Cayman Judge Appoints Bayou Hedge Fund Liquidators

by Phillip Morton, Investors Offshore.com

06 September 2005

A judge in the Cayman Islands has appointed Kroll (Cayman) Limited as joint provisional liquidators of four hedge funds run by the Bayou Group, which is currently the centre of a large-scale fraud investigation after the funds' operators were accused by federal prosecutors of cheating investors by overstating returns and concealing losses.

"With the court's appointment, we are now in a position to investigate this matter - and we will do so as proficiently as possible," Kroll's Gordon MacRae announced in a statement, according to Reuters.

In addition to Mr MacRae, the judge at the Grand Court of the Cayman Islands has also appointed James Cleaver to the job of protecting the assets held in the Bayou Offshore Master Fund, Bayou Offshore Fund A, Bayou Offshore Fund B, and Bayou Offshore Fund C.

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 Israel has since disappeared. Reportedly, an investor who visited Bayou's deserted offices on August 16 found a typed six-page letter on CFO Daniel Marino's desk that began, "This is my suicide note and confession."

However, investigators believe that Bayou's deceptions go back much further, and it is thought that the firm had lured investors to commit some $300 million by overstating returns and concealing losses since 1998. 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.

Federal prosecutors have also laid claim to $101 million held in escrow by Arizona state prosecutors, citing evidence that the money was being used by Bayou to defraud banks in an elaborate "prime bank" fraud.

A website, www.bayoucaymanliquidation.ky, has been set up to help provide investors with information on developments in the case.

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