Charles Gradante, co-founder of Hennessee Group, says Congress, the Securities and Exchange Commission, and the Federal Reserve Bank should consider recommendations that he has made since 1998 to the House of Representatives, the Senate Banking Committee, the SEC, and the Commodities Futures Trading Commission.

Gradante and Hennessee Group were recently charged with securities law violations by the SEC for failing to perform their advertised review and analysis before recommending their clients invest in the Bayou hedge funds that were later discovered to be a fraud. They are required to pay USD814,644.12 in disgorgement and penalties.

In his recommendations, Gradante says that to reduce fraud hedge fund fraud audits should be outsourced to third parties. He also agrees with President Obama that 'regulation can reduce systemic risk'.

'Assign the equivalent of a CUSIP Number to each hedge fund (especially the top 100 in assets which constitute the vast majority of systemic risk potential). Monitor leverage extended by commercial banks and prime brokers using the CUSIP Number concept,' says Gradante.

He says the 'Know Your Customer Rule' is fundamental to lending and that this rule has been distorted by many banks and prime brokers, with respect to hedge funds, resulting in a greater potential for systemic risk.

Gradante also says that gatekeepers are accountable and responsible as follows:

• Lawyers: perform 'A to Z' background checks on the hedge fund manager's resume placed in the offering memorandum produced by lawyers for investors;
• Prime Brokers: receive annual financial audits and compare for performance accuracy to the prime broker Realized and Unrealized Gain/Loss Report.
• Accountants: limited partners must receive their annual financial audits directly from the Accountant and not from the manager.
• Accountants/administrators: no 'Trader Marks', only screen marks or third party marks. Exceptions must be noted on annual financial audits to limited partners.

In addition, he recommends that monthly NAV for onshore funds is mandated, stating that the incidents of fraud for offshore funds are far less than onshore funds because of this monthly NAV calculation. 

He says banks and Insurance companies should not be allowed to 'over insure' a bond issuance and that credit default swaps are insurance contracts and should not be treated as put options.