The Bayou Hedge Fund, masterminded by Samuel Israel III, was a scam right from the start.
How would you react if an investment fund promised you that, if you invested in it at its opening, it would increase your original investment more than 23-fold in just 10 years? Regular readers of this series would, no doubt, assign it to the “Pull the other one” category and keep it well out of bargepole reach. But I'm sure you'd also be well aware that there really is one born every minute, and you'd expect the suckers to flock to it.
And that's exactly what happened with the Bayou Hedge Fund Group, founded by Samuel Israel III, when it opened in 1996. It amassed an initial $300m from investors, with the promise of turning that into approximately $7bn within the next decade.
Many fraudulent funds start out honourably, with their managers only starting to fiddle the books when their lofty ambitions are not realised. But not so for Bayou -- it was designed as a scam right from day one, with the fund's managers misappropriating investors' funds from the beginning, and using Ponzi tactics to make payouts to early investors.
Fake accountants
Even as early as 1998, Bayou was unable to show its accountants, Grant Thornton, anything like the returns the investors had been promised, but that was no problem for its enterprising directors. So they fired them and set up their own fake accounting firm, Richmond-Fairfield Associates, and then hired it to provide Bayou with fake audited accounts, embarking on a sustained spell of unashamedly overstating gains (when there were usually very few or none at all), and understating losses.
It's quite surprising that Israel and his cronies carried it off for so long -- even as late as 2004 they were reporting assets of $450m (which was a long way away from the promised $7bn, but it was still far more than the fund actually possessed). All through this, Bayou's loss-making investments were all handled by its own broker, Bayou Securities, raking in huge commissions for the group even though investors' funds were shrinking. By July of that year, Bayou was desperately fighting off losses, stopped trading, and withdrew more than $150m from a number of bank accounts -- money that disappeared overseas.
Cessation of trading
The fraud came to a halt in late 2005, when the Commodities Futures Trading Commission filed a complaint about the fund, and Bayou filed for bankruptcy early the following year. When the directors were caught, they were in the act of trying to wire the remaining $100m from the company's accounts overseas, and that sum was frozen.
At his subsequent trial, Samuel Israel pleaded guilty, and professed to how sorry he was and how bad he felt (and isn't it a shame that they never feel that bad before they're caught?). He was sentenced to 20 years in prison for his part in defrauding his investors, and was ordered to forfeit $300m. At the time, that was one of the toughest sentences levied for an investment fraud since Worldcom's Bernard J Ebbers was sent down for 25 years, but it has since been impressively eclipsed by the 150 year sentence handed out this year to Bernard Madoff.
Bayou's chief financial officer got 20 years, and co-founder James Marquez received a term of 4 years and 3 months, having been found to have played a relatively minor part in the operation.
Suicide is painless
Did Israel take his medicine and come quietly? No, a con-artist to the end, in a final twist he tried to fake his own suicide. Shortly before he was to begin his sentence, Israel's car was found abandoned on the Bear Mountain Bridge, in New York State, with the words “Suicide is painless” written in the dust on the hood. But his girlfriend, Debra Ryan, was arrested and charged with helping him escape, and Israel turned himself in -- and got an extra 2 years for the fake suicide.
Previous Scam Articles:
• Death Valley Scotty
• The Cazique of Poyais
• BCCI
