Bayou Group Founder Israel, Finance Chief Marino Plead Guilty

Date: Thursday, September 29, 2005
Author: Bloomberg.com

Sept. 29 (Bloomberg) -- Bayou Group founder Samuel Israel III and finance chief Daniel Marino pleaded guilty to using fake results and a phony auditing firm to lure investors to the $450 million hedge fund, which collapsed this summer.

Israel and Marino, both 46, pleaded guilty in federal court in White Plains, New York, to mail fraud, investment advisor fraud and conspiracy to commit those crimes. Marino also pleaded to wire fraud. The maximum penalty of the most serious offense is 20 years in prison.

The case prompted state regulators to call for stricter oversight of an industry whose assets have doubled to more than $1 trillion in five years. Information the two men provide to prosecutors may help regulators fashion new rules for hedge funds.

``I think they will debrief these folks on all the things they did, before sentencing and learn the tricks of the trade,'' said Michael Koblenz, an ex-federal prosecutor who practices securities law in New York.

Marino pleaded in the morning; Israel, in the afternoon.

Marino said in admitting guilt that he had participated in a conspiracy ``to mislead investors in the Bayou hedge fund.''

``I deeply regret my action,'' Marino told U.S. Magistrate Judge George Yanthis. ``I am very sorry in more ways than I can say. I one hundred percent accept responsibility.''

Yanthis, after accepting Marino's plea, allowed him to remain free on bail until Jan. 9, when he will be sentenced by U.S. District Judge Colleen McMahon. Prosecutors didn't say what sentence they will recommend.

Both men told the judge they are under psychiatric care.

$100 Million

Marino will give up any claim to $100 million in Bayou assets seized in Arizona and will give up his house in Westport, Connecticut, to make restitution.

Margery Feinzig, an assistant U.S. attorney, told the court the government was prepared to show the men misrepresented the value of hedge fund's assets, results and rates of return.

Bayou is the biggest hedge fund to come under scrutiny for missing money since 2000, when Michael Berger was accused of hiding $400 million of losses at his Manhattan Investment Fund.

``It's a huge business and frauds are rare, but they are going to happen,'' said Colin Mclean, who invests part of Edinburgh-based SVM Asset Management's $1.8 billion in hedge funds. ``It's something we'll have to watch out for.''

Bayou, a Stamford, Connecticut-based fund, collapsed this summer, prompting an FBI investigation. The U.S. Attorney's Office in New York said in a civil suit this month that the fund lied about profits and created a sham accounting firm to certify false reports.

Frozen Assets

Prosecutors are seeking to freeze whatever money was left at Bayou, including the $100 million, which was seized in May by Arizona officials, so it can be returned to investors.

Israel, who rents a Tudor house with enclosed grounds in Westchester County, north of New York City, said in July that he would shut Bayou's four hedge funds, which he managed, and return investors' money in August. That didn't happen, triggering investigations by the Federal Bureau of Investigation, the Securities and Exchange Commission and Connecticut banking regulators.

Marino wrote a six-page suicide note with details of the alleged fraud that was recovered by the police at Bayou's office in Stamford, authorities said. Marino, who didn't take his life, grew up in Staten Island, New York, before relocating to Westport, Connecticut. He earned a certified public accountant's license in 1990, according to New York records.

The confession in the suicide note may have made a defense by Marino and Israel difficult had they gone to trial.

Civil Suit

The civil suit filed this month by the U.S. Attorney's Office claims Bayou's financial statements and other documents from 1998 through 2005 ``overstated gains, understated losses and reported gains where there were losses.''

Bayou also created a sham accounting firm, Richmond- Fairfield Associates, to certify false financial statements, the government said in the suit.

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, the presentation said.

Before founding Bayou, Israel worked as a trader for Leon Cooperman's Omega Advisors hedge fund from January 1993 to June 1995. Bayou's investors included wealthy people and institutions such as Silver Creek Capital Management LLC of Seattle. Unlike most hedge funds, Bayou charged no management fee. It did take the industry's standard 20 percent of investment profits, according to one of its marketing presentations.

Investors were allowed to take their money out monthly, compared with so-called lock-ups of a year or more at many funds. The minimum investment was $250,000, compared with $1 million or more for other funds.

To contact the reporters on this story:
Christopher Mumma in New York at  cmumma@bloomberg.net;
David Glovin in New York at  dglovin@bloomberg.net.