More clues regarding the implosion of Stamford, Conn.-based Bayou Management emerged late last week in a pair of court proceedings at opposite ends of the country.
In Manhattan on Sept. 1, the U.S. Attorney's Office filed the first official fraud allegations against the hedge fund, whose CEO, Samuel Israel III, abruptly announced in July that it would shut down its operations and ceased contact with his investors. The court papers, according to a report in The Wall Street Journal, reveal that the firm was "rife with fraud" and that Israel began overstating assets and returns as early as 1998, just one year after Bayou's launch. At one point, Bayou said it was managing $400 million when in reality that figure was closer to $160 million.
In a Phoenix court, meanwhile, state authorities revealed that they are trying to determine if the $101 million they seized early last week from a Bayou business associate was an elaborate gamble by Israel to conceal the missing assets or whether he had fallen prey to a group of con artists.
State and federal authorities in Arizona say Israel could have been involved a form of "prime bank instrument fraud," a complex scheme where investors are promised big returns on high-yield bank debt, but the money disappears as it's quickly moved from bank to bank around the world.
Three other men - former Bayou employee Lewis Malouf, investor Tedd Collins and New Jersey money manager Karl Johnson - have also been implicated in the scheme, according to court documents obtained by The Wall Street Journal.
"Whether this was an act of desperation in an attempt to recover previously misinvested funds, or was an attempt to create an apparent loss1/4with a side agreement with Malouf to split the $100 million at another time, is a question that will await further investigation," court papers said.
But Israel could also have been duped. In March, he signed an agreement with Malouf where the $100 million would grow to $7.1 million in 10 years.
That, court documents said, "appears to be the root of the downfall for Bayou."
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.