The Bayou Management LLC fraud, which began as early as 1998, started to unravel in the latter part of August after Bayou failed to produce checks to its investors after it announced the funds would close and investor money would be returned. At its height Bayou claimed to manage $440 million.
When the checks didn’t arrive by the promised date, investors got nervous and when Bayou principals Sam Israel III and Daniel Marino were unresponsive, authorities were contacted and investigations launched.
Well before most Bayou investors became nervous as to the state of their investment, Cameron Holmes the chief counsel Financial Remedies Section of the Arizona Attorney General’s Office, had a bead on their money or what was left of it. Holmes’ investigation into a possible prime bank instrument fraud had led the State of Arizona in May 2005 to seize a $101 million account at Wachovia bank in the name of Majestic Capital Management, which claimed to be holding the money for Israel. Israel also claimed the money through his attorneys. His attorneys later asked to be taken off of the case after Israel failed to maintain contact.
After the State of Arizona announced that the seized money most likely belong to Bayou investors, the U.S. Attorney’s office for the Southern District of New York filed a claim of forfeiture. Around the same time a suicide note written by Bayou CFO Daniel Marino was discovered by a Bayou investor at Bayou’s Stamford, Conn. offices. According to reports the letter acknowledged the near decade-long fraud and provided numerous Federal agency investigators a blueprint to the fraudulent Bayou activities.
The whereabouts of Israel and Marino had been in question up until they appeared before Federal court on Sept. 29 to plead guilty to multiple fraud charges. Still unclear is whether the Bayou principals were a part of or victim to the prime banking fraud that involved Israel investing the remaining $100 million of Bayou capital in a scheme that promised to return $7.1 billion throughout 10 years.
Here is a timeline of the events:
• March 1996: Bayou Management LLC was founded and commenced operation.
• 1998: Bayou began to disseminate false reports overstating gains and understating losses in its family of funds.
• January 2003: Bayou ceased operating the original funds.
• December 2000: Bayou told investors transactions done by Bayou’s family of funds were being audited by independent public accounting firm Richmond-Fairfield. It was not an independent accounting firm but the creation of Marino with Israel’s knowledge for the purpose of concealing the fraud.
• May 19, 2005: The State of Arizona seizes $101 million believed to be a part of a prime bank instrument fraud.
• July 27: Sam Israel sends a letter to Bayou investors announcing that he is closing the family of funds and investors would receive a payout on their investments following a final audit.
• August 11: Bayou sent out another letter stating 90% of the proceeds from the liquidation would begin to be sent out Aug. 17.
• August 22: Hennessee Group notified the Securities and Exchange Commission (SEC) and the Federal Bureau Investigation (FBI) after failing to contact Israel or his lawyers after visiting Israel’s home and his attorney’s offices.
• August 28: The New York Times reports that the principals of Bayou have not responded to inquiries of investors and have not returned investments as promised.
• August 30: The Arizona Attorney General’s office reports that its May seizure of $101 million account at Wachovia bank may belong to Bayou. Holmes says that one of the documents the State of Arizona produced to the court was a prime bank instrument fraudulent contract in which Bayou was supposed to make $7.1 billion out of this $100 million investment through 10 years. Lewis Malouf made the claim, according to Holmes. According to the claim, Malouf was a director of Majestic and also a director of Bayou.
• September 1: The U.S. Attorney’s Office for the Southern District of New York filed a civil forfeiture action against all of the assets of Bayou and its family of funds including money subject to the Arizona seizure order.
The action cites investigations by the FBI, the SEC, the CFTC and the U.S. Attorney’s office for the Southern District of New York finding evidence that Bayou from 1998 through 2004 perpetuated a fraud on its investors which included misrepresenting the value of its assets. The order states, “These false statements induced new investors to invest in Bayou and lulled existing investors into retaining their investment in Bayou.” It also states that Bayou created a phony accounting firm, Richmond Fairfield, and held it out as an independent public accounting firm in order to certify false Bayou financial statements.
The action also states that in the spring of 2004 Bayou began a series of transactions which involved transferring large sums of money to numerous banks. The private placement programs promised above average rates of return, as much as 100% per week. These transactions are what initiated the Arizona investigation.
September 29: Israel and Marino pleaded guilty to criminal charges brought by the U.S. Attorney’s Office. Up until this point the whereabouts of Israel and Marino were in question.
The CFTC filed fraud charges against Bayou, its principals and Richmond-Fairfield, citing much of the same evidence as the Federal court in charging Bayou. In addition the CFTC points out that Marino, CFO for Bayou, was listed as the registered agent of Richmond Fairfield from Oct. 10, 2000 to April 29, 2003 and is identified as the member/manager of Richmond-Fairfield in New York State records on those with professional licenses.
It also notes that Israel was listed as the registrant of the Richmond-Fairfield Web site and the e-mail address provided to the Web sites domain registry was firstname.lastname@example.org.