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Hedge fund officials plead guilty to fraud

The Bayou hedge fund sent investors false financial information, with losses estimated at $450-million.

WHITE PLAINS, N.Y. - The founder and the chief financial officer of a beleaguered hedge fund each pleaded guilty to conspiracy and fraud charges Thursday for their roles in a scandal that allegedly cost investors about $450-million.

Samuel Israel III, the founder, and Daniel Marino, the CFO of the Stamford, Conn., Bayou hedge fund, pleaded guilty in federal court.

Prosecutor Margery Feinzig said Bayou issued fictitious weekly, quarterly and annual reports that inflated its profits to attract new investors and lull existing investors into keeping their money in the fund.

Israel, 46, admitted sending out false financial information to current and prospective investors "which made it appear that Bayou was doing better than it really was."

Israel pleaded guilty to three counts: conspiracy to commit investment adviser fraud and mail fraud, investment adviser fraud and mail fraud.

Marino, 46, pleaded guilty to mail fraud, wire fraud, investment adviser fraud and conspiracy to commit investment adviser fraud.

The maximum sentence for the investment fraud counts are five years each; for mail fraud and wire fraud, the maximum is 20 years. Sentencing guidelines, however, are likely to call for considerably lower sentences.

Sentencing was set for Jan. 9.

Authorities began investigating Bayou after investors received a July 27 letter from Israel announcing that Bayou would return their money and shut its doors. Investors say they have not received refunds, and the government estimates the losses at $450-million.

Hedge funds profit by using unconventional techniques, such as short-selling, or betting on falling markets to make a profit during market downturns.

[Last modified September 30, 2005, 01:35:17]