SEC Charges Chicago-Based Investment Adviser With Defrauding Investors In Failing Private Equity Fund

The Securities and Exchange Commission today charged a Chicago-based investment adviser and his firm with defrauding clients and others who were promised returns that would “beat the market” for investing in a private equity fund they managed. What investors didn’t know was the fund was failing and they were being used to raise money to repay promissory notes to earlier investors.

The SEC alleges that Joseph J. Hennessy and Resources Planning Group (RPG) raised more than $1.3 million by misrepresenting the Midwest Opportunity Fund (MOF) as a viable private equity fund that could offer high returns. Hennessy failed to tell investors about the fund’s poor financial condition or that their money was being used to repay MOF promissory notes that he had personally guaranteed. He therefore misappropriated client funds to make payments on the notes and prop up the fund. Hennessy used at least $641,408 to make partial payments to certain note holders, substantially reducing his personal liability on the notes.

“Private equity fund investors expect their money to be invested in viable assets that will generate positive returns,” said Marshall S. Sprung, Deputy Chief of the SEC Enforcement Division’s Asset Management Unit. “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 against Hennessy and RPG in federal court in Chicago, Hennessy financed MOF’s acquisition of its largest portfolio company in 2007 in part by having the fund issue $1.65 million 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. From September 2007 to March 2010, Hennessy raised $1.36 million 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 further alleges 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. 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.

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. Hennessy 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.

The SEC’s investigation was conducted by Amy S. Cotter, Luz M. Aguilar, and John J. Sikora, Jr. in the SEC’s Chicago Regional Office. Ms. Cotter and Mr. Sikora are members of the Asset Management Unit. The examination of RPG was conducted by Susan M. Weis, Matthew D. Harris, and Maureen S. Dempsey of the Investment Company/Investment Adviser examination group in the Chicago office. The SEC’s litigation will be led by Ms. Cotter and John E. Birkenheier.