SEC Charges Chicago Investment Advisor For Propping Up Fund With Client Money

Eliane Chavagnon Reporter 30 November 2012

SEC Charges Chicago Investment Advisor For Propping Up Fund With Client Money

The Securities and Exchange Commission has charged a Chicago, IL-based investment advisor and his firm for using client money to "prop up" a private equity fund they managed and repay promissory notes to earlier investors.

The SEC alleges that Joseph Hennessy and Resources Planning Group promised returns that would “beat the market” for investing in the Midwest Opportunity Fund. Altogether, Hennessy and his firm fraudulently raised over $1.3 million.

Hennessy failed to tell investors about the fund’s poor financial condition or that their money was being used to repay fund promissory notes that he had personally guaranteed. He used at least $641,408 to make partial payments to certain note holders, "substantially reducing his personal liability on the notes," the authority said.

According to the SEC’s complaint filed against Hennessy and RPG in federal court in Chicago, Hennessy financed the Midwest Opportunity fund's acquisition of its largest portfolio company in 2007, in part by having the fund issue $1.65 million in promissory notes - all of which he personally guaranteed. When the fund’s portfolio companies were unable to pay management fees later that year, it lacked sufficient assets to repay the notes.   

Further, the SEC contends that Hennessy misappropriated money from RPG clients, raising $750,000 from three clients, purportedly to invest in the fund in November 2007 but which were instead used to repay another client’s investment from that fund.

Meanwhile, on two occasions in mid-2009, Hennessy forged letters of authorization from a widowed RPG client to transfer $100,000 from her account to the Midwest Opportunity Fund in exchange for promissory notes that have yet to be repaid, the SEC said.

The SEC’s complaint charges Hennessy with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. He is also charged with violating Sections 206(1), (2) and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8. RPG is charged with violating Sections 206(1), (2) and (4) of the Advisers Act and Rule 206(4)-7.

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