WHITE PLAINS, N.Y. (HedgeWorld.com)–Samuel Israel III and Daniel E. Marino pleaded guilty to criminal fraud charges in federal court today as the prosecution upped the tally of hedge fund collapse to US$450 million.
Mr. Israel admitted in court that he conspired with Mr. Marino to defraud investors by distributing fake financial statements that told investors of substantial gains that didn’t exist.
Between 1996 and 2005 the funds sustained consistent losses. Mr. Marino said in his guilty plea that he along with a former employee and co-founder of the Bayou funds came up with the scheme after the funds started to rack up losses. They went as far as to create a public accounting firm called Richmond-Fairfield Associates to distribute false returns to existing and potential investors.
The third co-conspirator was not named by prosecutors.
Both Messrs. Israel and Marino waived indictment and pleaded guilty. Mr. Israel pleaded guilty to conspiracy, mail fraud and investment adviser fraud, while Mr. Marino pleaded guilty to conspiracy, mail fraud, wire fraud and investment adviser fraud. The pair could end up serving up to five years for each of the conspiracy and investment adviser fraud charges and another 20 years on mail fraud charges, and Mr. Marino could get another 20 years for the wire fraud charges.
Maximum fines would total US$250,000 for each count or twice the gross gain or loss resulting from their crime in addition to restitution and the forfeiture of the proceeds from the scheme.
For Mr. Israel, times are already tough as he reportedly is already behind on the rent of his Westchester mansion. His landlord, real estate mogul Donald Trump, has reportedly asked Mr. Israel to move out.
Of the more than US$450 million that Bayou once had in its coffers, only US$100 million has resurfaced. Those funds had been transferred in connection with purportedly legitimate private placement transactions that were said to produce 100% per week.
The New York State Attorney General’s office and provisional liquidators from the Caymans claimed the assets in separate forfeiture cases, on top of an initial forfeiture case in Arizona.
Other civil lawsuits against Bayou and its founders include that of fund of hedge funds South Cherry Street LLC; it has another court date set for Oct. 25; the Jewish Federation of Metropolitan Chicago, a foundation that invested US$4 million with Bayou; and Multi-Dimension Fund, a fund of hedge funds that took a US$1.9 million stake in Bayou.
Douglas Hirsch, attorney for Multi-Dimension, said in a statement that the admission of guilt by the Bayou founders indicates that the prosecutors will have full cooperation from Messrs. Israel and Marino, which will increase the chances of locating more of the investors’ money.
In conjunction with the federal criminal charges, the Commodity Futures Trading Commission filed a compliant in the U.S. District Court for the Southern District of New York, alleging misappropriation and fraud involving Bayou Management, its principals and the accounting firm Richmond-Fairfield.
That separate complaint alleges that the defendants: misappropriated funds; acquired funds through false pretenses; engaged in unauthorized trading; and, lastly, misrepresented material facts to actual investors and prospective investors. The incorrect facts included the rates of return the hedge funds earned, the value of assets under management and the existence and identity of the accounting firms that supposedly audited the funds.
CFTC officials said they conducted their investigation along with the U.S. Attorney’s office and the Securities and Exchange Commission.
The SEC filed its own complaint today requesting permanent injunctions for violations of the federal securities laws. SEC attorneys are asking the federal court to freeze the defendant’s assets and to appoint a receiver to marshal the remaining assets.
The SEC said that Messrs. Israel and Marino have consented to the freeze of assets and the appointment of a receiver.
In its investigation, the SEC found that in 2003 a reported US$43 million profit in four hedge funds was actually a loss of US$49 million. By mid-2004, officials say that Messrs. Israel and Marino had stopped trading altogether and transferred the US$150 million that remained in the funds to other non-Bayou related firms for investment in fraudulent prime bank note scams that later were uncovered by the Arizona state attorney’s office in May 2005.
The prosecutors say that the investigation continues.
“This case demonstrates that even experienced investors in hedge funds can be victims of unscrupulous operators,” said the U.S. attorney for the Southern District of New York, Michael J. Garcia, in a statement. “Our office and our law enforcement partners will swiftly bring to bear all of our abilities to identify, investigate and prosecute such schemes and those who perpetuate them.”
Contact Bob Keane with questions or comments at firstname.lastname@example.org.