David Kelley, the US Attorney in Manhattan, filed the lawsuit which claims the fraud began in 1998 and included the overstatement of investment gains, the understatement of losses, and reporting gains to investors when there were actually losses, the New York Times reports. The suit also claims Bayou created a bogus accounting firm, Richmond-Fairfield Associates, to certify its false financial statements.
In their complaint, prosecutors say Bayou began a series of transactions in 2004 to produce large gains, in some cases 100% per week. The New York Times reports that the investments required that large sums of money be sent to foreign and domestic bank accounts; actions which the complaint said had all the characteristics of “prime bank instrument” or “high yield program” frauds. One of those transactions involved the money seized by Arizona authorities in May.
JP Morgan’s Undiscovered Managers Spinnaker Fund, with $7.3 million in assets, had 9.2% of its assets, or $662,602, in the Bayou Accredited Fund L.P. The New York Times reports that the Bayou investment was the largest holding of the Spinnaker fund. Mary Sedarat, a spokeswoman for JP Morgan, said that the Spinnaker Fund wrote off its position in the Bayou fund on August 23 and JP Morgan has stopped marketing the fund to investors.
In the complaint, which seeks forfeiture of all the assets held by Bayou, Kelley asked that any assets recovered be distributed to all investors who lost money.
The state of Connecticut received many complaints about the Stamford-based firm from investors who said that Israel sent them a letter in late July telling them their money would be returned and the firm was closing. The letter promised return of the money by August 15, the New York Times reports, but no one has received their money. Meanwhile, the Arizona Attorney General’s office announced the seizure of $101 million in assets believed to have been in a Bayou account. The issue prompted regulators in Connecticut to form a task force to look into hedge fund reform (See CT Unveils Hedge Fund Commission ).