Hedge hogs

"On Thursday, just two months after informing investors that he was shutting down his hedge fund and would return their money, [Sam] Israel trudged into federal court and admitted that Bayou Management was a fraud. According to prosecutors and attorneys from the Securities and Exchange Commission, Israel started deceiving investors in the hedge fund almost from the date of its launch in 1996. Court documents allege that Israel and his chief financial officer, Daniel Marino, disguised trading losses from Bayou's early investors by lying about the fund's performance and padding the results with infusions of cash from Bayou Securities, a stock-trading subsidiary that racked up heavy commissions from Israel's frenetic trading.

"The SEC alleges that since it was impossible to hide this manipulation from Grant Thornton, the fund's auditors, Israel and Marino fired them and replaced them with a new entity, Richmond-Fairfield Associates. According to prosecutors, Richmond-Fairfield was a sham company, established by Marino to make it appear as though Bayou's financials had been audited. Marino was the sole principal and the firm had no other clients.

"To attract more investors, Bayou had to continue showing year-end gains. Israel's written communications to his clients, falsely trumpeting his fund's performance, worked. In 2003, more than $125 million in new funds poured into Bayou from investors seeking higher returns than what was available elsewhere in the stock market. The new cash didn't change anything: Israel still lost money on his trades and he still lied about it. At the end of 2003, the hedge fund operator boasted to investors that his Bayou Superfund earned more than $25 million for the year. Prosecutors now say it actually lost $35 million.

"According to the SEC, Israel and Marino also defrauded investors by funneling all of the firm's trades through Bayou Securities, an unusual practice in the hedge fund industry. Because Israel's trading strategy called for his fund to buy and sell tens of millions of dollars of stocks nearly every day, Bayou Securities reaped enormous commissions. Even as investors' money evaporated, Israel and Marino profited from those commissions, the SEC alleges.

" And Israel no longer lives at the Heinz mansion, which he rented from Donald Trump for $32,000 a month. In fact, according to a Trump spokeswoman, Israel still owes "the Donald" rent."

This and more at: http://www.usatoday.com/money/industries/brokerage/2005-09-30-bayou-side_x.htm