Attorney General Richard Blumenthal said the move could have major ramifications because western Connecticut plays host to numerous hedge funds because of its proximity to New York City, according to news reports.“I think it may be a defining moment in the hedge fund industry’s development,” Blumenthal said, according to the media reports. “This instance may be simply one major alarm bell for the broader public.”
The task force, headed by Blumenthal and the state’s banking commissioner, John Burke, was formed after the state received numerous complaints about hedge fund Bayou Group, which investors complained they could no longer contact. Media reports indicated that investors received a July 27 letter from the fund’s founder, Samuel Israel III, announcing that the Bayou Family of Funds would return their money and shut its doors, but investors claim they have not received refunds.
The firm earlier this year reported to investors that it had assets of $440 million. Last year, it told investors that it had more than $500 million in assets. The firm was fined $7,500 in 2002 by Connecticut banking regulators for lax record keeping.
Also this week, the Wall Street Journal reported that the Arizona Attorney General’s office has seized more than $101 million in assets that may have been in a Bayou account . The Arizona officials made the move after being alerted to a series of quick transactions that had shifted the funds from German, Hong Kong, British and US accounts in rapid succession, according to a Wall Street Journal report.
Since the seizure, Bayou has filed a claim on the money, as has the account holder, Majestic Capital Management. Karl Johnson, a principal of Majestic Capital, has acknowledged that he originally received the funds from Israel.
“It is in fact reasonable to believe it is Bayou money,” Assistant Attorney General for Arizona Cameron Holmes told the Journal in an interview. But the tangled and rapid transactions mean it will take time to verify that, he added. “Mr. Johnson confirms that he received the money from Bayou.”
An unnamed Journal source said that Israel was served with court papers relating to a civil action this morning by a private investigative firm that had been staking out his Westchester County, New York estate.
Investors have been unable to reach Israel for weeks. Since news of overlapping probes by state and federal authorities surfaced last week Israel apparently has stayed in his house, the Journal reported, based on the unnamed source.
He didn’t answer his door late last week. A posted note on his front door in recent days asserted that “Bayou is not insolvent” and told investors that they “will be contacted soon by the proper authorities.” The note added: “I am prohibited at this time from making any comments, but plan to do so ASAP.”
Several prominent money managers had invested client money with Bayou, including Seattle-based Silver Creek Capital Management.