Hedge Fund Bosses Emerge To Plead Guilty To Fraud Charges

by Phillip Morton, Investors Offshore.com

04 October 2005

The founder and chief financial officer of the embattled Bayou hedge fund both emerged from hiding last week to appear in a federal court, where they pleaded guilty to fraud and other charges.

Surrendering themselves at the courthouse on Thursday, both Samuel Israel III, the founder and chief executive officer of Bayou, and the firm's CFO Daniel Marino waived their right to have the trial heard by a federal grand jury and pleaded guilty to the charges laid before them.

Both men went into hiding after Israel wrote to investors in the summer telling them that the Bayou hedge fund was closing and that their money would shortly be returned - a promise that Bayou failed to honour, leaving several investors out of pocket to the tune of more than $1 million. According to a report by the Associated Press, one of these investors is the Jewish Federation of Metropolitan Chicago, which is seeking the return of more than $4 million.

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.

Facing Magistrate Judge George Yanthis, Israel admitted that the information passed to current and prospective investors in the fund "made it appear that Bayou was doing better than it really was".

Isreal, 46, pleaded guilty to three counts, which were: investment advisor fraud; mail fraud; and conspiracy to commit investment advisor fraud and mail fraud.

Meanwhile, Marino, who is also 46, pleaded guilty to similar charges, including: mail fraud, wire fraud; investment advisor fraud; and conspiracy to commit investment advisor fraud.

Israel's maximum sentence in the criminal case would be 30 years in prison, and Marino would face up to 50 years. However, it has been suggested that federal guidelines are likely to shorten these sentences. Both men were ordered to undergo a psychiatric assessment prior to sentencing, which has been set for January 9.

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