Hedge fund files for Chap. 11

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HARTFORD, Conn. (AP) – Scandal-ridden Bayou (Domestic) Hedge Funds said Tuesday it filed for Chapter 11 bankruptcy protection and will seek recoveries for defrauded investors.

Bayou filed lawsuits against some former investors, accusing them of receiving “fictitious profits” as part of a scheme to inflate the value of the Stamford, Conn.-based company’s funds.

Last September, former Bayou Chief Executive Samuel Israel III and Daniel Marino, the company’s financial head at the time, pleaded guilty to related charges of fraud.

The Chapter 11 reorganization will be headed by Jeff Marwil, a partner at the law firm Jenner & Block LLP. He will work with H. Jeffrey Schwartz, a partner at law firm Dechert LLP.

Marwil said the lawsuit seeks recoveries of $450 million invested and lost in Bayou. He said it is “patently unfair that certain former investors received all of their money back, plus profit, while other investors received nothing.”

Investors who “got out with a windfall” could be forced to give up their profits, Marwil said. Claims of losses could total more than $100 million, he said.

“This has been expected and is all part of the process we anticipated,” said Linda Haase, spokeswoman for the organization.

Marwil said the bankruptcy protection was anticipated “in terms of equalizing investor returns. Bankruptcy is one convenient and efficient way to do that.”

A message seeking comment was left with Ross Intelisano, a lawyer who represents several investors.

Israel and Marino admitted telling existing and prospective customers in weekly, monthly, quarterly and annual reports that Bayou was generating significant profits when the fund was actually losing money. They also set up a fake accounting firm to show the fund was being properly audited.

The two executives tried to stem losses by putting money into highly speculative investments without telling investors.

Hedge funds are typically investment companies that use high-risk strategies such as borrowing money and selling short to make large capital gains.

AP-ES-05-30-06 1642EDT


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