STAMFORD, Connecticut - A Jewish philanthropy organization is seeking more than USD 4 million in a lawsuit against a hedge fund under state and federal investigation, while another investor called the fund a massive fraud and a classic Ponzi
scheme.
The Jewish Federation of Metropolitan Chicago
is suing Stamford-based Bayou Securities and its executives in U.S. District Court in Bridgeport. The other investor, Multi-Dimension Fund, has filed a lawsuit in New York Supreme Court against Bayou and its accounting firm, Richmond-Fairfield Associates.
The Jewish nonprofit group, which supports health care, education, culture, resettlement and care for Jewish people in need around the world, said it has been unable to recover more than USD 4 million invested last year in a Bayou offshore fund. Bayou claimed the investment had grown to more than USD 4.5 million, according to the lawsuit.
Multi-Dimension said it was unable to recover nearly USD 2 million. Its lawsuit seeks to represent other investors who lost money as well.
Large-scale fraud
"From what I can tell, this is one of the top five hedge fund frauds in the last five years," Douglas Hirsch, an attorney for Multi-Dimension, said Wednesday.
The Jewish Federation also accused Bayou of large-scale fraud.
"Indeed, it is possible that defendants have absconded with most of the USD 400 million of investments reportedly made by all Bayou investors," the lawsuit states.
The federation filed a lawsuit on Friday. On Tuesday, a federal judge hearing the case issued a temporary restraining order freezing the fund's assets, said William Prickett, a lawyer for the nonprofit group.
Multi-Dimension, a New York-based investment firm, filed its lawsuit on Tuesday.
Bayou executives have not returned telephone messages seeking comment. Bayou founder Samuel Israel III
could not be reached for comment Wednesday, and his attorneys withdrew from representing him after they could not contact him.
Civil complaint
Bayou claimed to have USD 411 million under management at the end of the last year and targeted investors with at least USD 1 million net worth.
A civil complaint filed last week by the U.S. attorney in Manhattan seeks to freeze all assets of Bayou, claiming the assets are proceeds of mail, wire and securities fraud.
Reuters reports that as hedge funds play a bigger role in portfolios, investment officers are saying that this once super-secretive and expensive asset class is losing some of its mystique as more fund managers accommodate clients' wishes to take their money.
"Looking ahead, people will dig deeper, look harder and wait longer before investing," said Justin Dew, a hedge fund analyst at research and ratings agency Standard & Poor's.
More investors may be taking a more cautious approach now that state and federal regulators are investigating how Stamford, Connecticut-based
Bayou Management collapsed. Last week the U.S. government charged that the firm and its founder Samuel Israel III had cheated clients since 1998.
The Bayou collapse, analysts and investors alike said, will prompt investors to be more careful about vetting the consultants or managers of funds of funds who are hired to select hedge funds for pensions funds and other investors.
"The most obvious impact of Bayou will be that people will ask how good their consultants' due diligence is. How good are their questions and what should they ask that they haven't asked yet?" S&P's Dew said.
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