplace. ( Id. ¶ 26.) Further, [a]s part of its investment recommendation to Groothuis and South Cherry, Hennessee Group also provided South Cherry with six years of written monthly performance figures for Bayou Fund. Net of all fees, Hennessee Group represented to South Cherry that Bayou Fund's annual performance between 1997 and 2002 ranged from a 7.05% gain in 2001 to a 21.04% gain in 1999 to a high water gain of 32.52% in 1997. ( Id. ¶ 28.) In reliance on Hennessee Group's representations and recommendations, and in specific reliance on [South Cherry's] understanding that Bayou [Accredited] had passed all stages of Hennessee Group's due diligence process, South Cherry invested in Bayou Accredited. (Complaint ¶ 32.) The Complaint states that South Cherry invested a total of $2.9 million [ sic  $2.0 million?] in Bayou Accredited from March 3, 2003 through June 1, 2003, that it withdrew $1.75 million in the spring of 2004, and that it invested another $900,000 on or about October 5, 2004 ... for a total net investment of $1.15 million. ( Id. ) From the spring of 2003 until the spring of 2005, Hennessee Group sent South Cherry monthly reports as to the status of its investment in Bayou Accredited, the last of which reported to South Cherry that its $1.15 million had appreciated to approximately $1.5 million. ( Id. ¶ 33.) The Complaint alleged that in fact, however, as revealed in a September 2 005 SEC report and an SEC action against the Bayou funds' principals, Bayou Accredited was part of a Ponzi scheme. ( See, e.g., Complaint ¶¶ 33-35.) According to the SEC, Israel and Marino had begun to divert moneys from all members of the Bayou Family Funds in 2003, and they had essentially stopped trading in those accounts and transferred all of those funds' assets to other accounts in April 2004. ( See Complaint ¶¶ 34, 35; see also id. ¶ 31 (quoting the SEC as asserting that shortly after its inception in 1996, [Bayou] began to sustain large losses from trading and ... Israel and Marino, and ... a former Bayou principal, began lying to investors regarding the Fund's performance and the value of investors' accounts. Defendants Israel and Marino also began to misappropriate and dissipate millions of dollars of investor monies from the Fund and, beginning in 2003, the four successor Funds. (internal quotation marks omitted) (alterations in Complaint)).) All of the Bayou Family Fund principals were eventually convicted, upon their pleas of guilty, of securities fraud. ( See id. ¶ 37.) In July 2005, Israel had written to Bayou Family Fund investors to say that the funds would be liquidated and that each investor would receive distributions in August; no distributions were ever made. South Cherry lost its entire remaining $1.15 million investment in Bayou Accredited. ( See Complaint ¶ 36.) The SEC reported that Bayou Fund in fact lost millions of dollars in every single year it traded. (Complaint ¶ 28.) Thus, [t]he figures Hennessee Group provided to South Cherry were all false, showing profits where there were instead large losses. ( id. ) In fact, the Complaint alleged, all of the above representations by Hennessee Group as to Israel's background and the performance of Bayou Fund were false. ( See, e.g., id. ¶¶ 23, 26, 28-30.) Israel was never `head trader' for Omega Advisors, and never held any position remotely comparable; rather, the `legendary' Leon Cooperman has since described Israel as a mere `order taker.' ( Id. ¶¶ 29, 30.) And Bayou Fund, having consistently lost money trading in securities and options, ... created trading profits out of whole cloth in order to mask that fact. ( Id. ¶ 26). Further, [i]n order to hide th[e] fact of those losses, Israel and Marino in or around 1998 fired Bayou Fund's independent auditor, Hertz Herson & Co. (HHCO), and replaced it with a firm called Richmond, Fairfield & Associates (Richmond Fairfield) ( id. ¶ 23), a firm that the Complaint alleged was not a genuine auditor ( id. ¶ 27), was not independent because its principal was Marino ( id. ), and never did any auditing ( id. ). Despite the fact that HHCO had stopped auditing Bayou Fund in 1998, and never audited any of the Bayou Family Funds once they were established in 2003, Hennessee Group represented to South Cherry that Bayou [Accredited], and the Bayou Family Funds, were audited by HHCO. ( Id. ¶ 23.) The Complaint alleged that Hennessee Group could not have performed any real due diligence in 2003, for if it had, it would have discovered, inter alia, that Israel, prior to forming Bayou Fund, had been a mere clerk, that HHCO had not been the auditor for any of the Bayou-related funds since 1998, and that the new auditor was not independent because it was owned by Marino, a Bayou Fund principal. ( See, e.g., Complaint ¶¶ 24, 28, 30.) Thus, Hennessee Group had no reasonable basis to credit the Bayou Fund financial figures and was accordingly  at best  grossly negligent or reckless in passing them on to investors like South Cherry. (Complaint ¶ 28.)