NEW YORK (CNN/Money) - Hedge fund advisor Hennessee Group recommended Bayou to its clients. Now it's being sued. The firm says it regrets steering clients to Bayou but had reason to think at the time the hedge fund was legitimate.

Bayou's founder and CFO pleaded guilty nearly six weeks ago to charges that they raised more than $450 million from investors, lied about the fund's returns and formed a phony accounting firm to audit the firm's results.

Hennessee Group admits it should have done a better job of spotting red flags at Bayou, including the fact that Bayou wasn't using a well-known auditor. Hennessee recently spoke out about Bayou, acknowledging that the firm didn't catch the fraud, but defended its review process nonetheless.

"I can see why, in hindsight, it might seem like this was all very obvious, but it's important to realize how it appears when you are going through it real time," Leeana Piscopo, senior vice president and chief compliance officer at Hennessee, said in an interview.

Like other marketing and consulting firms in the investment world, Hennessee recommends hedge funds to clients for a fee. New York-based Hennessee also runs a widely quoted hedge fund database that has been cited by numerous news outlets, including CNN/Money.

Piscopo and other Hennessee officials stress this was the first time the firm has been hit by fraud and note that Hennessee, once it learned of the problems at Bayou, worked with regulators to get the fund's remaining assets frozen, and filed its own lawsuit against Bayou.

Piscopo acknowledges that when Hennessee reviewed Bayou "the relative size and reputation" of its bogus auditor was "in question." But because Hennessee knew Dan Marino, Bayou's CFO, and had been informed Bayou was using a well-known accounting firm to review Bayou's broker-dealer, Hennessee officials felt comfortable.

"There were no flags raised" at that point in Hennessee's review process, she said. "Internally, their books and records were being performed by an industry professional (Marino) and an independent external review was being conducted."

Authorities first learned of the extent of the fraud at Bayou from a would-be suicide note that Marino left on his desk, in which he admitted to years of fraud, according to published accounts.

Piscopo added that as part of Hennessee's review "we always request at least the last three years of audited financial statements" which were provided by Bayou.

A handful of other firms that match hedge funds with investors had also recommended Bayou to clients, including Consulting Services Group and Altegris Investments. But unlike Hennessee Group, these firms advised their clients to take their money out well before the scandal came to light.

Joe Meals, executive vice president and chief compliance officer at Memphis, Tenn.-based Consulting Services Group, refused to comment on why he advised clients to pull their money out of Bayou, saying that he does not discuss client matters with the press. Matthew Osborne, vice president and chief investment officer for Altegris, said "there was no one specific thing" that happened at Bayou to cause Altegris to advise its clients to get out, but that the firm became increasingly uncomfortable with what it felt was a lack of transparency from Bayou regarding its activities. Osborne would not comment further on Bayou.

One investor, Indiana's DePauw University, has sued Hennessee over the Bayou debacle. The Greencastle, Indiana-based liberal arts college said it hired Hennessee to help it choose hedge fund investments for the school's $403 million endowment and put $3.25 million into Bayou at Hennessee's suggestion. The school is charging Hennessee with misrepresenting facts about Bayou.

DePauw's complaint charged that Hennessee said in its marketing material that the hedge funds it recommends "undergo extensive analysis" including reviews of personnel, management, investment philosophy, risk management, performance and other factors. The university is charging Hennessee with breaching its fiduciary duty by advising it to invest in Bayou.

Ken Owen, a spokesperson for DePauw, referred CNN/Money to the school's complaint, saying only, "The lawsuit speaks volumes about our disappointment" with the Bayou situation.

Piscopo would not comment on the details of DePauw's suit, except to say it contained statements that are "not accurate" and that Hennessee's attorneys will respond. In the mean time, the firm is reviewing its review process and has hired a law firm, Kirkpatrick & Lockhart, to help.

Now, it will be up to judges to decide whether firms that recommended Bayou must reimburse clients who lost money.

Ron Geffner, a partner in the financial services practice at New York-based law firm Sadis & Goldberg, said consultants who recommend funds to their clients can be held liable if a fund goes bad, even if there was no fraud, if it wasn't a "suitable investment."

"If they fail to comply with their fiduciary obligations or fully disclose any conflicts of interest, they may incur liability related to the loss of investments," he said. "It doesn't even have to be fraud."

The issue of how these fund marketers operate has landed the business on regulators' radar.

"The consultants are limited in their access to data and thus, their predictions may not be much better than the rest of us," SEC Commissioner Roel Campos said at a hedge fund conference earlier this year. "Yet, Hennessee Group, Aris Partners and Altegris and Consulting Services Group, for example, raised tens of millions of dollars for Bayou Group."

For its part, Hennessee said that unlike third party marketers that raise money for hedge funds and are paid by hedge fund managers, it works solely for investors.

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