La corsa degli hedge funds a cedere i loro assets

[Cantor]

up, per essere aggiornato di eventuali interventi di Fabio Galletti

Bel 3d anche se ostico da masticare (per me ovviamente)

Saluti
Cantor

[FaGal]

son solo casi di fallimenti/frodi con hedge in Usa. A breve metterò su www.masterfinance.splinder.com dell'utente tegio un intervento in italiano sulla normativa Usa degli hedge funds

[FaGal]

news su Man group

Man Group says has supported U.S. hedge fund probe
today.reuters.co.uk - October 3, 2005 - By Pratima Desai


LONDON - Man Group said on Monday it had cooperated with the receiver of a collapsed U.S. hedge fund firm and that it was surprised by his motion for the London-listed financial company to be held in contempt of court.

Man's brokerage unit, Man Financial, was broker to one of the funds of Philadelphia Alternative Asset Management. The U.S. Commodities Futures Trading Commission in June filed a lawsuit alleging fraud against Paul Eustace, founder of the U.S. firm.

Clark Hodgson, appointed to recover money for investors in the firm's funds, filed a motion last week alleging that the British company had hindered the investigation by refusing to turn over relevant documents.

Man said it had provided more than 4,200 pages of documentation to the receiver.

"Man Financial is surprised and disappointed by the actions of the receiver to Philadelphia Alternative Asset Management (PAAM.L: Quote, Profile, Research)," said the world's largest listed hedge fund firm with $44 billion under management.

"We ... have offered to meet him (the receiver) to discuss any further requirements that he has, an offer that has to date been ignored."

Man said Hodgson's motion against it was at odds with his previous public statements to the effect that he had received a "high degree of cooperation from most parties involved, and no one has yet refused to provide documents requested".

According to UK newpapers reports, however, Thomas Gilmartin, a senior vice-president at Man Financial, was a shareholder in the hedge fund firm, and the company has sent him on leave while it investigates claims he conspired to hide losses.

Traders said they marked Man's shares down because of potential unexpected costs in the case, but analysts said it was too soon to know.

"I don't think there is any justification for marking down Man's share price at the moment," said Martin Cross, an analyst at Teather & Greenwood.

Analysts say there is a tendency in North America to look around for those seen as having deep pockets.



UK financial group suspends broker linked to Cayman losses
caymannetnews.com - October 6, 2005


LONDON, England – Man Group has suspended Thomas Gilmartin, one of its senior brokers named in court papers in the US as a main point of contact for Paul Eustace, manager of a Cayman Islands hedge fund that collapsed in June amid allegations of fraud.

The suspension represents an intensification of an affair in which a US court-appointed receiver claims Man Financial, the London group’s broking division, helped to hide “staggering” losses of $175m (£100m) at a fund run by Mr Eustace’s Philadelphia Alternative Asset Management (PAAM).

The receiver to PAAM, Clark Hodgson, claimed last week that Man Financial helped to establish and operate a secret and unauthorised account for PAAM known as the “50 account”. Mr Hodgson also alleges that Man Financial is hindering his inquiries by refusing to disclose relevant documents. He issued a motion last week to hold the firm in contempt of court. Man says it has cooperated fully with the inquiry and continues to do so.

Mr Gilmartin is a senior vice-president of Man Financial in New York and is in his early 40s. It is understood he was put on “administrative leave” last week.

Man is also understood to have ordered a full internal inquiry by its compliance department into the allegations, which are, in effect, a challenge to its reputation for financial probity.


SEC Probes Man Group Over Hedge Fund Collapse, People Say
www.bloomberg.com - October 7, 2005


The U.S. Securities and Exchange Commission is investigating whether Man Group Plc, the world's largest publicly traded hedge fund company, helped another hedge fund hide $175 million in losses, said people with direct knowledge of the probe.

The SEC is conducting an ``informal inquiry of Philadelphia Alternative Asset Management Ltd., a company to which'' Man Financial Inc. provided brokerage services, Man Group said today in an e-mailed statement. ``We have an excellent record of regulatory engagement and compliance, and will cooperate fully with the SEC in connection with this review.''

Philadelphia Alternative and its founder, Paul Eustace, were sued in June by the Commodities Futures Trading Commission, which accused them of fraud. A court-appointed receiver in the case said in a Sept. 27 legal filing that Man Financial, the U.S. brokerage unit of London-based Man Group, set up an unauthorized, secret account that Eustace used to conceal losses equal to two- thirds of the $230 million that he had raised.

``This is very serious for Man because the SEC has complete power over broker-dealers here in the U.S., and can impose remedies that go right up to pulling the plug on their license,'' said Thomas Newkirk, a former SEC enforcement official now in private practice at Jenner & Block in Washington. ``My former colleagues are going to want to know whether this was a one-off case of the firm helping a hedge fund mislead investors or whether it may be something that's more systemic.''

Man Group, led by Chief Executive Officer Stanley Fink, manages about $44 billion of assets. Its brokerage unit, based in Chicago, processes futures, options and other derivates trades for institutional investors including hedge funds.

Heightened Scrutiny

The SEC has ratcheted up its scrutiny of hedge funds, lightly regulated private investment partnerships that cater to wealthy individual and institutions, such as pension funds. Many hedge funds bet on falling as well as rising markets, and borrow money to boost returns.

Worldwide, hedge-fund assets climbed to $1.03 trillion in the second quarter from $490 billion in 2000, according to Chicago-based Hedge Fund Research Inc.

John Nester, an SEC spokesman in Washington, declined to comment



SEC opens inquiry into Man's $175m hedge fund losses
www.guardian.co.uk - Nils Pratley - October 10, 2005 - The Guardian


The United States' securities and exchange commission, the world's most powerful financial regulator, has launched its own investigation into allegations that Man Group helped to hide losses of $175m (£100m) from investors in a Cayman Islands hedge fund.

The SEC is thought to have begun its inquiry within the past week into the collapse of Philadelphia Alternative Asset Management (PAAM), a hedge fund for which Man Financial, Man's brokerage business, transacted trades. It comes as investors have started behind-the-scenes discussions to determine whether to launch multi-million pound claims for compensation against Man.

The SEC's involvement follows serious charges made by the receiver to PAAM a fortnight ago. Clark Hodgson alleged in a motion to hold Man Financial in contempt of court that the firm opened and operated an unauthorised bank account for Paul Eustace, manager of the PAAM funds, through which losing bets on the commodity markets were dumped.
Man Financial, Mr Hodgson claims, kept this account secret from investors and the fund's administrator, the Swiss bank UBS, even when losses reached a "staggering"$175m. In a statement, Man said: "We have an excellent record of regulatory engagement and compliance, and will cooperate fully with the SEC in connection with this review."

The Financial Services Authority, the UK's chief financial watchdog, has declined to comment on the allegations against Man, a FTSE 100 company worth £5bn and with $44bn under management.

Man last week suspended Thomas Gilmartin, a senior broker in its New York office who was named by Mr Hodgson as a "main contact" for Mr Eustace. It also ordered its compliance department to conduct an internal investigation and maintains: "There are a number of areas where we do not agree with the receiver's interpretation of information obtained during his investigation."

Mr Gilmartin was an investor in PAAM, the receiver alleges in his court motion. Such an arrangement between prime broker and client - if proved - would be unusual, according to hedge fund experts.

Man is also accused by Mr Hodgson in his motion of refusing to disclose documents relevant to his inquiry and his efforts to recover money for investors, namely "correspondence, notes, email, memos, computer files, audio tape or other records from the files of Thomas Gilmartin".

Man says it has cooperated fully with Mr Hodgson's investigation. "We have provided more than 4,200 pages of documentation at the request of the receiver, and have offered to meet him to discuss any further requirements that he has - an offer that has to date been ignored."

Man has not been charged with any offence. Legal action by the commodities futures trading commission, the US regulatory body that launched its investigation in June, has been confined to charges of fraud against Mr Eustace and PAAM.

That has not stopped PAAM investors discussing the possibility of litigation against Man. Stanley Pantowich, a founder of $4bn New York money manager TAG Associates, which invested with Mr Eustace, told the Bloomberg news service last week: "Either they [Man Financial] were complicit or stupid, and in either case they should owe the investors."

Such openness is unusual in the world of hedge funds and reflects the furore the affair has caused within the industry. Reasons include the size of the apparent trading losses and the speed with which they seem to have been incurred - between February and May this year.

Backstory

Thomas Gilmartin, the Man Financial broker at the heart of the inquiries, may have known Paul Eustace for about 20 years. Mr Eustace, head of the collapsed Cayman Islands fund, and Mr Gilmartin attended Wharton business school at the University of Pennsylvania in the 1980s. Mr Gilmartin gained a Bachelors of Business Administration in 1988. Mr Eustace received a BSc in economics the previous year.


OSC probes failed fund PAAM
www.theglobeandmail.com - By PAUL WALDIE - October 9, 2005


The Ontario Securities Commission has launched an investigation into an Ontario hedge fund manager who faces fraud allegations in the United States.

The OSC is the latest regulator to become involved in the widening scandal surrounding the collapse of Philadelphia Alternative Asset Management Co., a hedge fund company run by Paul Eustace from his home in Oakville, Ont. The $230-million (U.S.) fund, known as PAAM, was based in Philadelphia and specialized in a complex type of commodity trading.

The U.S. Securities and Exchange Commission has also begun an informal inquiry into allegations that the U.S. brokerage arm of Man Group PLC, one of the world's largest hedge fund companies, helped PAAM hide $175-million in losses. Man Group's subsidiary, Man Financial Inc., has denied any wrongdoing and said it will co-operate fully with the SEC.

The U.S. Commodity Futures Trading Commission, or CFTC, has alleged in court documents that Mr. Eustace defrauded investors.

The CFTC alleges he did this by telling investors his commodity trading pool was increasing in value when, in fact, it had lost more than $140-million from February, 2005, to May. The CFTC alleged the fraud dates back to 2001 and that Mr. Eustace enticed clients to invest in one fund that did not exist by showing them fictitious monthly trading statements. He also allegedly co-mingled client money with his own accounts.

Mr. Eustace, 40, was not available for comment. His lawyers in the U.S. and Canada said he will defend himself against the allegations and that he is co-operating with the CFTC.

Mr. Eustace recently filed for personal bankruptcy in Ontario. In documents filed in court as part of the bankruptcy, Mr. Eustace included in his list of assets $5.3-million (Canadian) in securities, nearly $40,000 in cash and a $54,000 Porsche. His liabilities consisted of $5,000 owed to BMO MasterCard and $28.6-million owed to a group of American investors in a PAAM fund called the Option Capital Fund.

Last week, an Ontario court ordered the trustee administering the bankruptcy to turn over more than a dozen of Mr. Eustace's computers to the OSC. “We have an interest in the computers,” said OSC enforcement director Michael Watson. Mr. Watson declined further comment. Sources close to the commission confirmed the OSC has launched an investigation into the hedge fund company.

Mr. Eustace is believed to be Canadian and while most of his clients were Americans, several Canadians also sank money into PAAM.

The hedge fund company has been put into receivership in the U.S., and the receiver, Clark Hodgson, is trying to track down assets on behalf of investors.

In a recent court filing in the U.S., Mr. Hodgson alleged that another key player in the scandal is Thomas Gilmartin, a senior vice-president at Man Financial. Mr. Hodgson alleged that Mr. Gilmartin, who worked in New York, handled trades for Mr. Eustace and was a part owner of PAAM.

He also alleged Mr. Gilmartin doctored some trading records in order to boost the returns of some of PAAM's funds and that he covered up huge losses. Mr. Gilmartin was recently placed on administrative leave by Man Financial.

Mr. Hodgson has filed a contempt motion against Man Financial alleging the company has violated an earlier court order by withholding key documents.

“Despite the suspicious trades between accounts, the unusual transfers between accounts and the back-dating of transactions that occurred at Man Financial, Man Financial has produced no records justifying why these trades, transfers and back-dated transactions took place,” he alleged in a court filing. “The documents produced to date suggest that Man Financial had knowledge of the conduct described [by the receiver] and consented to and assisted in that conduct.”

In a statement, Man Financial said it was “surprised and disappointed” by the receiver's actions. “We have provided more than 4,200 pages of documentation at the request of the receiver, and have offered to meet him to discuss any further requirements that he has — an offer that has to date been ignored. The receiver's actions are at odds with public statements he has made to the effect that he has received a ‘high degree of co-operation from most parties involved and no one has yet refused to provide documents requested,'” the company said. Last week, Man Group said it has been told by the SEC the commission is conducting an informal inquiry into PAAM, “a company to which Man Financial provided clearing and execution brokerage services.”

“We have an excellent record of regulatory engagement and compliance, and will co-operate fully with the SEC in connection with this review,” Man Group said.


Man Group Recommended by Merrill; No Link to Refco
www.bloomberg.com - October 14, 2005


Man Group Plc, the world's largest hedge fund company, was added to a list of favored European stocks by Merrill Lynch & Co., which said a slide in its shares spurred by a financial crisis at U.S. futures broker Refco Inc. was unjustified.

Man Group, which is based in London and also acts as a futures broker, was added to Merrill's ``Europe 1'' list by analysts Philip Middleton and Nathan Wong in a note to clients today. They have a ``buy'' recommendation on the stock, which has fallen 6 percent this week as news emerged that Refco's chief executive officer hid unpaid debts.

``It appears as if the goings-on at Refco lie at the root of Man's recent weakness,'' the Merrill analysts wrote. ``In our view, this is a very poor reason to sell Man, as there is no linkage at all.''

Shares of Man Group today rose as much as 36 pence, or 2.4 percent, to 1,545 pence, headed for the stock's biggest percentage gain since Aug. 10. The shares were at 1,543 pence as of 12:20 p.m. in London. Merrill's price target for Man is 2,200 pence.

Man Group executives had been considering whether to spin off its brokerage unit into a separate business, encouraged by the stock market listing of Refco earlier this year.

``The board hasn't taken a decision on this,'' Man's CEO, Stanley Fink, said on Sept. 30, when the group announced its second- quarter earnings. ``We are committed to reviewing the structure of our business. We saw the incredible success of Refco.''

Refco Plunge

Refco this week has lost customers and its stock market value has plummeted 72 percent after Refco CEO and Chairman Phillip R. Bennett, who took the company public two months ago, resigned and was arrested on charges of securities fraud after an internal review found he hid $430 million in unpaid debts dating back to 1998.

Refco stock plunged to $7.90 a share yesterday, from $28.56 at the end of last week. The company yesterday blocked client withdrawals from Refco Capital Markets Ltd., a currency-trading unit. Its regulated futures brokerage, Refco LLC, is unaffected and was said by the New York Mercantile Exchange yesterday to be ``in good standing'' for its oil-trading obligations.

``Man group's brokerage business competes with Refco's brokerage business but has limited overlap with its Capital Markets business, which is focused on the area of foreign exchange and Treasury repos,'' a note from Credit Suisse First Boston analysts said today.

Separate Investigation

In a separate matter more than a week before Refco's disclosure, court documents showed Man Group's U.S. brokerage unit, Man Financial Inc., helped a now-defunct trading firm hide $175 million in losses before regulators froze the accounts because of fraud claims

A special trading account was set up by Man Financial for Paul Eustace, founder of hedge fund Philadelphia Alternative Asset Management Ltd., or PAAM, to absorb losses, according to papers filed in federal court on Sept. 27 by a court-appointed receiver, Clark Hodgson.

Neither the account nor the losses were disclosed to investors, the papers said. Hodgson is seeking a contempt of court order against Chicago-based Man Financial.

The U.S. Securities and Exchange Commission is conducting an ``informal inquiry'' into PAAM, which processed its trades through Man Financial Inc., Man Group said Oct. 7 in a statement. ``We have an excellent record of regulatory engagement and compliance, and will cooperate fully with the SEC in connection with this review.''

No Accusation

The Merrill Lynch report said Man is one of a number of brokers that dealt with PAAM and that, to date, it has not been accused of anything by a regulator.

Even so, ``the PAAM saga cannot logically be actively good for Man's share price, because the best outcome for them is that Man Financial is exonerated, in which case its value is exactly what it was before,'' the Merrill note said.

A spokesman at Man Group's outside public relations company said he wasn't immediately able to comment.

Merrill Lynch is a passive, minority shareholder in Bloomberg LP, which owns Bloomberg News.

[FaGal]

news su Bayou Management LLC

SEC seeks freeze of Bayou assets and appointment of receiver
www.hedgeweek.com - October 7, 2005


The Securities and Exchange Commission has filed a civil injunctive action against Samuel Israel III and Daniel E.Marino, managers of the Bayou Funds.

The SEC's complaint alleges that, between 1996 and the present, Samuel Israel III of New York and Daniel E. Marino of Connecticut defrauded investors in the Funds and misappropriated millions of dollars in investor funds for their personal use.

The SEC is seeking permanent injunctions for violations of the anti-fraud provisions of the federal securities laws against Israel, the founder of and investment adviser to the Stamford, Connecticut-based Funds; Bayou Management, the investment adviser to the funds; and Marino, the chief financial officer of Bayou Management.

Additionally, the SEC has requested that the court freeze the defendants' assets and appoint a receiver to marshal any remaining assets for the benefit of defrauded hedge fund investors. All of the defendants have consented to the freeze of assets and appointment of a receiver. The requested relief is subject to court approval.

On 29 September 29, the United States Attorney for the Southern District of New York announced that it had filed criminal fraud charges against Israel and Marino. The Commodity Futures Trading Commission (CFTC) has also announced that it has filed an action arising from the same conduct.

Linda Chatman Thomsen, Director of the Division of Enforcement, said: "The action filed by the SEC today, together with the parallel criminal proceedings instituted by the United States Attorney and the action brought by the CFTC, demonstrate that hedge fund managers who defraud their investors can expect a comprehensive and vigorous enforcement response."

Antonia Chion, an Associate Director of Enforcement, added: "As our action demonstrates, we not only seek to hold the defendants accountable, but we will work to recover and return assets to harmed investors."

The SEC alleges in its complaint that from 1996 through 2005, investors deposited over USD 450 million into the Bayou Funds and a predecessor fund. During that period, Israel and Marino defrauded current investors, and attracted new investors, by grossly exaggerating the Funds' performance to make it appear that the Funds were profitable and attractive investments, when in fact, the Funds had never posted a year-end profit.

The SEC's complaint further alleges that, in furtherance of their fraud, Israel and Marino concocted and disseminated to the Funds' investors periodic account statements and performance summaries containing fictitious profit and loss figures and forged audited financial statements in order to hide multimillion dollar trading losses from investors. Among other things, the complaint alleges that:

• Israel, Marino, and Bayou Management overstated the Funds' 2003 performance by claiming a USD 43 million profit in the four hedge funds, while trading records show that the Funds actually lost USD 49 million;

• In 1999, Marino created a sham accounting firm, "Richmond-Fairfield Associates," that he used to fabricate annual "independent" audits of the Funds and attest to the fake results that he and Israel had assigned to the Funds;

• Israel and Marino stole investor funds by annually withdrawing from the Funds "incentive fees" that they were not entitled to receive because the Funds never returned a year-end profit;

• By mid-2004, Israel and Marino had largely suspended trading securities on behalf of the Funds and transferred all remaining Fund assets, consisting of approximately USD 150 million, to Israel and other non-Bayou-related entities, for investment in fraudulent prime bank note trading programs and venture capital investments in non-public startup companies; and

• Despite having abandoned their hedge fund strategy in 2004, Bayou Management continued to send periodic statements and financial statements to investors describing purportedly profitable hedge fund trading activities through mid-2005.

In addition to injunctions against all of the defendants, the SEC also seeks disgorgement of ill-gotten gains, prejudgment interest, and civil money penalties from Israel, Marino, and Bayou Management. The SEC's investigation continues.


Guilty Of Massive Fraud
www.courant.com - October 13, 2005

Stamford-based Bayou Management offers a cautionary tale for investors in the $1.3 trillion hedge fund industry.


The recent guilty pleas by Bayou's two principals to criminal fraud charges exposed a massive swindle in which the firm collected $450 million from trusting investors and lost most of it. Chief executive Samuel Israel III, 46, and former chief financial officer Daniel Marino, 45, admitted to investment adviser fraud, mail fraud and conspiracy. Each deserves a long prison term at their sentencing on Jan. 9.

Hedge funds - many of them based in Fairfield County - are typically investment opportunities for wealthy individuals and institutions. The funds make money through rapid in-and-out trades and greater risk-taking.

But the funds operate with little regulation. The Bayou experience shows why greater state and federal oversight is needed.

Bayou Management was launched in 1997. Almost immediately it started losing money and lying to investors. Bayou even created a fictitious auditing firm to trick investors into believing it was making money, while it was losing millions. The deception worked so well that one Bayou fund took in $90 million in new investments two years ago, but lost $35 million through trading.

Mr. Israel told a judge, "I knew what I was doing was wrong and fraudulent."

Of the $450 million that investors had entrusted to Bayou, only $150 million remained by last year. Desperate to make money, Mr. Israel tried to pour money into a crazy scheme that promised to turn a $100 million investment into $7.1 billion in 10 years.

Finally, suspicious clients started demanding their money back. Mr. Israel held them off until the fund collapsed just months ago. Meanwhile, he and Mr. Marino collected millions in management fees and lived in extravagant luxury.

Investigators have a duty to determine what happened to all the money.

Arizona has seized $100 million in bank funds that may be linked to Bayou, but little is known about what happened to the rest of the money. Investors deserve a full accounting of how the fraud developed without detection.

For now, hedge fund investors would do well to start asking more questions and monitoring hedge fund returns.



Investor sues Hennessee over Bayou investment
today.reuters.com - October 14, 2005


BOSTON - A prominent hedge fund consulting group was sued by one of its clients this week for having suggested putting $3.25 million into Bayou Group, a hedge fund that collapsed last month, court papers show.

DePauw University filed a lawsuit in U.S. District Court in the Southern District of Indiana on Wednesday alleging the Hennessee Group and its principals, Lee Hennessee and Charles Gradante, failed to conduct the kind of due diligence they had promised their clients.

Relying on the consultants' recommendation, DePauw said it invested $3.25 million in Bayou in 2004.

The Hennessee Group failed to notice that Bayou's founder, Samuel Israel, and chief financial officer, Daniel Marino, had falsified performance data and fabricated auditor's reports.

The consultants also failed to identify discrepancies on Israel's resume after having told DePauw they conducted a thorough background check, the university said.

DePauw is demanding that Hennessee pay back all of the losses the university suffered plus interest of 8 percent and attorney's fees.

The Bayou collapse, which may have cost investors $450 million, is among the latest blowups in the fast growing $1 trillion hedge fund industry.

[fever7]

molte cose interessanti

[aston]

"If you have been following financial press in last few months, you will be aware of a couple of recent stories relating to fraud in hedge funds. It's easy to see why such incidents make newsworthy headlines, not only are the amounts of money involved significant but they let the public into the secretive world of hedge funds. A casual observer of the hedge fund industry would almost certainly think that such occurences were pandemic to the industry.
This would be incorrect as hedge funds are not exposed to any more fraud risk than other types of industry. Based on a creude calculation, ther are estimated to be 8.000 funds globally among which I am aware of only three episodes of fraud this year. That represents a rate of 0.00375 percent per anum (assuming there are no further problems in the remainder of this year). Even if the number has been understimated by a factor of ten, this still does not represent a fraud level greater than experienced in other industries..."

Stan Chaudhry
Thames River Capital

[FaGal]

London firm 'was link in US banking fraud case'
www.telegraph.co.uk - By James Moore, Financial Correspondent - September 27, 2005


A City-based securities broker run by a direct descendent of the Duke of Wellington has been named as the company used as the London link in an alleged $101m banking fraud involving collapsed hedge fund Bayou.

Court papers filed by the Arizona Attorney General Office say $101m of funds in the name of Majestic Capital Management were deposited with London-based ODL Securities, run by Graham Wellesley, who holds the title Viscount Dangan, before they were sent on to US bank Wachovia from where they were seized on May 19.
In the papers, the attorney-general said US courts had "probable cause that the seized funds were in the process of being used in a fraud on various financial institutions".

The decision to seize the funds was opposed by lawyers representing Bayou, which is being sued by the US Government.

The US authorities allege that the hedge fund was involved in a "massive fraud" since 1998, barely a year after opening for business.

The State of Arizona said it had not yet confirmed that the $101m came from Bayou but is currently investigating their origin.

However, the statement said that the US Attorney for the Eastern District of New York believed that the funds were from Bayou and that the funds could soon be transferred to the US District Court.

Mr Wellesley yesterday said that ODL had been concerned about the funds as soon as it received them. He also that said the money was from Bayou.

He said: "Bayou opened an account with ODL and deposited $101m. They requested to do two different bond transactions both of which we refused to do. We reported suspicious activity to the Financial Services Authority."

Mr Wellesley also said that the company had not released the funds for transfer to Wachovia until it had received approval from the US authorities.

He added: "We blew the whistle on this. I think that this reflects well on our compliance procedures. ODL should be seen in a very good light in relation to Bayou."

Mr Wellesley said the company had sent a statement to its clients to inform them that it had raised its concerns about the Bayou funds with UK regulators.

ODL was founded in 1994 and specialises in derivatives trading and stockbroking. Mr Wellesley joined ODL, where he is executive chairman, in 2003 after leaving IFX Group, the spread betting company he founded. IFX was formerly the football pools operator Zetters.

Cameron Holmes, chief counsel for the financial remedies section of the Arizona Attorney General, said they had been alerted that the money had been placed in an account with a bank in the state by a US financial institution.

Mr Holmes would not comment on the identity of the institution.

A number of financial companies are under investigation by the Arizona District Attorney's office, but it is understood that ODL is not one of them.

Bayou, based in the state of Connecticut, is accused of attracting more than $440m from investors through bogus claims which also "lulled existing investors into retaining their investments in Bayou".

US authorities have called for tighter regulation of the hedge fund industry as a result of the scandal







Bayou Chief Is Expected to Turn Himself In
www.nytimes.com - By JENNY ANDERSON and WILLIAM K. RASHBAUM - September 29, 2005


Samuel Israel III, the founder and chief executive of the Bayou Group, the Connecticut hedge fund that seemingly disappeared overnight in what federal prosecutors have described as a $300 million fraud, is expected to surrender to federal authorities today, a law enforcement official who has been briefed on the case said last night.

The fund's chief financial officer, Daniel E. Marino, also is expected to surrender.

Both men are expected to enter guilty pleas to fraud charges in federal court as soon as this week.

Their surrender will cap the extraordinary rise and fall of Bayou, a Stamford-based hedge fund that at one point claimed to have more than $400 million under management.

Neither Mr. Israel's lawyer, Lawrence S. Bader, nor Mr. Marino's lawyer, Andrew B. Bowman, returned calls seeking comment.

A spokesman for the United States attorney's office for the Southern District could not be reached.

The two men have not been seen publicly since state and federal officials began investigating Bayou last month after investors complained that they were unable to reach anyone at the fund. Among the many questions that had been surrounding the collapse of Bayou was why no arrests had been made.

On Sept. 1, the United States attorney's office for the Southern District of New York sued to freeze $100 million of funds that were seized in Arizona as part of a separate fraud investigation.

According to that complaint, Bayou began defrauding investors in 1998, just a year after it opened its doors. The fraud extended through August, the complaint said, and included the overstatement of investment gains, the understatement of losses and the reporting of gains to investors when, in fact, losses should have been recorded.

One of Bayou's questionable transactions involved the $100 million that Arizona authorities seized in May.

At the time, Arizona authorities were investigating an unrelated financial fraud and became suspicious when they found money that had been zipping around accounts, moving from London to the Wachovia bank and then to Wachovia's Hong Kong unit.

They had stumbled onto what may be this year's most spectacular hedge fund fraud. Bayou's involvement emerged after lawyers for Mr. Israel sought to claim the money. That $100 million may be all that is left of Bayou, prosecutors have said.

Mr. Israel founded Bayou in 1996 as a day-trading shop that would make significant but not outlandish returns on lots of small bets. In his first year, he lost money, say people who invested with him, and he later changed the firm's documents to indicate the firm had started in 1997.

Mr. Israel leveraged his relationships to attract money, embellishing his r�sum� along the way. Having once worked at Omega Advisors, a hedge fund run by Leon Cooperman, he told people that he was a "head trader" when in fact it seems he was more of an order taker.

Things started to unravel quickly at Bayou. According to a note left by Mr. Marino that was intended to be a suicide note, and which was later obtained by state and local authorities, by the end of 1998 the fund had performed badly and Mr. Israel, Mr. Marino and another associate decided to create a fake accounting firm to fudge the numbers.

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

While Mr. Israel and Mr. Marino were duping investors about the fund's true performance, they were living well. In 2003, Mr. Israel moved into a 10-bedroom estate that was built for the ketchup magnate H. J. Heinz. Mr. Marino, who had been living in Staten Island, moved into a multimillion-dollar home in Westport and started driving a Bentley.

Red flags abounded at the fund, including a lawsuit filed by a trader who was hired and quit months later and then sued Mr. Israel, Mr. Marino and the fund, accusing them of engaging in fraud. That lawsuit was moved to arbitration and later dismissed, but its contents suggested that Mr. Israel and Mr. Marino would not share critical information about the operations of the fund, including $7 million that the suit said disappeared without explanation.

In December 2004, Mr. Israel and Mr. Marino transferred $100 million into Mr. Israel's name. He then invested in a fanciful scheme intended to convert $100 million to $7.1 billion. When Arizona authorities saw that $100 million being moved around the world, they became suspicious.

Mr. Israel, meanwhile, recently left the former Heinz mansion, which he rented from Donald J. Trump for $32,000 a month, after falling behind on his payments.

"He owes two months' rent," Mr. Trump said yesterday. "We said, 'Pay the rent and hit the road.' "




Bayou's Samuel Israel, Dan Marino to Plead Guilty, Person Says
www.bloomberg.com - September 29, 2005


Bayou Group founder Samuel Israel III and Chief Financial Officer Daniel Marino plan to plead guilty to fraud charges from an investigation of their hedge fund, a person familiar with their case said.

Bayou, a Stamford, Connecticut-based hedge fund with more than $300 million in assets collapsed in July. Earlier this month, the U.S. attorney's office in New York claimed in a civil lawsuit the fund lied about investment profits and created a sham accounting firm to certify false financial statements.

Israel and Marino, both 46, plan to plead guilty to the charges at a federal court in New York City or White Plains, New York, as early as today, said the person, who requested anonymity so as not to affect the plea plans. Prosecutors are seeking to freeze whatever money was left at Bayou, including $100 million seized in May by Arizona officials, so it can be returned to investors.

``By pleading guilty, you can get the number and nature of possible charges reduced,'' said Richard Phillips, a lawyer at Kirkpatrick & Lockhart Nicholson Graham LLP in San Francisco who isn't involved in the case. ``There's an awful lot you can gain by plea bargaining.''

Israel's lawyer, Lawrence Bader, and Marino's attorney, Andrew Bowman, didn't immediately return calls seeking comment. Herb Hadad, a spokesman for the U.S. attorney in New York, Michael Garcia, declined to comment.

SEC Investigation

Israel, who rents a Tudor house with enclosed grounds in Westchester County, north of New York City, said in July that he would shut Bayou's four hedge funds, which he managed, and return investors' money in August. That didn't happen, triggering investigations by Connecticut banking regulators, the U.S. Securities and Exchange Commission and the Federal Bureau of Investigation.

Marino wrote a six-page suicide note with details of the alleged fraud that was recovered by police at Bayou's office in Stamford, Connecticut, police said. Marino, who didn't take his life, grew up in Staten Island, New York, before relocating to Westport, Connecticut. He earned a Certified Public Accountant's license in 1990, according to New York records.

The confession in the suicide note may have made a defense by Marino and Israel difficult had they gone to trial.

The civil lawsuit filed this month by the U.S. attorney's office in New York claims Bayou's financial statements and other documents from 1998 through 2005 ``overstated gains, understated losses and reported gains where there were losses.''

`Sham Accounting Firm'

The company also created a sham accounting firm, Richmond- Fairfield Associates, to certify false financial statements, prosecutors claimed in the suit.

Israel pitched himself as a short-term stock trader, with turnover of about 200 percent per month, according to a presentation given to potential investors in 2002. He aimed to make 1 percent to 3 percent a month and positioned his portfolio with 50 percent of assets wagering on falling stocks and the other half on shares he expected to rise, the presentation said.

Before founding Bayou, Israel worked as a trader for Leon Cooperman's Omega Advisors hedge fund from January 1993 to June 1995.

Bayou is the biggest hedge fund to come under scrutiny for missing funds since 2000, when money manager Michael Berger was accused of hiding $400 million of losses over four years.

Managers of hedge funds -- lightly regulated investment portfolios designed for wealthy investors and institutions -- will have to register with the Securities and Exchange Commission beginning in February, opening them to random audits for the first time. There are about 8,000 hedge funds with about $1 trillion under management.

Wealthy Individuals

Bayou's investors included wealthy individuals and institutions, including Silver Creek Capital Management LLC of Seattle. Unlike most hedge funds, Bayou charged no management fee. It did take the industry's standard 20 percent of investment profits, according to one of its marketing presentations.

Investors were allowed to take their money out monthly, compared with so-called lock-ups of a year or more at many funds. The minimum investment was $250,000, compared with $1 million or more for other funds.


To contact the reporter on this story: Christopher Mumma in State Supreme Court in New York at (1) cmumma@bloomberg.net

[FaGal]

Hedge Fund Exec Pleads Guilty to Fraud
www.washingtonpost.com - By JIM FITZGERALD - The Associated Press - September 29, 2005


WHITE PLAINS, N.Y. - An executive for a beleaguered hedge fund pleaded guilty to fraud charges Thursday for his role in a scandal that allegedly cost investors millions of dollars.

Daniel Marino, 46, the chief financial officer at the Stamford, Conn.-based Bayou hedge fund, pleaded guilty in federal court in White Plains to charges that included mail fraud, wire fraud, investment adviser fraud, and conspiracy to commit investment adviser fraud.

Prosecutor Margery Feinzig said Marino helped make it appear that Bayou was earning profits on trading when it was not, and created "fictitious" quarterly and annual reports. Prosecutors say the fraud occurred from 1996 to 2005.

"At the end of '98, we all agreed to set up an accounting firm that would give the appearance of an independent auditor," Marino admitted in court.

The conspiracy and investment fraud counts each carry a maximum of five years in prison. The maximum punishment for the mail and wire fraud is 20 years, but Marino would serve considerably less time under federal sentencing guidelines.

Sentencing is Jan. 9. Marino also was ordered to surrender about $100 million in an account now under the control of the Arizona state treasurer, a house in Connecticut, and interest in various business partnerships.

Authorities began investigating Bayou after investors received a July 27 letter from Samuel Israel III, the fund's founder, announcing that Bayou would return their money and shut its doors.

Investors say they have not received refunds.

Bayou is the latest in what regulators say is a growing number of frauds involving hedge funds, which are largely unregulated and traditionally serve institutions and wealthy investors. Hedge funds profit by using unconventional techniques, such as short-selling, or betting on falling markets to make a profit during market downturns. Hedge funds typically are active traders and can use techniques off limits to mutual funds.

Bayou investors filed several lawsuits alleging that Bayou executives hid massive investment losses by raising new money to pay withdrawing investors and to pay themselves fees and commissions they had not earned. One lawsuit referred to Bayou as a classic Ponzi scheme.

Ross Intelisano, an attorney who represents some of the investors, said his clients invested between $250,000 and $1.5 million in Bayou. Some clients invested their retirement funds, he said.

One investor, the Jewish Federation of Metropolitan Chicago seeking more than $4 million.

The firm earlier this year reported to investors that it had assets of $440 million. Last year, it told investors that it had more than $500 million in assets.

In the last five years, the U.S. Securities and Exchange Commission brought 51 cases charging hedge fund advisers with defrauding investors of more than $1 billion. According to the agency, there are now about 7,000 hedge funds managing $870 billion in assets, a 260 percent jump over five years ago.




Two hedge fund executives plead guilty to conspiracy and fraud
www.canada.com - Jim Fitzgerald - Canadian Press - September 29, 2005


WHITE PLAINS, N.Y. (AP) - The founder and the chief financial officer of a beleaguered hedge fund each pleaded guilty to conspiracy and fraud charges Thursday for their roles in a scandal that allegedly cost investors about $450 million US.

Samuel Israel III, the founder, and Daniel Marino, the CFO of the Stamford, Conn.-based Bayou hedge fund, pleaded guilty in U.S. federal court.

Prosecutor Margery Feinzig said Bayou issued fictitious weekly, quarterly and annual reports that inflated its profits to attract new investors and lull existing investors into keeping their money in the fund.

Israel, 46, admitted sending out false financial information to current and prospective investors "which made it appear that Bayou was doing better than it really was."

Israel pleaded guilty to three counts: conspiracy to commit investment adviser fraud and mail fraud; investment adviser fraud; and mail fraud.

Marino, who is also 46, pleaded guilty to mail fraud, wire fraud, investment adviser fraud, and conspiracy to commit investment adviser fraud.

The maximum sentence for the investment fraud counts are five years each; for mail fraud and wire fraud, the maximum is 20 years. Sentencing guidelines, however, are likely to call for considerably lower sentences.

Sentencing for both executives was set for Jan. 9.

Authorities began investigating Bayou after investors received a July 27 letter from Israel announcing that Bayou would return their money and shut its doors. Investors say they have not received refunds, and the government estimates the losses at $450 million.

Bayou is the latest in what regulators say is a growing number of frauds involving hedge funds, which are largely unregulated and traditionally serve institutions and wealthy investors. Hedge funds profit by using unconventional techniques, such as short-selling, or betting on falling markets to make a profit during market downturns. Hedge funds typically are active traders and can use techniques off limits to mutual funds.

Bayou investors filed several lawsuits alleging that Bayou executives hid massive investment losses by raising new money to pay withdrawing investors and to pay themselves fees and commissions they had not earned. One lawsuit referred to Bayou as a classic Ponzi scheme.

Ross Intelisano, a lawyer who represents some of the investors, said his clients invested between $250,000 and $1.5 million in Bayou. Some clients invested their retirement funds, he said.

One investor, the Jewish Federation of Metropolitan Chicago seeking more than $4 million.

The firm earlier this year reported to investors that it had assets of $440 million. Last year, it told investors that it had more than $500 million in assets.

In the last five years, the U.S. Securities and Exchange Commission brought 51 cases charging hedge fund advisers with defrauding investors of more than $1 billion. According to the agency, there are now about 7,000 hedge funds managing $870 billion in assets, a 260 per cent jump over five years ago.




Bayou Investors Seek to Recover More Than $100 Mln
www.bloomberg.com - September 30, 2005


Investors in Bayou Group, the collapsed hedge fund company, are hoping to recover more than $100 million following guilty pleas yesterday by principals Samuel Israel III and Daniel Marino.

U.S. regulators are hunting for millions of dollars in Bayou funds that they allege Israel and Marino siphoned off to invest in private companies. They have already targeted for seizure $100 million that was intercepted in May by the Arizona attorney general; Marino's $2.9 million home in Westport, Connecticut; and other personal accounts and property.

``Investors are hoping there is going to be a large amount of money to recover that were the fruits of the Bayou fraud,'' said Ross Intelisano, a lawyer with Rich Intelisano LLP in New York, who's representing Bayou investors.

U.S. Attorney Michael Garcia said yesterday that Stamford, Connecticut-based Bayou took in $450 million since July 1996. The Securities and Exchange Commission has asked a court to appoint a receiver to track down assets that can be used to repay investors. Bayou ``grossly exagerrated'' its performance to make it appear the funds were profitable, the SEC said.

Israel and Marino, both 46, pleaded guilty yesterday in federal court in White Plains, New York, to mail fraud, investment adviser fraud and conspiracy to commit those crimes. Marino also pleaded guilty to wire fraud, and faces a maximum 50 years in prison. Israel may be sentenced to as many as 30 years.

Bayou is the biggest hedge fund to come under scrutiny for missing money since 2000, when Michael Berger was accused of hiding $400 million of losses at his Manhattan Investment Fund. The Bayou case has prompted regulators to call for stricter oversight of the industry, which caters to wealthy investors and institutions, and whose assets doubled to more than $1 trillion during the past five years.

Isle of Man

Israel, Bayou's founder and principal trader, and Marino, its chief financial officer, began investing in private companies in Europe and the U.S. in 2003 through partnerships including IM Partners and IMG LLC, a change they didn't disclose to investors, according to court documents filed by Garcia and the SEC. Investigators don't know how much of that money may be recovered.

One of Israel and Marino's early private investments was a startup called Kycos Ltd. IM Partners invested more than $10 million in the company, which opened in October 2003, said John Bourbon, a former financial regulator in the Isle of Man and the Cayman Islands who was Kycos's chief executive officer. The company marketed services to help offshore financial institutions meet anti-money laundering and anti-terrorist regulations.

Financing Movies

Kycos eventually opened offices in the Isle of Man and the Cayman Islands, employing more than 30 people. IM Partners took over management of Kycos in December and it closed in July, said Chris Corlett, CEO of the Isle of Man's Ministry of Industry and Trade.

IM Partners also was involved in financing movies. The partnership agreed to provide $2.7 million in funding for a film called ``Yellow,'' according to documents filed in Nevada. It's not clear if the financing deal was consummated.

In 2004, Israel stopped trading for the hedge funds, the SEC said. He began ``searching for high-payout, short-term investments and made the assets of the funds vulnerable to theft and fraudulent investment scams,'' the agency said. He wired $150 million of Bayou funds in and out of a series of bank accounts. Arizona officials suspected the transfers were part of an investment scam and the state froze $100 million in account.

Arizona officials allege a former Bayou executive entered into a complex and ``fanciful'' investment arrangement with Israel to use the $100 million, along with debt, to buy ``bank instruments'' on which Israel would earn $7.1 billion over 10 years.


To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net; Rob Urban in New York at robprag@bloomberg.net.

[FaGal]

Firm to keep going after Bayou blowup
today.reuters.com - September 30, 2005 - By Svea Herbst-Bayliss


BOSTON (Reuters) - A prominent consulting firm that sent clients into the collapsed Bayou hedge fund said it was blinded by the managers' bold lies, but pledged to stay in business after reviewing how it evaluates funds for clients.

"We have to do an objective assessment of what went on here," said Charles Gradante, who runs the Hennessee Group with his wife and business partner, Lee Hennessee, about how the firm fell for a multiyear fraud that was only interrupted this summer when clients noticed $450 million were missing.

To help overhaul the process, Hennessee hired law firm Kirkpatrick & Lockhart Nicholson Graham LLP to review how the New York-based consultants select hedge funds for clients like DePauw University, Gradante told Reuters on Friday.

"This was not sloppy work by us," Gradante said, in his first interview since the hedge fund managers turned themselves in this week, after hiding from authorities for weeks.

"We used the same kind of due diligence here that kept us from investing in Beacon Hill, the KL Group and other hedge fund frauds," he said, adding that "we are not a bunch of idiots here.

"We had a perfect track record that was stopped by Bayou and we are humbled by that."

Gradante also said the firm has not been sued by anyone and that its clients were supportive.

Lawyers said that hiring a law firm to review the process might offer added insurance in the case of future lawsuits because the information would be privileged.

NO TROUBLE ... UNTIL NOW

For 18 years, Gradante and Hennessee said they avoided all of the industry's collapses because they had long histories on Wall Street and relied on a broad network of independent contacts, including some of the industry's elder statesmen like Julian Robertson and George Soros, to steer clear of danger.

But now they are squarely in the middle of the fast-growing $1 trillion hedge fund industry's latest blowup, having been closely linked to Bayou founders Samuel Israel III and Daniel Marino, who pleaded guilty on Thursday to investment adviser fraud, mail fraud and conspiracy.

Other investors, including Seattle, Washington-based fund of funds firm Silver Creek, also put money into Bayou before it became clear that the founders told their clients they were making money while in fact they were losing millions of dollars.

For weeks, speculation mounted that the Hennessee Group may not survive this debacle because it missed red flags that appear to be glaring oversights in hindsight.

Bayou traded through Bayou Securities, a broker-dealer that was regulated by the NASD, and it did not pick a top-flight auditing firm. The fund created a bogus accounting firm.

Gradante said he talked to the fund about changing auditors and was told that was planned. Many new hedge funds cannot afford to hire the best accounting firms immediately and there was no reason to question the audited financial statements, Gradante explained.

"We thought we were dealing with good and honest people," Gradante said, recalling that his contacts had checked the pair out and that Samuel Israel, who comes from a prominent family in Louisiana, had a reputation as a "pretty good trader."

Hennessee also had no reason to suspect the returns were bogus because the pair was careful not to put down anything to attract too much attention.

"Returns were in line. Nothing stood out," Gradante said.

As Gradante and Hennessee dash from meeting to meeting to assure their clients nothing is amiss with other investments, the firm said it has not been sued by anyone.

"Our clients are behind us and so are the managers," Gradante said, describing e-mails telling the husband-and-wife team to "hang in there."

Still talk is circulating on Wall Street the firm won't be able to retain clients or sign up new ones as outsiders try to determine whether Hennessee made an honest mistake or overlooked glaring errors.

"Our competitors want to destroy us," Gradante said. "I understand it is Wall Street and it is a mean city and everyone is puking on us. But we are taking it."





SEC seeks freeze of Bayou assets and appointment of receiver
www.hedgeweek.com - October 7, 2005


The Securities and Exchange Commission has filed a civil injunctive action against Samuel Israel III and Daniel E.Marino, managers of the Bayou Funds.

The SEC's complaint alleges that, between 1996 and the present, Samuel Israel III of New York and Daniel E. Marino of Connecticut defrauded investors in the Funds and misappropriated millions of dollars in investor funds for their personal use.

The SEC is seeking permanent injunctions for violations of the anti-fraud provisions of the federal securities laws against Israel, the founder of and investment adviser to the Stamford, Connecticut-based Funds; Bayou Management, the investment adviser to the funds; and Marino, the chief financial officer of Bayou Management.

Additionally, the SEC has requested that the court freeze the defendants' assets and appoint a receiver to marshal any remaining assets for the benefit of defrauded hedge fund investors. All of the defendants have consented to the freeze of assets and appointment of a receiver. The requested relief is subject to court approval.

On 29 September 29, the United States Attorney for the Southern District of New York announced that it had filed criminal fraud charges against Israel and Marino. The Commodity Futures Trading Commission (CFTC) has also announced that it has filed an action arising from the same conduct.

Linda Chatman Thomsen, Director of the Division of Enforcement, said: "The action filed by the SEC today, together with the parallel criminal proceedings instituted by the United States Attorney and the action brought by the CFTC, demonstrate that hedge fund managers who defraud their investors can expect a comprehensive and vigorous enforcement response."

Antonia Chion, an Associate Director of Enforcement, added: "As our action demonstrates, we not only seek to hold the defendants accountable, but we will work to recover and return assets to harmed investors."

The SEC alleges in its complaint that from 1996 through 2005, investors deposited over USD 450 million into the Bayou Funds and a predecessor fund. During that period, Israel and Marino defrauded current investors, and attracted new investors, by grossly exaggerating the Funds' performance to make it appear that the Funds were profitable and attractive investments, when in fact, the Funds had never posted a year-end profit.

The SEC's complaint further alleges that, in furtherance of their fraud, Israel and Marino concocted and disseminated to the Funds' investors periodic account statements and performance summaries containing fictitious profit and loss figures and forged audited financial statements in order to hide multimillion dollar trading losses from investors. Among other things, the complaint alleges that:

� Israel, Marino, and Bayou Management overstated the Funds' 2003 performance by claiming a USD 43 million profit in the four hedge funds, while trading records show that the Funds actually lost USD 49 million;

� In 1999, Marino created a sham accounting firm, "Richmond-Fairfield Associates," that he used to fabricate annual "independent" audits of the Funds and attest to the fake results that he and Israel had assigned to the Funds;

� Israel and Marino stole investor funds by annually withdrawing from the Funds "incentive fees" that they were not entitled to receive because the Funds never returned a year-end profit;

� By mid-2004, Israel and Marino had largely suspended trading securities on behalf of the Funds and transferred all remaining Fund assets, consisting of approximately USD 150 million, to Israel and other non-Bayou-related entities, for investment in fraudulent prime bank note trading programs and venture capital investments in non-public startup companies; and

� Despite having abandoned their hedge fund strategy in 2004, Bayou Management continued to send periodic statements and financial statements to investors describing purportedly profitable hedge fund trading activities through mid-2005.

In addition to injunctions against all of the defendants, the SEC also seeks disgorgement of ill-gotten gains, prejudgment interest, and civil money penalties from Israel, Marino, and Bayou Management. The SEC's investigation continues.

[FaGal]

Guilty Of Massive Fraud
www.courant.com - October 13, 2005

Stamford-based Bayou Management offers a cautionary tale for investors in the $1.3 trillion hedge fund industry.


The recent guilty pleas by Bayou's two principals to criminal fraud charges exposed a massive swindle in which the firm collected $450 million from trusting investors and lost most of it. Chief executive Samuel Israel III, 46, and former chief financial officer Daniel Marino, 45, admitted to investment adviser fraud, mail fraud and conspiracy. Each deserves a long prison term at their sentencing on Jan. 9.

Hedge funds - many of them based in Fairfield County - are typically investment opportunities for wealthy individuals and institutions. The funds make money through rapid in-and-out trades and greater risk-taking.

But the funds operate with little regulation. The Bayou experience shows why greater state and federal oversight is needed.

Bayou Management was launched in 1997. Almost immediately it started losing money and lying to investors. Bayou even created a fictitious auditing firm to trick investors into believing it was making money, while it was losing millions. The deception worked so well that one Bayou fund took in $90 million in new investments two years ago, but lost $35 million through trading.

Mr. Israel told a judge, "I knew what I was doing was wrong and fraudulent."

Of the $450 million that investors had entrusted to Bayou, only $150 million remained by last year. Desperate to make money, Mr. Israel tried to pour money into a crazy scheme that promised to turn a $100 million investment into $7.1 billion in 10 years.

Finally, suspicious clients started demanding their money back. Mr. Israel held them off until the fund collapsed just months ago. Meanwhile, he and Mr. Marino collected millions in management fees and lived in extravagant luxury.

Investigators have a duty to determine what happened to all the money.

Arizona has seized $100 million in bank funds that may be linked to Bayou, but little is known about what happened to the rest of the money. Investors deserve a full accounting of how the fraud developed without detection.

For now, hedge fund investors would do well to start asking more questions and monitoring hedge fund returns.