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Bayou founder, CFO plead guilty to fraud
CEO Israel, finance chief Marino face potentially long jail terms for stealing investors' money.
September 29, 2005: 5:43 PM EDT
By Amanda Cantrell, CNN/Money staff writer

NEW YORK (CNN/Money) - Bayou Group founder Samuel Israel III and CFO Daniel Marino pleaded guilty Thursday to charges that they swindled more than $450 million from investors in one of the most bizarre hedge fund blowups in recent years.

Israel, 46, pleaded guilty to three counts of conspiracy, mail fraud and investment advisory fraud. He faces up to 30 years and fines up to $250,000 for each count.

Marino pleaded guilty to one count of conspiracy and three counts of fraud. He faces up to 50 years in prison and fines of up to $250,000 per count. The two men are to be sentenced in January.

Hedge funds, secretive pools of capital catering mostly to wealthy investors, have come under closer scrutiny from federal regulators in recent years.

"This case demonstrates that even experienced investors in hedge funds can be victims of unscrupulous operators," Michael Garcia, U.S. Attorney for the Southern District of New York, said 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."

Federal prosecutors say that the duo convinced investors to put more than $450 million into Bayou hedge funds and then conspired to lie about the funds' returns and issued phony accounting statements to investors, according to charges brought by Garcia.

Reuters reported that U.S. Magistrate George Yanthis set Marino's bail at $500,000, and that Marino agreed to surrender his passport and honor restrictions barring him from traveling outside New York and Connecticut.

"I deeply regret my actions. I am very sorry in more ways than I can say," Marino said in a federal courthouse in White Plains, N.Y., the news agency reported.

In a related action, the Securities and Exchange Commission sued Bayou, Israel and Marino, seeking civil penalties and for assets to be returned to investors.

In its suit, the SEC said Israel and Marino have been defrauding investors in Bayou since the fund's inception in 1996. It said that Israel and Marino raised more than $450 million from investors and misappropriated millions of dollars for their personal use.

The agency also requested that the court freeze the defendants' assets and accused them of claiming to have made $43 million in four hedge funds in 2003 when the funds actually lost $49 million.

The SEC also charged that Israel and Marino created a sham accounting firm, Richmond-Fairfield Associates, to issue fake audits attesting to the phony results, and that Israel and Marino stole from investors by withdrawing incentive fees every year, which they were not entitled to because the fund never returned a profit.

By 2004, Israel and Marino had stopped trading and had transferred the rest of Bayou's assets to Israel and other non-Bayou entities but still sent periodic statements to investors describing profitable trades, the SEC said in its complaint.

The commission has appointed a receiver for the defendants' assets and is seeking civil penalties and repayment to investors.

The Commodity Futures Trading Commission filed a similar complaint and like the SEC, froze the defendants' assets and demanded they turn over what's left to an appointed receiver.

The U.S. Attorney's Office in New York on Sept. 1 sued to freeze $100 million that was seized in Arizona as part of a separate fraud probe.

According to that lawsuit, Bayou began defrauding investors in 1998, just a year after it opened its doors and kept up the fraud until last month.

The alleged fraud at Bayou has been detailed in a letter left by Marino that was intended to be a suicide note, and which was later obtained by state and local authorities, according to published reports.

By the end of 1998, the note said the fund had performed badly and Israel, Marino and another associate decided to create a fake accounting firm to fudge the numbers, the New York Times reported Thursday.

That charade went on for six years, the paper reported Marino said in his note, the contents of which were confirmed to the paper by two people who had read the letter.

Attorneys for Israel and Marino did not return calls seeking comment.


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