Bayou Group Estate Wins $13 Million From Hedge Fun

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Bayou Group Estate Wins $13 Million From Hedge Funds for Fraud Investors

By Joel Rosenblatt - May 13, 2011 - www.bloomberg.com

The estate of hedge-fund firm Bayou Group LLC, which turned out to be a Ponzi scheme, won a jury verdict requiring hedge funds that redeemed their money before Bayou collapsed to pay investors $13 million, a lawyer said.

Today’s victory in federal court in Manhattan follows the estate’s previous recovery of $5.4 million in “fictitious profits,” bringing the total recouped to more than $60 million, said Gary Mennitt, a lawyer representing the estate for the benefit of its investors.

The estate sued to recover the amounts withdrawn by hedge funds Redwood Growth Partners and Heritage Hedged Equity, investment company D. Canale & Co., two trusts and an endowment fund, Mennitt said in a phone interview. The jury found the funds failed to prove that they had, in good faith, conducted a diligent investigation of the Bayou fraud before withdrawing their principal investment, he said.

“This is first time that a Ponzi scheme estate has been successful at trial in defeating an investor’s good-faith defense and thus recovering the full principal, or amount paid to the redeeming investor,” the lawyer said.

David Baum, a lawyer representing the defendant hedge funds, said in a phone interview he was disappointed by the verdict and that the funds will appeal.

In 2009, Samuel Israel, the convicted founder of Bayou Group LLC, was sentenced to two additional years in prison for faking his suicide and running away the day he was to begin a 20-year term for a $400 million fraud.

Israel founded Bayou in 1995 with James Marquez. After the company lost money in 1998, Marquez and finance chief Daniel Marino created a sham accounting firm to serve as the company’s external auditor, Israel admitted. Rather than disclose modest losses, Bayou reported profits, Israel said. Bayou filed for bankruptcy in May 2006.

The estate recovery case is In Re Bayou Group, LLC, 09- 2313, U.S. District Court, Southern District of New York (Manhattan). The Bayou fraud case is U.S. v. Israel, 1:05-cr- 01039, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Joel Rosenblatt in San Francisco at [e-mail]

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Judge Upholds $60M Restitution Order In Bayou Case

August 22, 2011 - www.finalternatives.com

A New York court has upheld a $60 million restitution order against a former Bayou Group employee for hiding a $500 million Ponzi scheme.

A Second Circuit three-judge panel rejected an appeal by Matthew Marino, brother of former Bayou CFO Daniel Marino. According to the web site Law360, Marino was the only real employee of a fictitious accounting firm (Richmond-Fairfield Associates) set up by Bayou to hide its fraud.

"In arguing that his conduct was not 'wantonly fraudulent,' appellant greatly understates his role in the Bayou fraud," Circuit Judge Ralph K. Winter wrote for the panel. "In essence, he asks us to ignore the importance of independent financial auditors as vouching to the investing public for the accuracy of a firm's books, and the importance of his role in vouching such accuracy to Bayou’s victim investors."

Marino’s lawyer argued that as his client had played a lesser role in the fraud, he should not have to pay restitution.

In April 2009, Marino, who pled guilty to misprision of a felony, was sentenced to 21 months by the U.S. District Judge Stephen Robinson, who also ordered the $60 million restitution.

Marino’s brother, Daniel, the so-called “linchpin” of the affair, received a 20-year prison sentence in 2008 after pleading guilty to conspiracy to commit investment adviser fraud, substantive investment adviser fraud, mail fraud and wire fraud.

Bayou collapsed in 2005, costing investors $450 million. Several of the firm’s executives, including founder Samuel Israel, were convicted of fraud; Israel, who spent several weeks on the run in the summer of 2008 after faking his suicide, was sentenced to 20 years.