Second Circuit Holds that Recommendations by Hennessee Group that Clients Invest in Bayou Hedge Funds Did Not Violate Federal Securities Laws

On July 14, 2009, the Second Circuit affirmed the dismissal of South Cherry Street, LLC’s complaint which alleged that hedge fund consultant Hennessee Group LLC (i) violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and (ii) breached an oral contract to conduct suitable due diligence by recommending that its clients invest in the “Bayou” group of funds, which turned out to be part of a Ponzi scheme.  The Second Circuit determined that the alleged oral contract was unenforceable by reason of the New York statute of frauds because it could not be fully performed within one year.  It also determined that South Cherry failed to allege sufficient facts to show that defendants acted with the requisite intent to sustain a claim for securities fraud under Section 10(b) of the Exchange Act.  We summarize the court’s findings and reasoning and its potential impact on hedge fund investors and the consultants who assist them in selecting hedge fund investments.

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