Investors who claimed that they were defrauded by a hedge fund that was operating as a Ponzi scheme could not recover against the advisory firm that directed them to the funds in question, held the 2nd Circuit in South Cherry Street, LLC v. Hennessee Group LLC. (Click here for the opinion.) The court rejected claims that the advisory firm's statements about its due diligence activities were fraudulent, and held that there were not sufficient credible allegations to indicate that the firm knowingly or recklessly misled its investors. On the question of whether an inference of scienter was as credible as competing non-culpable inferences, the court stated that
It is far less plausible to infer that an industry leader that prides itself on having expertise that is called upon by Congress, that emphasizes its thorough due diligence process, that values and advertises its credibility in the industry-and evaluates 550 funds-would deliberately jeopardize its standing and reliability, and the viability of its business, by recommending to a large segment of its clientele a fund as to which it had made, according to South Cherry, little or no inquiry at all.
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