The Bayou Management scandal appears to have taken a big bite out of Elizabeth Lee Hennessee's advisory business.

Her firm,

Hennessee Group

, has seen its asset-management business shrink dramatically since Bayou imploded in a $300 million fraud last August. Meanwhile, lawsuits surrounding Hennessee's ill-fated decision to invest her wealthy clients' money in the Bayou hedge fund keep mounting.

A recent regulatory filing shows that the Hennessee Group has lost half of its advisory customers, and more than half of its assets under management, in the wake of the Bayou scandal and the securities-fraud convictions last September of the fund's two top managers.

Hennessee reported having 53 investment customers with a combined $408.5 million in assets at the end of 2005, according to the

Securities and Exchange Commission's

Investment Adviser Public Disclosure Web site. That's down substantially from the $1.35 billion under management Hennessee Group reported to the SEC at the end of 2004.

In 2004, the firm also said it had 100 investment customers in its advisory group, which is formally known as Hennessee Hedge Fund Advisory Group.

Neither Hennessee, nor her business partner and husband, Charles Gradante, returned several phone calls to discuss the apparent lost business. But people familiar with the situation say that in the wake of the Bayou scandal many institutional customers pulled money out of the firm, which operates similarly to a so-called fund of funds in advising clients on which hedge funds to invest in.

A fund of funds essentially is a big portfolio that invests its clients' money in lots of different hedge funds. The managers charge their customers big fees, claming their expertise makes them adept at finding the best investment opportunities in the $1 trillion hedge fund universe.

The fund-of-funds industry got a black eye from the Bayou affair. Critics say advisers who put their clients' money into the Connecticut-based hedge fund did a poor job investigating Bayou and the background of its managers, who federal prosecutors say systematically overstated gains and losses and relied on a phony accounting firm to prepare false audits for years.

Hennessee Group, founded in 1997, came in for particular criticism because of its big footprint in the hedge fund industry. It compiles and publishes a popular hedge fund performance index, which is often quoted by the news media. It also charges a subscription fee for analytical newsletters it produces and provides consulting services to many other clients who manage their own money.

The firm, on its Web site, notes that it is not technically a fund of funds. Rather, Hennessee says, "we encourage a dialogue between investors and their money managers." To achieve that, Hennessee says, "our clients trust us to establish realistic investment objectives and develop diversified hedge fund portfolios.''

But the firm also says it "can act as a discretionary adviser and work with customized portfolios using the Hennessee Hedge Fund Select Program.''

No matter what it calls itself, Hennessee has drawn more heat than most advisers that were involved with Bayou. Just this week, the Hennessee Group was hit with a third lawsuit from an irate customer, charging the New York-based firm did not adequately vet Bayou's management team before recommending the fund.

The Hennessee Group also is named as defendant in a pending class-action lawsuit filed on behalf of Bayou's estimated 100 investors. Some of the investors in Bayou included DePauw University, South Cherry Street LLC, Jewish Federation of Metropolitan Chicago, Silver Creek Capital Management and Sterling Stamos, the $2 billion investment fund founded by New York Mets owner Fred Wilpon. Sterling Stamos, which had invested tens of millions of dollars in Bayou, redeemed its investment in the hedge fund just months before the fraud was revealed.

South Cherry, a Denver-based money-management firm, is the Hennessee customer that filed the lawsuit this week against the advisory firm.

It's believed that Hennessee customers, at one point, invested up to $70 million in Bayou, whose two top managers pleaded guilty to federal securities-fraud charges in September. The two ex-hedge fund mangers, Samuel Israel III and Daniel Marino, are still awaiting sentencing.

But the Bayou affair isn't the only legal trouble facing the firm and its founder, who goes by her middle name, Lee.

Last month Leeana Piscopo, a former senior vice president at the firm, filed a lawsuit claiming she was fired after telling Hennessee and Gradante that she was pregnant. The father of Piscopo's child, according to the complaint, is Alex Smith-Ryland, another employee of the firm. The lawsuit alleges that Hennessee "screamed'' at Piscopo and Smith-Ryland, telling them they both couldn't work at the firm and "one of you has to leave.''