Reuters – Forensic accountants, former prosecutors and private investigators list some potential red flags at hedge funds that might indicate irregularities and should make investors take notice and probe further.

*Returns that seem too good to be true. If a fund is reporting spectacular returns at a time most of the industry is suffering, industry experts urged investors to be skeptical and dig below the top line numbers.

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New York (HedgeCo.Net) – Disdained investors of the former Bayou hedge fund, run by one-time fugitive Sam Israel, are going after Goldman Sachs for $20 million to try and recover some of their losses.

Goldman Sachs served as the prime broker while clearing trades and taking custody of the securities.  They also provided reports on the hedge fund’s investments.  Reports that some say should hold them partly accountable for the $450 million that was duped out of trusting investors. 

The suit, which was filed as a private arbitration case in Federal Court, claims that Goldman Sachs Execution and Clearing provided monthly statements to Bayou highlighting its losses.  The reports showed more than $88 million between August 1999 and August 2005.  But while the reports may have been right on, creditors claim that Goldman knew that Bayou was turning around and reporting substantial gains to investors and did nothing about it. 

“Through either gross negligence or a willful choice to ignore the signs of fraud, G.S.E.C. failed to diligently investigate the red flags it was made aware of it, to contact Bayou’s auditors to request additional information, or to alert the appropriate authorities of what it had learned,” the suit alleges.

In 2004, Bayou provided Goldman with reports that claimed it had earned returns of almost 18 percent since its inception, which the suit says was “completely inconsistent with the actual returns the Bayou Funds had been realizing in their trading accounts at G.S.E.C., in which they had done nothing but lose money.”

Goldman has declined to comment.

Julie Scuderi
Senior Editor for HedgeCo.Net
Email: julie@hedgeco.net

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