Hedge Fund Firm Charged with Fraud Files Bankruptcy

May 30, 2006 (PLANSPONSOR.com) - Bayou Management LLC, the hedge fund firm charged with fraud last year, has filed for Chapter 11 bankruptcy.

Reuters reports that, in conjunction with the bankruptcy filing, Bayou filed suit against investors including UT Medical Group Inc. and 25 others in a move to recover profits that Bayou paid to those defendants before it collapsed. “It is patently unfair that certain former investors received all of their money back, plus profit, while other investors received nothing,” said Jeff Marwil, a partner with the law firm Jenner & Block, in a press release from the firm.

The lawsuit charges that UT Medical and other investors received fictitious profits and outsized returns for their investments in Bayou, according to Reuters. The suit, which applies only to Bayou’s US operations and not those in the Cayman Islands, seeks return of the alleged gains to the estate of Bayou under fraudulent transfer statutes.

The hedge fund company was charged with fraud that included the overstatement of investment gains, the understatement of losses, reporting gains to investors when there were actually losses, and creating a bogus accounting firm to certify its false financial statements (See Bayou Funds Sued For Fraud ). Company founders Daniel Marino and Samuel Israel III pleaded guilty to conspiracy, investment advisor fraud, mail fraud, and wire fraud (See Bayou Founder Pleads Guilty to Fraud ).