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.
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