Suit by Bayou hedge fund investor dismissed

NEW YORK, Aug 3 (Reuters) - A federal judge on Thursday dismissed a lawsuit filed by an investor in the collapsed hedge fund Bayou Group against a consulting firm, saying the plaintiff failed to prove that the consultant knew the hedge fund was a fraud.

The suit alleging breach of fiduciary duty was filed in 2006 against advisor Hennessee Group by South Cherry Street LLC, which invested $1.15 million into Bayou in 2003-2004 on Hennessee's recommendation.

Bayou, which once managed around $400 million, collapsed in 2005 after the discovery of multiple frauds by its managers led by Sam Israel III and Daniel Marino, both of whom later pleaded guilty to various charges and await sentencing.

New York-based Hennessee, which is managed by Lee Hennessee and her husband Charles Gradante, claimed it undertook a rigorous, five-step due diligence review before recommending clients invest in any hedge fund.

South Cherry claimed the facts that ultimately emerged "clearly demonstrate" that Hennessee either never conducted the due diligence or did a "woefully inadequate job."

Federal Judge Colleen McMahon, however, granted a defense motion to dismiss the case, finding that Hennessee wasn't alone in being duped by Bayou.

"Hennessee Group's failure to discover the fraud merely places it alongside the SEC, the IRS and every other interested party that reviewed Bayou's finances," the judge said.

In its suit, South Cherry outlined a litany of claims that Hennessee failed to adequately advise it. Bayou was found to have established a phony auditing firm, Richmon-Fairfield, that Hennessee never investigated, according to court papers.

South Cherry also alleged that Hennessee told it that one Bayou fund had "a greater than 19 percent annualized return since inception" in 1997, but that in actuality the fund consistently lost money.