A Chicago-based investment advisor and his firm have been charged with defrauding clients by misrepresenting the poorly performing Midwest Opportunity Fund as a viable investment, the US Securities and Exchange Commission has said.
The SEC charged Joseph Hennessy and Resources Planning Group with failing to tell investors about MOF’s poor returns and persuading them it would “beat the market” according to a statement released today.
It said MOF was actually failing and the money raised – more than $1.3m – was being used to repay promissory notes to previous investors.
Hennessy used at least $641,408 to make partial payments to certain note holders, substantially reducing his personal liability on the notes, the SEC said.
Marshall Sprung, deputy chief of the SEC Enforcement Division’s Asset Management Unit, said, “Private equity fund investors expect their money to be invested in viable assets that will generate positive returns.
“Hennessy made these promises, but betrayed his clients and others by using their money to save himself from financial ruin.”
According to the SEC’s complaint filed in federal court in Chicago, Hennessy financed MOF’s acquisition of its largest portfolio company in 2007 in part by having the fund issue $1.65mi in promissory notes, all of which he personally guaranteed.
When MOF’s portfolio companies were unable to pay management fees later that year, MOF lacked sufficient funds to repay the notes, it said.
From September 2007 to March 2010, Hennessy raised $1.36m from RPG clients and other investors to make payments on the notes.
Hennessy falsely told investors that MOF was viable and offered high returns, the SEC said.
It further alleged that Hennessy misappropriated money from RPG clients.
In November 2007, he raised $750,000 from three RPG clients purportedly to invest in MOF.
But then Hennessy used that money to redeem another client’s investment in the fund, the SEC said.
Twice in mid-2009 Hennessy forged letters of authorization from a widowed RPG client to transfer $100,000 from her account to MOF in exchange for promissory notes that have yet to be repaid, it added.
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