Bayou Group - Quant. fund turned Ponzi scheme/fraud

Update, 2008-06-10: Sam Israel, who had just been sentenced to 20 years, has disappeared and may have committed suicide.

Update, 2008-02-01: James Marquez, one of the principals at Bayou, has been sentenced to 51 months as a "co-conspirator" in the fraud. He has been ordered to pay over $6M in restitution. CEO Israel and CFO Marino have not yet been sentenced.

Original Writeup:

Bayou Group LLC, a hedge fund founded by Samuel Israel in the mid-90s, operated a Ponzi Scheme of reporting false returns both to satisfy existing investors as well as attract new investors. The scheme seems to have officially begun around the end of 1998 when Israel brought on Daniel E. Marino as CFO. According to an extensive article in the New York Times, Clues to a Hedge Fund's Collapse:

The 1998 attempt to recoup trading losses at Bayou was to involve two steps, according to the plan outlined in Mr. Marino's letter. First, Mr. Israel would raise fresh funds from investors and trade his way to outsized gains on that money. In addition, the commissions generated by the Bayou funds' trades - almost always executed by Bayou Securities, the brokerage firm owned by Mr. Israel - would be credited back to the funds to help offset the losses. Because Mr. Israel was known for his rapid-fire trading, the commissions would be high, Mr. Marino's letter said.

But hiding a mountain of past losses from investors also meant that the fund's auditor had to be replaced. A new accounting firm - Richmond-Fairfield - was created to oversee the fake bookkeeping, prosecutors contend. Mr. Marino was the firm's principal.

The scheme continued along until mid-2005 when Israel told investors that he would be closing the Bayou funds. It seems that by this time Bayou had little capital left to continue maintaining the illusion of success.

According to a CNN Money article on Bayou Group, the fund swindled around $450 mm from investors, approximately $100 million of which ended up being seized by the State of Arizona.