U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19406 / September 29, 2005
SEC v. Samuel Israel III; Daniel E. Marino; Bayou Management, LLC; Bayou Accredited Fund, LLC; Bayou Affiliates Fund, LLC; Bayou No Leverage Fund, LLC; and Bayou Superfund, LLC, Civil Action No. 05-CIV-8376 (S.D.N.Y.)
SEC CHARGES SAMUEL ISRAEL III, DANIEL E. MARINO, BAYOU MANAGEMENT, AND BAYOU FUNDS FOR DEFRAUDING HEDGE FUND INVESTORS AND MISAPPROPRIATING INVESTOR ASSETS
Commission Seeks Freeze of Assets and Appointment of Receiver
The Securities and Exchange Commission (Commission) today filed a civil injunctive action against Samuel Israel III of New York and Daniel E. Marino of Connecticut, the managers of a group of hedge funds known as the Bayou Funds (Funds), based in Stamford, Connecticut. The Commission's complaint alleges that, beginning in 1996 and continuing through the present, Israel and Marino have defrauded investors in the Funds and misappropriated millions of dollars in investor funds for their personal use. The Commission is seeking permanent injunctions for violations of the antifraud provisions of the federal securities laws against Israel, the founder of and investment adviser to the Funds; Bayou Management, the investment adviser to the funds; and Marino, the chief financial officer of Bayou Management. Additionally, the Commission 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.Today, the United States Attorney for the Southern District of New York announced that it has 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.
The Commission alleges in its complaint that from 1996 through 2005, investors deposited over $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 Commission'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 $43 million profit in the four hedge funds, while trading records show that the Funds actually lost $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 $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.
The Commission's complaint also seeks to permanently enjoin: Bayou Management, Israel, Marino, and the Bayou Funds from violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 10b-5 thereunder, which are the general antifraud provisions of the federal securities laws; Bayou Management and Israel from violating the antifraud provisions of the Investment Advisers Act of 1940 (Advisers Act), Sections 206(1) and 206(2); and Marino from aiding and abetting violations of Sections 206(1) and 206(2) of the Advisers Act. The Commission also seeks disgorgement of ill-gotten gains, prejudgment interest, and civil money penalties from Israel, Marino, and Bayou Management.
The Commission acknowledges the assistance and cooperation of the White Plains Division of the United States Attorney's Office for the Southern District of New York, the Federal Bureau of Investigation, and the CFTC in this matter. The Commission's investigation continues.
