Bayou Seeks To Block US Creditors

by Carla Johnson, Investors Offshore.com

23 September 2005

Hedge fund group Bayou is seeking a permanent injunction to block United States creditors from moving against its assets, according to a report by The Deal.com.

According to court documents, Judge Alan H.W. Shiff of the US Bankruptcy Court for the District of Connecticut in Stamford ordered the liquidators in Bayou's Cayman Islands' insolvency case to show cause why the permanent injunction should be granted on October 5.

Judge Shiff approved a temporary restraining order on September 9 that bars US creditors from acting against Bayou's assets under Section 304 of the US Bankruptcy Code.

Federal prosecutors have also laid claim to $100 million held in escrow by Arizona state prosecutors, who began investigating Bayou in May, citing evidence that the money was being used by the firm to defraud banks in an elaborate "prime bank" fraud. The state of Connecticut, where Bayou is based, has also joined the investigation.

Investigators believe that Bayou's deceptions go back as far as 1998, and it is thought that the firm had lured investors to commit some $300 million by overstating returns and concealing losses in the intervening years. It has also emerged that Bayou used a phony accounting firm to audit its financial statements, which, according to federal prosecutors, contained glaring errors; one entity, Bayou Superfund, reported assets of $192 million and trading gains of $27 million at end 2003 when in reality it had a value of $53 million and had lost $35 million.

Bayou Group filed for liquidation on Sept. 1 before the Grand Court of the Cayman Islands. A judge in the jurisdiction has appointed Kroll (Cayman) Limited as joint provisional liquidators of four hedge funds run by the Bayou Group.

The founder of Bayou, Samuel Israel III, abruptly shut down the fund in July, saying that he wanted to spend more time with his children after a messy divorce. On August 11 he wrote to investors saying that 90% of their money would be returned within a week and the remainder by the end of the month. However, investors are still waiting to be reimbursed, and nobody is certain of Israel's current whereabouts.

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