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Report: Connecticut hedge fund probed
Officials investigate $400M Bayou Group following investor complaints, newspapers say.
September 29, 2005: 12:21 PM EDT

NEW YORK (CNN/Money) - State and federal officials are said to be investigating the possible collapse of Bayou Group, a $400 million, Stamford, Conn.-based hedge fund firm, after reports that investors were unable to get their money out of its two funds.

Investors in Bayou Group's funds became alarmed when refund checks the firm sent to investors bounced and phone calls to the firm went unanswered, according to a report in the New York Times.

"We are aware that there is a situation with people not being able to be in contact with the company," James Heckman, a spokesman for the Connecticut Department of Banking, told the paper. "We are looking into it. Beyond that, I can't comment."

Bayou, founded in 1996 by Samuel Israel III, managed two hedge funds, the Bayou Fund LLC and Bayou Fund Ltd., as well as a brokerage arm, Bayou Securities. The firm claimed its funds produced an average annual return of 9.8 percent since 1997, the Wall Street Journal said in a separate report.

Bayou started four hedge funds in January 2003 in hopes of raising more than $250 million from wealthy individuals, according to the Times.

This is not the first time regulators have investigated Bayou. The Connecticut Department of Banking filed an administrative proceeding against the firm in 2003, alleging the company's records didn't accurately reflect the business it was doing, according to the Times report.

The firm settled the proceeding, paying a $7,500 fine and agreeing to provide regulators with a list of complaints filed against it by Connecticut residents until 2005, but did not admit or deny wrongdoing, according to the report.

In 2003, two former employees, Paul Westerveld Jr. and his son, Paul Westerveld III, sued Israel and his colleague, Daniel Marino, accusing them of possibly violating SEC regulations regarding the operation of hedge funds and claiming Bayou's management persuaded the pair to join the firm but did not provide them with necessary business documents and financial information relating to the firm, according to the Times report.

The case was dismissed from federal court in 2003 after a judge ordered the case to be heard by an NASD arbitration panel, though it was not clear an arbitration proceeding ever occurred, according to the Times.

This is the second time in recent months that a multi-million dollar hedge fund has caught regulatory attention.

Federal investigators are currently examining the collapse of a $200 million, West Palm Beach, Fla., hedge fund shop called KL Group. Two of the firm's principals fled the country after the SEC sued them.

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