U.S. securities regulators charged a prominent hedge fund industry executive on Wednesday with failing to properly review collapsed hedge fund Bayou Group before recommending that their clients invest.

Hennessee Group and its principal Charles Gradante, who runs the New York-based group with his wife, failed to research the hedge fund group as vigorously as promised, the Securities and Exchange Commission charged.

The news is a big blow to Gradante and the Hennessee Group, which established their reputation in the $1.3 trillion hedge fund industry by tracking funds' returns, industry flows and creating portfolios for clients.

In 2005, the SEC charged the managers of the Bayou hedge fund with fraud, alleging they misappropriated millions of dollars in investor funds for their personal use and fabricated the fund's performance in client account statements and year- end financial statements.

According to the SEC's order, the Hennessee Group and Gradante did not conduct a reasonable investigation into red flags concerning Bayou and routinely told their clients they would not recommend investments that did not satisfy all phases of their due diligence evaluation.

Hennessee and Gradante did not admit to or deny the SEC's findings. From early 2003 through August 2005, about 40 clients invested millions of dollars in the Bayou hedge funds after the Hennessee Group recommended those investments, the SEC said.

Bayou lost most of that money.

The advice that clients receive from hedge fund consultants is especially critical when the hedge funds are neither regulated nor transparent, Antonia Chion, an associate director in the SEC's enforcement division, said in a statement.

Calls to lawyers for Hennessee and Gradante were not immediately returned.

(Reporting by Rachelle Younglai; Editing by Andre Grenon)

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