Investigators Probe Connecticut Money Manager

by Carla Johnson, Investors Offshore.com

30 August 2005

Investors in Connecticut money-management firm Bayou Securities are increasingly concerned after the firm failed to honour a promise to refund more than $400m by mid-August.

The founder of Bayou, Samuel Israel III, 46 years old, 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 that 90% of their money would be returned within a week and the remainder by the end of the month.

The Federal Bureau of Investigation, Connecticut banking officials and federal prosecutors are now urgently investigating Bayou, and it has transpired that the fund's auditor lists one of the money manager's principals as its registered agent. New York State public records show that Bayou partner and chief financial officer, Daniel Marino, filed registration papers for the accounting firm that Bayou has listed as its auditor – Richmond-Fairfield Associates.

On Monday it was reported that 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."

Earlier this year, Bayou Securities LLC reported to investors that it had assets of $440 million, down from more than $500 million last year. Late in 2004, Mr Israel reported to investors that a lawsuit had been filed by Paul T. Westervelt Jr., a trader he had hired in 2002 and fired a bit more than a year later. Mr. Israel said Mr. Westervelt failed to follow the firm's trading discipline and methods, investing "based on Wall Street information which my investors know I do not believe in."

Bayou's offices in Stamford are empty, and officers of the company do not return phone calls. At Mr Israel's home in Westchester, a note taped to the front door, at the end of a quarter-mile-long driveway, says, "Please do not ring the bell, you are trespassing." The note continues: "To Whom It May Concern: Please be patient. Bayou is not insolvent. You will be contacted soon by the proper authorities. I am prohibited at this time from making any comments, but plan to do so ASAP."

For the first six months of 2005, Bayou documents show gains of 4.56%. Bayou rules allow investors to leave the fund at any time, unlike many hedge funds which have lock-up arrangements. And unlike most hedge funds, Bayou did not charge a management fee; its management simply took the standard incentive fee of 20 percent of profits.

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