Matthew Marino... brother of former bayou exec, Daniel Marino (already plead guilty).

Labels: Bayou Group, Daniel Marino, Matthew Marino, Sam Israel

Hennessee Group, a New York-based investment adviser is facing a $800,000 fine from the SEC due to the firm's failure to perform promised due diligence of the Bayou Group hedge fund, once run by eventual death-faking, scooter-riding fugitive from justice, Sam Israel.

Bayou, of course, was one of the biggest hedge fund flame-outs of all time, with many of the fund's major players doing jail time. The SEC complaint details about 40 Hennessee clients who altogether has about $56 million invested inthe Bayou fund.

Hennssee head, Charles Gradante has neither confirmed or denied wrongdoing in the matter. While he hasn't commented on the specifics of his own case, Gradante has submitted a letter to the SEC with a variety of recommendations for how other migh avoid Hennessee's fate.

Amongst Gradante's recommendations - increased reguation of hedge fund borrowing and requiring that third parties, such has Kroll, be hired to conductforencic audits of hedge fund financial statements. More here, via Bloomberg.

-- MDT

Labels: Bayou Group, Fraud, hedge fund, Hennessee, Kroll, Sam Israel

I know I am a little late posting this, but the past week has been all election all the time, so I apologize for my tardiness. If you have yet to read about the latest turn in the twisted tale of fraudster (and former dead guy), Sam Israel you can do so right here.

-- MDT

Labels: Bayou Group, hedge fund, Sam Israel

Oh the humanity!

A new low for the former hedge fund fugitive.

-- MDT

Labels: Bayou Group, hedge fund, Sam Israel

Cool piece from Bloomberg on this - had no idea.

Look for cameos and colorful anecdotes involving some of your fave white collar crooks.

-- MDT

Labels: asset recovery, Bayou Group, Kroll, Sam Israel, U.S. Marshalls

As white collar fugitive bolt-holes go, this is so, soooo weak. Rolling into the police station on a Yamaha scooter because his mama told him to? Seriously? This is our $2 trillion arch criminal mastermind?

I am so deflated.

-- MDT

Labels: Bayou Group, fugitive, hedge fund, Sam Israel

And here I hoped that the fugitive hedge fiend show would run all summer long...

I guess I'm back to Matlock reruns. That and Season Three of The Wire!

-- MDT

Labels: Bayou Group, fugitive, Sam Israel

Here's a few thoughts on the Israel disappearance from former FBI Agent, Paul Hayes, now managing director of Corporate Resolutions, a NY-based corporate investigative firm.

-- MDT

Labels: Bayou Group, Corporate Resolutions, Paul Hayes, Sam Israel

If you've seen it, you've potentially laid eyes on the highly styling ride of the recently un-departed hedge fund fraudster and fugitive from justice, Sam Israel.

Meanwhile, at least some folks have found a way to make something good happen over Israel's shenanigans. Own a piece of history for yourself.

Something not good would be the prospects for Israel's girlfriend, Debra Ryan. She could be facing 10 years for her part in Israel's elaborate dodge of his own twenty year fraud sentence.

-- MDT

Labels: Bayou Group, Debra Ryan, Sam Israel

The Feds seem all but certain that the Bayou hedge fund founder's suicide was mere window dressing to a disappearing act.

I must confess... I love it when they run. As to why he'd run? If you need a reminder, try Bloomberg. Something to do with starting a 20 year prison sentence, I'd think.

-- MDT

Labels: Bayou Group, Fraud, fugitive, hedge fund, Sam Israel, suicide

Sam Israel presided over the spectacular $40 million flame-out of the now defunct hedge fund, Bayou Group. Bayou was the hedge fund fraud and failure that really put the subject on the front page - not just the business pages. This week Israel got his comeuppance - a sentence of 20 years and an order to forfeit $300 million to compensate his former investors for their losses.

Now if Israel had that kind of money at hand, doubtless Bayou would still be in business, so who knows whether those bilked by Bayou have any realistic chance of reclaiming their money. Still, the knowledge that Israel (and his previously convicted Bayou co-horts) will be spending a significant number of years behind bars might provide some small solace.

Or not...

-- MDT

Labels: Bayou Group, Fraud, hedge fund, James Marquez, Sam Israel

James Marquez, co-founder of Bayou Financial, plead guilty in December of 2006 to participation in the $400 million fraud arising from his former firm (Marquez left Bayou in 2001).

Sentenced just this week, Marquez, in addition to spending a little over four years in prison and another two years under supervised release, Marquez is expected to pay over $6 million in restitution.

Two other former Bayou executives, Sam Israel and Daniel Marino have also plead guilty in relation to the fraud.

For further details on the Marquez sentencing, check out CNNMoney.

--MDT

Labels: Bayou Group, Daniel Marino, Fraud, hedge fund, James Marquez, Sam Israel

Bayou Hedge Fund co-founder, James Marquez saw his sentencing hearing was moved to today, November 20th due to "disputed issues of fact." As of this evening nothing notable has come across the wire. But we'll keep an eye out.

If you'd like to recap, here's Marquez's guilty plea from late last year. Bayou, of course, was one of the more notable hedge fund flameouts of the past few years and the one that started putting these stories on the front page, not just the front page of the business section.

-- MDT

Labels: Bayou Group, Fraud, hedge fund, James Marquez

A Bayou-related investor suit filed against Hennessee Group, a financial advisory firm has been dismissed. Hennessee was being sued for breach of fiduciary duty by South Cherry Street, LLC, which on Hennessee's say-so had invested $1.5 million with Bayou.

While proprietors of Hennessee, Lee and her husband Charles Gradante claim to have a thorough five-step due diligence process, the folks at South Cherry Street claimed that this was never conducted in the case of Bayou.

The judge found differently, deciding that Hennessee was just another sucker in a group that included the IRS and the SEC. Ouch...

Also, it appears that Bayou badguys Sam Israel and Daniel Marino will be sentenced for their roll in the hedge fund fraud as soon as September.

Further details on Bayou via Reuters.

-- MDT

Labels: Bayou Group, Fraud, hedge fund, Hennessee, South Cherry Street

Bayou would be the hedge fund whose collapse brought questions about hedge fund transparency from the business page to the front page. The reverberations from the Bayou collapse continue, most recently with the guilty plea on tax evasion from former Bayou financial advisor Burt Kozloff. You can get a look at the terms of Kozloff's plea deal right here, courtesy of the fine folks at the U.S. Attorneys Office, Souther District of New York.

-- MDT

Labels: Bayou Group, Fraud, hedge fund

Lets go back to last fall and recall the implosion of hedge fund, Bayou Group. The failure of this multi-million dollar fund sent shockwaves through the business media and was one of the key factors in raising the profile of hedge fund fraud in the press. Heck, it even prompted Risk Magazine to give a call to The Daily Caveat for a brief interview.

Law.com has a post-game analysis of the Bayou collapse from Jeff Marwill, a partner in the bankruptcy practice of Jenner and Block. Marwill charts the organization of the Bayou entities, what went wrong and how investors were made to eat the losses. Bayou Group subsequently declared bankruptcy and Marwill is uniquely qualified to comment on the aftermath as, in April '06 , he was appointed the federal equity receiver responsible for aiding investors in recouping some of the $450 million lost in the Bayou Fraud.

Interesting reading. And as always, when it comes to investing - do your homework.

-- MDT

Labels: Bayou Group, Fraud, hedge fund, Jeff Marwill, Jenner and Block

Whether on behalf of individual investors or fund of funds who bear responsibility for the actions of the funds they manage, corporate investigators can be a crucial component in risk management - operational, headline and otherwise. If nothing else, the IMA story illustrates that if you don't work investigators on the front end, you may end up hiring them anyway...when it comes time to figure out where your money went.

Recently The Daily Caveat had the opportunity to discuss the challenges of hedge fund due diligence with the fine folks at Risk Magazine, the world's leading fianancial risk management journal. Seems appropriate to revisit the story, in light of continuing concerns in this arena:

Fund investors turn to private investigators

Risk Magazine
November 2005
By Jayne Jung

The recent to turn to private investigators to dig deeper into fund managers and to conduct due diligence

A spate of hedge fund-related scandals in recent months has increased concern among investors about fraud, and is prompting many to turn to private investigators to dig deeper into fund managers and to conduct due diligence. "What's going on with Bayou, Refco and Man Financial makes people nervous. And nervous people call investigators," says Michael Thomas, a partner at Caveat, a Washington DC-based corporate investigation firm...

...Caveat's Thomas says investors' focus is broader than the financial markets when making investment decisions, and with good reason. Something as simple as a driving under the influence of alcohol or drugs charge might cause investors to withdraw cash from a fund manager, he says. Investors don't want there to be any kind of question mark hanging over the integrity, or principles, of a manager.

The full article appears here.

-- MDT

Labels: Bayou Group, Kroll, Refco

51 SEC investigations between 1999 and 2004 and 30 some odd cases brought mean one thing for the hedge fund industry industry....increased regulation. But already many have come forward saying the soon-to-take-effect SEC regs of hedge funds are a joke, with enforcement and oversight capacities sadly lacking...206 will tell the tale.

Via the FT.com:

Deadline looms as SEC turns screw on hedge funds

By Andrew Parker in New York,
Stephen Schurr in London and
Francesco Guerrera in Hong Kong
The Financial Times

The chief US financial regulator is flexing its muscles again, both at home and abroad. The Securities and Exchange Commission has set a deadline of Wednesday for many US and foreign hedge fund managers to register with it. They must provide the regulator with information about their businesses and brace themselves for the possibility of inspections.

The extension of the SEC's supervisory work to hedge funds, where wealthy investors put their money, represents a big expansion of its powers and responsibilities. However, intense controversy and uncertainty surrounds the regulator's flagship project. A federal appeals court was asked in December to strike down the SEC's rule requiring hedge fund managers who advise more than 14 investors to register with the regulator.

Phillip Goldstein, a New York-based hedge fund manager, says he is "cautiously optimistic" that the court will support his argument that the SEC did not have the authority to draw up the rule in October 2004.

William Donaldson, the SEC's Republican chairman at the time, had to rely on the support of the regulator's two Democratic commissioners to get the rule approved. He insisted the rule was necessary for the SEC to gain a full understanding of the traditionally secretive hedge fund industry, which controls assets worth $1,200bn. More than 1,000 hedge fund managers had registered with the SEC before the rule was approved. Some did so voluntarily, while others had to if they were advisers to mutual funds, for example.

But the SEC estimated that a further 1,000 hedge fund managers would have to register following the rule. Mr Donaldson said the growth of hedge funds had been accompanied by increasing instances of fraud. He highlighted 51 SEC investigations into hedge fund managers accused of fraud between 1999 and 2004. Since then the SEC has brought a further 30 cases, including against Samuel Israel III, founder of the Bayou group of hedge funds, where investors had put $450m.

The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused.Today, concerns about the SEC's registration rule focus on compliance costs, and the risk they will be passed on to investors in the guise of reduced returns. Hedge fund managers, for example, must appoint chief compliance officers at their businesses. But Ernst & Young, the accountants, last month published a survey of 109 managers that found 85 per cent thought the annual costs to be $500,000 or less, which was "generally below market projections".

Some hedge fund managers appear to be taking steps to avoid having to register with the SEC by Wednesday. Managers do not have to register if after February 1 they do not take additional money from existing clients or accept contributions from new investors. They also do not have register if they bar clients from withdrawing their investments for more than two years.

SEC officials say the UK and Hong Kong are the most significant overseas jurisdictions for hedge fund managers. By the end of last Thursday, 113 hedge fund managers based outside the US were registered with the SEC. Of these, 68 are in the UK and seven are in Hong Kong.

In London, some hedge fund managers regard the SEC's oversight as unwarranted, given that the Financial Services Authority, the chief UK financial regulator, scrutinises their industry. "Outside the US, the feeling is that the FSA is completely on top of hedge funds, far more than anyone else in the world," says Philippe Bonnefoy, partner at Cedar Partners, a London-based fund that invests in hedge funds.

In Hong Kong, hedge fund managers say they expect the bigger players to register with the SEC, partly because it would help them improve their image. "They may not like it but they have little choice if they want to continue to attract US investors and not raise suspicions in the eyes of regulators," says the Hong Kong-based manager of a large hedge fund.

The original article appears here.

-- MDT

Labels: Bayou Group, Financial Services Authority

Via CNNMoney.com:

Top hedge fund stories of 2005 -- Fines, proxy fights, rocky returns -- 2005 has proved a tricky year for hedge funds

December 12, 200
By Amanda Cantrell
CNN/Money staff writer

From fines to frauds to proxy fights to rocky returns, the press-shy hedge fund industry grabbed more headlines in 2005 than it has since 1998, when the spectacular blowup of a fund called Long Term Capital made "hedge fund" a household word. Since then, strong performance and other factors have helped these funds rack up $1 trillion in assets worldwide. The industry has swelled to an estimated 8,000 funds, attracting new investors such as endowments and pension plans along the way. Here are the top hedge fund stories of the year:

Bayou blows up

Bayou Group founder Samuel Israel III, scion of a New Orleans commodity trading family, and Daniel Marino, the fund's chief financial officer, pleaded guilty to defrauding investors of $450 million over several years simply by lying to them about how much money the funds were producing and setting up a phony auditor to sign off on the cooked books.

The tale produced news reports containing sordid details such as a six-page suicide note and confession from Marino, who didn't kill himself, and allegations that Israel had a drug problem and threatened his partner with a gun. While Israel and Marino await sentencing in January, investors are trying to get their money back. Numerous class-action suits are hitting court dockets, filed by investors suing third-party firms who invested in Bayou on their behalf.

Tough October; lackluster year

October proved to bethe worst single month for hedge funds in many years, with even typically strong performing managers posting losses in the high-single digits. For some, the month wiped out the modest gains managers have made in what has proved to be a difficult year for getting strong returns. "Performance was terrible," said Daniel Strachman, managing partner of financial services firm Answers & Company Group and the author of "Getting Started in Hedge Funds."

Strachman believes the mediocre performance has also affected funds of funds, or managers who invest in a portfolio of hedge funds on behalf of clients for an additional layer of fees. But a snap-back in November, coupled with what many believe will be a strong December, could lift hedge fund returns out of their doldrums. If that happens, it would be a repeat of 2004, in which many hedge funds racked up their gains for the year during the final quarter.

Rise of "activist" managers

Whatever you call them – shareholder activists, corporate raiders, saber-rattlers – hedge fund managers who battle corporate managements in the hope of boosting target companies' stock prices generated headlines and also cash as the hedge fund style du jour. And they're taking on big targets. Famed agitator Carl Icahn, who launched his hedge fund late last year, rounded up a cartel of investors, including fellow activists Jana Partners, to take on behemoths like Time Warner. (Time Warner is the parent company of CNNMoney.com) Meanwhile, Bill Ackman's activist fund Pershing Square Partners has taken on a corporate behemoth of its own in agitating for change at McDonald's.

The race to registration

While hedge funds have known for more than a year that many of them will be required to register with the Securities and Exchange Commission, some un-registered managers are evaluating their options for not having to comply with the rule, which takes effect in February 2006. The SEC is not requiring managers who "lock up" their investors' capital for two years or more to register and is also giving a pass to firms who agree not to take in new money.

Said Jedd Wider, a partner in the private investment fund practice at law firm Orrick, Herrington & Sutcliffe, "Most of our clients who are required to register have gone through the process already; others are giving very serious thought to extending their lockup periods or looking to close their funds to new investors."

Meanwhile, hedge fund manager Phillip Goldstein, who is suing the SEC on the grounds that the SEC exceeded its regulatory authority, got a short-term boost to his case Friday when U.S. appeals court judge Harry Edwards, one of three judges hearing arguments in the suit, told an SEC attorney the agency stretched the definition of "hedge fund clients" to make the registration proposal work, according to news reports. The panel will issue a verdict in about three months – after the rule will have already gone into effect -- Goldstein's attorney told the Chicago Tribune.

Overstock, Rocker Partners, and the "Sith Lord"

What started out as a brief, straightforward civil complaint rapidly spun into a circus sideshow as Patrick Byrne, chief executive of online closeout retailer Overstock.com, accused famed short-seller David Rocker of conspiring with independent research firm Gradient Analytics to drive down Overstock.com's share price. Byrne filed suit against both firms and their principals, but his bizarre publicity junket soon overshadowed the contents of the suit.

In a conference call to investors and reporters, Byrne launched into a rambling diatribe in which he accused hedge fund managers, journalists, and a well-known Wall Street figure, whom he would not name but instead dubbed the "Sith Lord, " of conspiring to drive the company's stock price down. Rocker and Gradient filed a motion to dismiss the suit, and Rocker founder David Rocker told Fortune he is preparing to file a countersuit.

Automaker downgrades lead to losses

When two bond-rating agencies this summer cut General Motors' corporate bonds to junk, some hedge funds, as well as some investment banks, suffered heavy losses. Particularly hard hit were funds that were shorting the common stock of GM and holding long positions in the underlying bonds. When the bonds got downgraded, investors were forced to try to sell into a market with no buyers; meanwhile, investor Kirk Kerkorian announced he would acquire a large stake in GM, causing a price spike in the stock. While the debacle did not force any large funds to unwind, the events sent jitters throughout the markets.

A once-dependable strategy falters

Once considered a safe, conservative strategy, convertible bond arbitrage, in which managers buy convertible bonds and short the underlying stock, proved to be the worst performing hedge fund strategy this year, and the plunge caused some large convertible arbitrage hedge funds to close, including Marin Capital Partners, which had $2.2 billion in assets at its peak, and Alta Partners, run by Creedon Keller & Partners, which had about $1.2 billion at its peak. The rout began late last year, when investors in these funds, unimpressed with a streak of lackluster returns, began asking for their money back. The redemption requests forced managers to sell into a market with no buyers, which drove returns even lower. Convertible arbitrage funds are down 2.69 percent for the year to date through November, according to Chicago-based hedge fund tracker Hedge Fund Research.

The original article appears here.

-- MDT

Labels: Bayou Group, Gradient Analytics, Patrick Byrne

Last week The Daily Caveat wrote about the looming court challenges to the SEC's new hedge fund regulations (between 1999 and 2004 the SEC brought 51 fraud cases relating to hedge funds) set to take effect in February 2006.

A hearing was held on Friday last, allowing both sides to courteously express their views on the merits or pitfalls of the proposed SEC rules. The Washington Post has the rather contentious details.

And now, the undignified scrapping:

Appeals Judges Question SEC's Hedge Fund Rule

By Carrie Johnson
Washington Post Staff Writer
Saturday, December 10, 2005; D01

Appeals court judges sharply questioned yesterday whether the Securities and Exchange Commission had a reasonable basis for adopting a controversial rule that requires hedge funds to register with the agency.

A divided SEC passed the rule in a 3 to 2 vote last year, citing evidence that the loosely regulated investment pools had become a breeding ground for fraud and trading abuses. But New York fund adviser Phillip Goldstein sued to stop the rule, arguing that the SEC had overstepped its authority and did not provide adequate foundation for the move.

Goldstein's case appeared to get a boost yesterday based on questions from two of the three judges on the U.S. Court of Appeals for the D.C. Circuit panel.

"You don't have authority to act simply because you exist," Judge Harry T. Edwards told Jacob H. Stillman, the SEC's lawyer.

A few moments later, Edwards said: "We have to test your thesis, and your thesis doesn't hold up."

Judge A. Raymond Randolph also expressed skepticism about the agency's arguments.

Legal experts cautioned that it is difficult to draw conclusions about how a court will rule based on questions asked by judges during oral arguments. The appeals court, however, has criticized the SEC's approach in a few recent cases.

Earlier this year, the court sent back for more research a rule mandating that mutual fund board chairmen be independent of management. The SEC retooled the rule, prompting a second, pending legal challenge by the U.S. Chamber of Commerce. That case is to be argued Jan. 6.

Last month, the court rejected a separate bid by agency lawyers to impose financial penalties on board members at an investment fund called the Rockies Fund Inc., ruling that the agency had levied the fines "arbitrarily and capriciously."

Former SEC Chairman William H. Donaldson made the hedge fund effort one of his central initiatives before he resigned in June. In recent years, the market has boomed to include more than 8,000 funds with over $1 trillion in assets. Average investors and pension funds increasingly are investing in the funds.

From 1999 to 2004, the agency filed 51 fraud cases involving hedge funds. Last week, Millennium Partners LP, a highflying New York fund, agreed to pay $180 million to settle trading abuse allegations lodged by the SEC and New York state Attorney General Eliot L. Spitzer. In September, two top officers at the Bayou Management fund pleaded guilty to criminal charges for engaging in a fraud that cost investors $450 million.

Stillman, the SEC's lawyer, stressed to the appeals court yesterday that the agency moved to register funds with more than 14 investors and $25 million under management to further its mission of protecting investors.

"Aren't they really getting at trying to enhance the government's ability to identify and prosecute fraud when it occurs?" Judge Thomas B. Griffith asked a lawyer for Goldstein. "That's really what's at the core of this."

The rule is set to take effect in February. Critics fear the hedge fund rule could foreshadow inspections and other efforts to rein in the funds. Before it was adopted, the plan had been criticized by Treasury Secretary John W. Snow and Federal Reserve Board Chairman Alan Greenspan, among others.

A ruling is expected within the next several months, according Philip D. Bartz, a lawyer at McKenna Long & Aldridge LLP who represents Goldstein.

The original article appears here.

-- MDT

Labels: Bayou Group, Eliot Spitzer, New York AG