Bayous Israel Gets 20-Year Term for Hedge-Fund Fraud

Date: Monday, April 14, 2008
Author: Thom Weidlich and David Glovin, Bloomberg

Samuel Israel, a co-founder of bankrupt hedge-fund company Bayou Group LLC, was sentenced to 20 years in prison after pleading guilty to defrauding investors of more than $400 million.

``I lied to you and I cheated you and I cannot put into words how sorry I am,'' a visibly sweating Israel told investors as he stood before U.S. District Judge Colleen McMahon today in Manhattan federal court. His lawyers had sought leniency, noting Israel's nine back operations, his addiction to painkillers, the rod in his spine and pacemaker in his chest.

``He suffered from these ailments while he did the crime,'' the judge, unmoved, said before pronouncing sentence. ``He can deal with them while he does the time.''

The sentence brings to a close the criminal prosecutions stemming from the company's collapse. Bayou filed for bankruptcy in May 2006, prompting lawsuits claiming it operated a ``Ponzi scheme'' that paid old investors with money from new ones. Israel faced as much as 30 years in prison if he was convicted at trial.

Based in Stamford, Connecticut, Bayou was among the biggest hedge-fund companies to come under federal scrutiny for missing money since 2000, when Michael Berger was accused of hiding $400 million of losses at his Manhattan Investment Fund.

Israel's sentence is among the stiffest given to a white- collar offender in the seven years since Enron Corp. collapsed. Others included former WorldCom Inc. Chairman Bernard Ebbers, who received 25 years for fraud, and former Enron Chief Executive Officer Jeffrey Skilling, who got a 24-year sentence.

Daniel Marino Bayou's chief finance officer, Daniel Marino, was sentenced by McMahon in January to 20 years in prison.

Israel and Marino, who pleaded guilty in 2005, admitted they used fake results and a phony auditing firm to lure investors to participate in the hedge fund.

``Israel volunteered to speak to the government, spoke to the government early, spoke to the government often,'' defense lawyer Barry Bohrer told McMahon before sentencing. The judge responded by pointing out that Israel only cooperated after the Bayou fraud became public.

``After he was caught, he stopped lying,'' the judge said. ``Good for him.''

Israel was sentenced to five years for investor adviser fraud, five years for conspiracy and 20 years for mail fraud.

McMahon gave Israel the maximum for each count while allowing him to serve the sentences concurrently rather than consecutively.

Conspiracy, Fraud

The judge also allowed him to remain free before his June 9 surrender date.

While the U.S. Bureau of Prisons has final say on where Israel will serve his term, his lawyers requested the Federal Correctional Complex Butner, located in North Carolina. The facility has a medical unit.

Israel, Bohrer and Assistant U.S. Attorney Margery Feinzig declined to comment after sentencing.

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, according to Hedge Fund Research.

James Marquez, another Bayou co-founder who pleaded guilty, was sentenced to 4 1/2 years in prison. He was found responsible only for $6 million of the fraud.

Short-Term Trader

Israel described himself as a short-term stock trader, with turnover of about 200 percent per month, according to a presentation given to potential investors in 2002. He aimed to make 1 percent to 3 percent a month and positioned his portfolio with 50 percent of assets wagering on falling stocks and the other half on shares he expected to rise, according to the presentation.

He and Marquez founded Bayou in 1995. After Bayou suffered losses in 1998, Marquez and Marino created a sham accounting firm, Richmond Fairfield, to serve as the fund's external auditor, Israel said in court papers. Rather than disclose the modest losses, Bayou reported profits.

Israel said he initially believed that Richmond Fairfield had other clients and that Bayou's books were legitimate. Later, as Bayou grew, he allegedly learned they weren't. Between 1996 and 2002, Israel said his trading cost the firm roughly $55 million, which Bayou hid from its wealthy clients.

Scheme Collapses

The scheme collapsed when Seattle-based Silver Creek Capital Management sought to withdraw $53 million in August 2005.

According to Marino's lawyer, Andrew 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 investigators to the fraud. Marino didn't kill himself.

Israel was born in New Orleans into a family known for supporting charitable and civic causes, according to a sentencing memorandum filed by his lawyers. His father ran a commodities business that imported coffee, rubber, shrimp and fertilizer, according to the memo. The family sold the business in 1981 to Donaldson Lufkin & Jenrette Inc. for $44 million.

Israel's family moved to Harrison, New York, when he was 16. He attended Tulane University without graduating, according to the court filing, and in a Wall Street job beginning in 1982, worked as a messenger on the New York Stock Exchange floor for Frederic J. Graber & Co. His salary was $16,500. He worked his way up to trader.

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: Thom Weidlich in New York federal court at tweidlich@bloomberg.net; David Glovin in New York federal court at dglovin@bloomberg.net.