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Law Firm Launches Bayou Class Action

by Glen Shapiro, LawAndTax-News.com, New York

29 November 2005


It emerged last week that law firm Berger & Montague, PC has filed the first class action suit resulting from the collapse of the Bayou Management hedge funds.

Defendants to the suit include a number of Bayou funds, Bayou's principals, Samuel Israel, III and Daniel E. Marino, Bayou's bank, Citibank, NA, and hedge fund consultants Hennessee Group. The lawsuit is filed on behalf of persons who, during the Class Period December 31, 1996 through August 25, 2005, invested funds or maintained investments in the Bayou Hedge Funds, and suffered damages.

The suit alleges that almost Bayou's inception in 1996, the funds operated as a massive financial sham and Ponzi scheme in which investors were lured to to invest approximately $450 million, subsequently pilfered by Bayou's founders. Citibank is alleged to have facilitated the scheme by allowing defendant Israel to transfer at least some $120 million of the Class member fiduciary funds Bayou had under management to one or more of his own personal bank accounts in Germany and elsewhere. Hennessee Group LLC are alleged to have facilitated the fraud by failing to conduct proper due diligence of the Bayou Hedge Funds prior to recommending those investments to investors, and by failing to properly monitor those investments.

Samuel Israel III, the founder and chief executive officer of Bayou, and the firm's CFO Daniel Marino surrendered to justice last month and waived their right to have the trial heard by a federal grand jury. The case is pending in the United States District Court for the District of Connecticut, Civil Action No. 3:05-cv-01762-JBA. 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.

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.

Berger & Montague has represented shareholders in securities cases involving Sunbeam, Rite Aid, Waste Management, Drexel Burnham Lambert and numerous other well-known companies.


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