Administration April 23, 2009

Ohio 529 Plans Earn Best and Worst Ranking

April 23, 2009 (PLANSPONSOR.com) - The state of Ohio's two 529 college savings plans earned spots at both ends of the spectrum in a new Morningstar national ranking of 529 programs.
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A Morningstar news release said Ohio’s direct-sold CollegeAdvantage plan was named as one of the country’s best while its Putnam CollegeAdvantage was listed as one of the worst.

According to the announcement, CollegeAdvantage got its kudos because of its “sensible” age-based options, active and index strategies, low fees, and “generous” tax deductions for in-state residents. Because the state of Ohio manages CollegeAdvantage, it has the flexibility to create a lineup of offerings from numerous fund families, Morningstar said.

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The Putnam CollegeAdvantage appeared on the Worst list for the second year in a row.   Morningstar commented: “Despite lowering fees and adding non-Putnam funds to its lineup during the past year, it still relies heavily on Putnam funds, which have been hampered for several years by high manager and executive turnover and poor performance.”

“2008 was a terrible year for 529 plan investors,” said Greg Brown, Morningstar mutual fund analyst and author of the study, in the announcement. “In recent years, the industry made strides by lowering fees, improving investment options, and closing down poorly structured plans. Last year, however, we saw too many plans that were overly aggressive with their investment strategies as students approached college, and plans that stayed loyal to strategies that just weren’t working.”

Also on the top list were Virginia's two plans, Education Savings Trust and CollegeAmerica, which earned Morningstar's accolades two years in a row.

"Virginia Education Savings Trust is managed by the state of Virginia, rather than a fund company, which gives the plan the freedom to choose among different fund families," Morningstar said in its announcement. "The fund also offers a mix of index and actively managed age-based portfolios, as well as healthy state tax breaks and low costs. Virginia CollegeAmerica returns to the Best list with its lineup of high-quality American Fund funds with broad asset class exposure and low fees."

Further, Morningstar said, its "longtime favorite" Utah Educational Savings Plan Trust returns to the Best list for its low costs, strong lineup of Vanguard Group index funds, and the flexibility offered by five age-based options. Indiana CollegeChoice 529 Direct Savings Plan debuts on the Best list with strong underlying funds, broad asset class exposure, prudent age-based portfolios, and customization options.

At the other end, Morningstar said two Nebraska 529 plans appear on the Worst list this year. Nebraska AIM College Savings Plan makes its fourth appearance in a row as a result of its high fees and lack of fund options. Nebraska State Farm College Savings Plan joins the Worst list not only because plan administrators chose precisely the wrong time to invest heavily in Oppenheimer bond funds, but also because the state still hasn't done anything to address the problem (see  College Savings Plans Hit Hard by Oppenheimer Fund Loss ).

More information is available  here .

Best 529 College Savings Plans
Name, Program Manager
Ohio CollegeAdvantage, Ohio Tuition Trust Authority
Utah Educational Savings Plan Trust, UESP Trust
Indiana CollegeChoice 529 Direct Savings Plan, Upromise Investments, Inc.
Virginia Education Savings Trust, Virginia College Savings Plan Board
Virginia CollegeAmerica 529 Savings Plan*, American Funds
*Broker-sold

Worst 529 College Savings Plans
Name, Program Manager
Ohio Putnam CollegeAdvantage*, Putnam
Nebraska AIM College Savings Plan*, Union Bank and Trust Company
Nebraska State Farm College Savings Plan*, OppenheimerFunds
New Jersey Best 529 College Savings Plan, Franklin Templeton
Montana Pacific Life Funds 529 College Savings Plan, Pacific Life Funds
*Broker-sold

Source: Morningstar

Administration April 22, 2009

SEC Charges Hennessee on Bayou Hedge Fund

April 22, 2009 (PLANSPONSOR.com) - The Securities and Exchange Commission (SEC) has charged a hedge fund adviser with failing to perform the due diligence it promised clients.
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The SEC charged New York-based investment adviser Hennessee Group LLC and its principal Charles J. Gradante with securities law violations for “failing to perform their advertised review and analysis before recommending that their clients invest in the Bayou hedge funds that were later discovered to be a fraud,” according to an  SEC announcement .

In a settled  administrative proceeding , the SEC issued an order finding that Hennessee Group and Gradante did not perform key elements of the due diligence that they had represented they would conduct prior to recommending investments in the Bayou hedge funds.

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The SEC also said that they failed to conduct a reasonable investigation into red flags concerning Bayou. “Hennessee Group and Gradante routinely represented to clients and prospective clients that they would not recommend investments in hedge funds that did not satisfy all phases of their due diligence evaluation,” according to an announcement of the action.

“Forewarned is forearmed — investment advisers must make good on their promises or face the consequences of vigorous SEC enforcement action,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

“As the Commission found, these investment advisers failed to honor the representations they made to their clients and did not disclose these material departures from their advertised services,” said Antonia Chion, Associate Director of the SEC’s Division of Enforcement. “The advice that clients receive from hedge fund consultants is especially critical when the hedge funds are neither regulated nor transparent.”

According to the Commission's order, approximately 40 clients invested millions of dollars in the Bayou hedge funds from February 2003 through August 2005 after the Hennessee Group recommended those investments. Most of the money was lost through trading or dissipated by Bayou's principals, who defrauded their investors by fabricating Bayou's performance in client account statements and year-end financial statements. The SEC charged the managers of the Bayou hedge funds with fraud in 2005 (see  Bayou Founder Pleads Guilty to Fraud ).

The Commission's order finds that Hennessee Group and Gradante failed to conduct the portfolio and trading analysis that it had advertised to clients. "Instead of analyzing Bayou's results and processes through a review of Bayou's historical trading methods to determine whether the fund was, in fact, successfully executing its purported day-trading strategy, Hennessee Group and Gradante decided not to perform any analysis after Bayou refused to produce its trading data," the SEC said. The SEC said that Hennessee and Gradante instead "relied entirely on Bayou's uncorroborated representations about its strategy and its purported rates of return".

Additional Findings

The Commission's order also finds that despite conflicting reports from Bayou about the identity of their independent auditor, Hennessee Group and Gradante failed to verify Bayou's relationship with its auditor. "In fact, the accounting firm that purportedly conducted Bayou's annual audit was a non-existent entity fabricated by one of Bayou's principals, who was identified in publicly available state accountancy board records as the registered agent for the bogus accounting firm," according to the SEC.

According to the Commission's order, Hennessee Group and Gradante also failed to respond to red flags concerning Bayou that came to their attention while they were monitoring Bayou on behalf of their clients. In particular, the SEC says that the two "failed to inquire or investigate when Bayou provided contradictory responses regarding the identity of its auditor or to adequately inquire about a rumor that one of Bayou's principals was affiliated with Bayou's purported outside auditing firm."

The Commission's order finds that Hennessee Group and Gradante violated Section 206(2) of the Advisers Act. The order requires Hennessee Group and Gradante to pay $814,644.12 in disgorgement and penalties, and to cease and desist from committing or causing further violations. The parties also are required to adopt policies to ensure adequate disclosures in the future and to provide copies of the Commission's Order to all current and prospective clients for a period of two years.

Hennessee Group and Gradante consented to the entry of the Commission's order without admitting or denying the findings, according to the SEC announcement.

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