Bayou Ex CFO Marino Gets 20 Years for Hedge Fund Fraud

Date: Wednesday, January 30, 2008
Author: Patricia Hurtado and David Glovin, Bloomberg

Jan. 29 (Bloomberg) -- Daniel Marino, the former finance chief of the bankrupt hedge-fund firm Bayou Group LLC, was sentenced to 20 years in prison for defrauding investors of more than $400 million.

The judge cited the size and length of the eight-year fraud, and Marino\\\'s role as its ``linchpin\\\'\\\' in setting the sentence. Marino, 48, who had sought leniency due to his cooperation with prosecutors, was ordered imprisoned immediately. He was handcuffed by marshals in the well of the courtroom and led away.

``You are as much a career criminal as any mobster or any drug kingpin,\\\'\\\' U.S. District Judge Colleen McMahon said today in Manhattan federal court, adding he may have gotten a 50-year term. ``There is simply no alternative but to punish you for your life of crime.\\\'\\\'

At least 16 corporate executives have been sentenced to 20 years or more in prison since 2003, according to court records. They include former WorldCom Inc. Chairman Bernard Ebbers, who received 25 years for fraud, and former Enron Corp. Chief Executive Officer Jeffrey Skilling, who got a 24-year term.

Bayou, based in Stamford, Connecticut, was among the biggest hedge-fund firms to come under federal scrutiny for missing money. It filed for bankruptcy in May 2006, prompting lawsuits that claimed it operated a ``Ponzi scheme\\\'\\\' that paid off old investors with money from new ones.

`Nine Figures\\\'

Marino apologized today, saying he was ``truly sorry.\\\'\\\'

Individuals who cooperate typically receive greatly reduced sentences. The judge said she didn\\\'t give Marino credit for cooperating because his help wasn\\\'t central to solving the case. She said the amount of the fraud ``boggles the mind.\\\'\\\'

``I simply cannot get my mind around the number,\\\'\\\' she said.

The judge said other Bayou officials came to Marino and asked him to help conceal the fraud, and that he agreed to create a phony accounting firm that provided an ``audit\\\'\\\' to conceal it.

``What a stroke of genius Mr. Marino,\\\'\\\' she said. ``You eliminated the middleman and did it yourself.\\\'\\\' McMahon concluded ``there is no way that the Bayou fraud could have been perpetrated, nor could it have grown to its immense proportions, but for you.\\\'\\\' The court will order Marino to pay restitution in the ``nine figures,\\\'\\\' McMahon said, adding she will set the amount within 90 days. Marino\\\'s lawyer, Andrew Bowman, said he will appeal the sentence. Largely Unregulated Pools Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested. Globally, managers oversee more than $1.8 trillion, Hedge Fund Research said. Marino grew up in the working-class borough of Staten Island in New York City. He became an accountant, graduating in 1981 from Wagner College, and later worked as an auditor at New York- based Coopers & Lybrand LLP, then one of the Big Eight U.S. accounting firms. He eventually landed at hedge-fund firm JGM Management Co. as chief financial officer, where he met his two codefendants. Along with Bayou co-founder Samuel Israel, Marino pleaded guilty to using fake results and the phony auditing firm to lure investors to participate in the fund, which collapsed in 2005. James Marquez, another Bayou co-founder who pleaded guilty, was sentenced last week to 4 1/2 years in prison. He was found responsible only for $6 million of the fraud. Israel\\\'s sentencing date hasn\\\'t been set. His lawyer, Lawrence Bader, didn\\\'t immediately return a call seeking comment. Hatched Scheme The case stems from a scheme hatched by Israel and Marquez to falsify financial disclosures after Bayou sustained substantial losses in 1998. Israel and Marquez asked Marino to form the sham accounting firm, named Richmond-Fairfield Associates, to sign off on fake financial documents sent to clients. Marino agreed in a bid to save the firm, Bowman claimed in court papers. The fraud collapsed when Seattle-based Silver Creek Capital Management sought to withdraw $53 million in August 2005. According to Bowman, Israel told Marino to write a check although Bayou lacked the funds. Marino wrote the check and then penned a six-page confession and suicide note, Bowman said. An investor discovered the documents, leading prosecutors to Marino. McMahon said investors lost between $210 million and $450 million, although the exact amount couldn\\\'t be determined. In court papers, prosecutors said investors lost more than $400 million. In a press release after Marino\\\'s sentencing, the government put the loss at over $450 million. Others in the case had put the loss at more than $350 million. Asked For Leniency Bowman asked for leniency, citing his client\\\'s recurring bouts of cancer, hearing loss, depression and attempted suicide. The lawyer claimed Marino has been sickly since age 5, when complications from the mumps left him with severe hearing loss. The judge responded that, rather than acting as a gatekeeper to keep Bayou officials honest, Marino acted instead to help prevent his codefendants\\\' crimes from being detected. What he did was ``a theft, a deception, perpetrated out of a sense of arrogance and belief that the rules didn\\\'t apply to you,\\\'\\\' McMahon said. In refusing his bid for leniency, she told Marino that his ``personal difficulties\\\'\\\' don\\\'t warrant a shorter sentence. ``You are a sad individual -- you were good at doing the worst,\\\'\\\' she told him. ``And for this, you have to pay.\\\'\\\' The case is U.S. v. Marino, 05-cr-1036, U.S. District Court, Southern District of New York (Manhattan). To contact the reporters on this story: Patricia Hurtado in New York federal court at pathurtado@bloomberg.net ; David Glovin in New York federal court at dglovin@bloomberg.net .