In 1995, Sam Israel III and James Marquez launched the Bayou Group LLC, with initially good intentions to produce high returns for investors. With $300 million of initial funds in the Bayou Hedge Fund Group, Israel, along with CFO Daniel Marino, promised investors that the fund would be worth $7.1 billion in ten years. However, the fund almost immediately started experiencing losses, prompting Israel to start defrauding early on in the game. What resulted was a façade that lasted nearly a decade, where oblivious investors would keep pouring money into Bayou, with the false notion and supporting documentation that the fund was achieving monumental gains.
In 1998, trading losses started to accumulate. It was clear that the Bayou strategy was not garnering the kind of returns that Israel had promised his investors. Instead of altering the strategy or closing up shop, Israel opted for another alternative. He started a fake corporation to audit Bayou, and produced false documentation overstating gains, understating losses and positioning Bayou in a light that actually made it look successful. In reality, the fund never made any money. Israel would consistently send out performance reports to investors and at one point claimed the fund was worth $450 million.
But Israel wasn’t necessarily losing money. He funneled all of the hedge funds trades through Bayou Securities, reaping huge commissions since hedge funds trade millions of dollars worth of stocks every day. So even as the hedge fund lost money, Israel still banked through his securities firm.
While investors were pleased with the façade of a brilliant investment, Israel and Marino were living the high life. Israel settled into a mansion just north of New York City that he rented from Donald Trump for $32,000 a month while Marino was parading around the east coast in his new Bentley.
In 2004, Israel started to panic and was desperate to make back what he lost in the fund. He suspended the fund’s trading activities and wired $150 million to a bank account overseas and proceeded to launch a “prime bank instrument” fraud. Basically, in this type of fraud, investors are promised above average returns, (in this case, 100% a week), since the manager supposedly has access to a “secret” trading platform. Of course, this is never the case as there is no “secret” trading platform in existence.
In July 2004, officials were alerted when an abnormally large transfer of $99 million was made into a Wachovia account in New Jersey, prompting the initial investigation and the ensuing demise of Bayou.
What was amazing about Bayou was how Israel managed to dupe investors into giving him such a substantial amount of money. One of the biggest obstacles new hedge funds face is securing initial capital. Israel not only did that, he did it to the tune of $300 million. He even got well established fund of funds to invest in Bayou, establishments that are adamant on conducting extensive background checks. Israel had the charm, contacts and Wall Street background to gain the trust of very affluent individuals. In retrospect, investors wish they had noticed some of the red flags accompanying Israel. For one, the fake accounting firm. With large hedge funds, there is almost always an established, big-name accounting firm used, which was not the case here. Also, Israel never charged a management fee, an action almost unheard of with hedge funds. He also gave no resistance to investors who wished to pull out, another tactic not usual in the hedge fund industry.
In April of this year, Israel was sentenced to 20 years in prison after pleading guilty to fraud. He was also ordered to pay $300 million back to investors.
On June 10th, 2008, the same day he was supposed to start his 20-year sentence, Israel’s SUV was found abandoned on the banks of the Hudson River, with the words “Suicide is Painless” scrawled through the dust of the window. However, officials were reluctant to confirm his suicide for several reasons. For one, no body turned up. The Bear Mountain Bridge, where Israel supposedly plunged to his death, has been used by others as a sure-fire suicide method. However, those bodies have turned up on the banks of the Hudson, usually only days after the jump.
Several weeks later, on July 2, Israel surrendered to federal law enforcement authorities. He was given two additional years of prison time for faking his own death, and is currently serving a 22 year sentence.
James Marquez is serving his 4 ½ year sentence for his role in the crime, which was determined to be around $6 million.