by emad » Mon Sep 05, 2005 12:46 pm
Suicide note rang alarm bells over hedge fund millions<br>By James Doran<br>Our correspondent examines the strange story of a New England investment firm accused of a seven-year fraud<br> <br> <br> <br>DANIEL MARINO sat at his desk on a hot August day, hands poised at the keyboard to type a letter to investors in Bayou Management, the hedge fund of whom he was finance director. “This is my suicide note and confession,” he began, before tapping out six pages to detail an alleged seven-year fraud that could cost investors more than $300 million (£163 million). <br><br>Bayou Management was a small hedge fund run out of a cream-coloured cottage in Stamford, Connecticut — a picturesque corner of the American northeast, where the wealthy like to sail yachts on the crystal waters of the Atlantic. Bayou promised massive returns for those with assets of more than $1 million and at least $200,000 to invest in its risky portfolio of hedge funds. And for nearly a decade it apparently did very well. <br> <br>But on July 27 Bayou unexpectedly closed down. Samuel Israel III, the founder and chief executive, said that there were was nothing wrong, other than his messy divorce and the fact that he was suffering from a bad back. Because of these personal problems, he needed to close down the funds, he said, and would hand back the money invested. <br><br>Few of his clients believed him, on either count. Now authorities in the United States, including the Securities and Exchange Commission, the Justice Department, the FBI and the Connecticut Department of Banking are investigating Bayou’s collapse. Mr Marino’s suicide note is a key piece of evidence. <br><br>Mr Marino might have succeeded in taking his own life had it not been for a client who called at Bayou’s waterfront headquarters on August 16 to find out why the fund was shut down. He found Mr Marino’s office empty, apart from a jumble of papers on his desk that included the six-page suicide note. <br><br>The client called the police, who found Mr Marino at home in a “dishevelled” state, Stamford police sources said. The investor soon discovered that the remainder of the letter was as shocking as its opening line. It explained bluntly that Mr Israel, Mr Marino and James Marquez, a former Bayou partner, had “defrauded all these investors” from “about 1998 to now”. <br><br>Government prosecutors in Manhattan took his confession seriously and late last Thursday filed a lawsuit, with claims that the hedge fund was rife with fraud almost from the day that it had been launched. “All of the assets of Bayou . . . constitute proceeds of criminal activity,” the lawsuit claims. <br><br>Yet the nature of the alleged fraud still perplexes the authorities investigating it. The New York prosecutors allege that investors have paid more than $300 million into the hedge fund since 1998. Bayou, meanwhile, claimed to have $500 million under management at its peak last year and $440 million shortly before it closed down. However, rather than the impressive gains that Mr Israel boasted of, the only company books that investigators have found show a series of sizeable trading losses. <br><br>Its bank accounts reveal a series of complex and confusing cash transfers that moved more than $160 million of the firm’s money around the world several times without apparent purpose. Somebody connected to the hedge fund withdrew $161 million from five bank accounts during six days in July 2004. There are no records at this stage of the inquiry to show that there was ever any more cash in Bayou’s accounts, which would suggest that claims of coffers containing half a billion dollars were not true. <br><br>About $100 million of the $161 million was wired to accounts in Germany, and back out again. The rest is not accounted for. A sum of $101 million ended up in a Citibank account in Arizona, where it was seized last week. <br><br>The Arizona authorities believe that Mr Israel might have become embroiled in an old scam known as “prime bank instrument fraud”. They allege that the $101 million was passed from bank account to bank account, and country to country, for more than a year to give the illusion that some sort of business was taking place. If the alleged scam had been successful, the money would have disappeared eventually, but the authorities in Arizona smelt a rat. <br><br>“Whether this was an act of desperation in an attempt to recover previously misinvested funds, or an attempt to create an apparent loss . . . with a side agreement . . . to split the $100 million at a later time, is a question that will await further investigation,” the Arizona authorities wrote in a court filing last week. <br><br>Bayou Management was one of a growing number of relatively small hedge funds that have sprung up in America to cater to wealthy individuals. US hedge funds have ballooned in number to more than 8,000 with an estimated $1 trillion under management. <br><br>On August 11, Mr Israel told investors that he would return 90 per cent of the cash left in Bayou’s coffers within a week, with the rest paid by the end of the month. Now, however, he has gone to ground and his lawyers working on the Arizona case have resigned. None of the cash has been repaid. <br><br>Mr Marino never did kill himself and is understood to be barricaded in his luxury home in Westport, Connecticut. Several attempts were made to contact him, but none of the messages was returned. <br> <br> <br> <!--EZCODE AUTOLINK START--><a href="http://www.timesonline.co.uk/newspaper/0,,170-1764946,00.html">www.timesonline.co.uk/new...46,00.html</a><!--EZCODE AUTOLINK END--><br> <p></p><i></i>
