Post by jannikki on Dec 4, 2006 18:22:09 GMT -4
Suit seeks profit from hedge fund
By YAMIL BERARD
Star-Telegram Staff Writer
DANIEL MARINO
More photosFORT WORTH -- A lawsuit demands that the Employees' Retirement Fund of Fort Worth give back the profits it is accused of making in an investment that collapsed in scandal last year.
The investment fund operated by the Bayou Group was part of an extensive Ponzi scheme, and there were no actual profits to be distributed, the lawsuit states. Instead, money from new investors was used to pay earlier ones, to give the appearance that the fund was successful and perpetrate the fraud, the suit states.
Bayou went bankrupt, and the court-appointed receiver has filed more than 100 such lawsuits to try to recoup millions of dollars in "fictitious investment gains" distributed shortly before the collapse. In many cases, the so-called redeeming investors were tipped to withdraw their money, the lawsuits say.
In Fort Worth's case, more than $674,000 was "fraudulently" refunded to the city's pension fund, while other investors lost more than $250 million, according to attorneys involved in the case. The most recent lawsuit, filed in U.S. Bankruptcy Court in the Southern District of New York, also states that any principal invested in the fund had been significantly eroded by the time the refunds were made.
"We are pursuing actions against those people that redeemed to the detriment of the remaining investors," said Elise Frejka, one of the attorneys for Dechert, a New York law firm representing creditors for Bayou Group.
In reply, Vinson & Elkins, the Dallas law firm representing the pension fund, said in court documents that the fund was not aware of any fraud and that it should not have to give back any of the money it received.
The pension fund "denies such transfer was fraudulent or otherwise improper," the fund's attorneys wrote.
Even though the pension fund doesn't believe that it owes the money, "being prudent business people, the fund will explore the possibility of a settlement if it makes economic sense," said Jim Lee, a bankruptcy litigator for Vinson & Elkins.
The Fort Worth city pension decided in February 2004, on the recommendation of Consulting Services Group, to invest about $6 million in a Bayou hedge fund. Four months later, it was told that it had already earned more than $230,000 in profit on the investment. But in June, again on Consulting Services' recommendation, the pension asked to withdraw its money from the fund.
It got back $5.64 million in August. In June 2005, it received $674,000 more.
Bayou's scheme had begun to unravel by May 2005 when Arizona officials were alerted to a $100 million transfer. They seized the money, believing that it was part of a financial fraud.
Bayou collapsed in August 2005. In September 2005, Bayou founder and Chief Executive Samuel Israel and Chief Financial Officer Daniel Marino pleaded guilty to federal criminal fraud charges involving various Bayou funds. They are scheduled to be sentenced in January.
The money Arizona seized has been put into a fund to help repay victims. Lee, representing the Fort Worth pension fund, said that if it has to pay back the money, it will try to tap that money.
According to documents filed in federal court to support the criminal case against Israel and Marino, the fraud began as early as 1996, when the two men engaged in a flurry of trades so they could earn commissions. They made false returns to cover huge trading losses. Marino, an accountant, also opened an auditing firm to create false books.
As the scheme fell apart, "the remaining investor funds under the Bayou Entities' control vanished in a final act of deception and fraud," the lawsuit states.
"In attempt to conceal the ongoing fraud ... hinder, delay or defraud other current prospective investors, Bayou paid the redeeming investors the inflated amount reflected in the falsified financial statements, including non-existent principal and fictitious profits, not a redeeming investors' true depleted account balances," according to the suit.
When the pension fund redeemed its investment, it knew or should have known that Bayou entities were fraudulent and insolvent because of several red flags, the lawsuit states.
A Star-Telegram examination in April reported that the pension fund's decision to invest in Bayou pointed to weaknesses in some fundamental safeguards that could undermine the fund.
IN THE KNOW
Hedge funds
Hedge funds can execute complex trading maneuvers that are often off-limits to mutual funds and can borrow money to make investment bets. They can win big and lose big.
The risks are compounded because hedge funds are largely unregulated by U.S. securities laws. There is a lack of verifiable financial information, and the funds often carry very high fees.
--------------------------------------------------------------------------------
Yamil Berard, 817-390-7239 yberard@star-telegram.com
www.dfw.com/mld/dfw/news/16160330.htm
By YAMIL BERARD
Star-Telegram Staff Writer
DANIEL MARINO
More photosFORT WORTH -- A lawsuit demands that the Employees' Retirement Fund of Fort Worth give back the profits it is accused of making in an investment that collapsed in scandal last year.
The investment fund operated by the Bayou Group was part of an extensive Ponzi scheme, and there were no actual profits to be distributed, the lawsuit states. Instead, money from new investors was used to pay earlier ones, to give the appearance that the fund was successful and perpetrate the fraud, the suit states.
Bayou went bankrupt, and the court-appointed receiver has filed more than 100 such lawsuits to try to recoup millions of dollars in "fictitious investment gains" distributed shortly before the collapse. In many cases, the so-called redeeming investors were tipped to withdraw their money, the lawsuits say.
In Fort Worth's case, more than $674,000 was "fraudulently" refunded to the city's pension fund, while other investors lost more than $250 million, according to attorneys involved in the case. The most recent lawsuit, filed in U.S. Bankruptcy Court in the Southern District of New York, also states that any principal invested in the fund had been significantly eroded by the time the refunds were made.
"We are pursuing actions against those people that redeemed to the detriment of the remaining investors," said Elise Frejka, one of the attorneys for Dechert, a New York law firm representing creditors for Bayou Group.
In reply, Vinson & Elkins, the Dallas law firm representing the pension fund, said in court documents that the fund was not aware of any fraud and that it should not have to give back any of the money it received.
The pension fund "denies such transfer was fraudulent or otherwise improper," the fund's attorneys wrote.
Even though the pension fund doesn't believe that it owes the money, "being prudent business people, the fund will explore the possibility of a settlement if it makes economic sense," said Jim Lee, a bankruptcy litigator for Vinson & Elkins.
The Fort Worth city pension decided in February 2004, on the recommendation of Consulting Services Group, to invest about $6 million in a Bayou hedge fund. Four months later, it was told that it had already earned more than $230,000 in profit on the investment. But in June, again on Consulting Services' recommendation, the pension asked to withdraw its money from the fund.
It got back $5.64 million in August. In June 2005, it received $674,000 more.
Bayou's scheme had begun to unravel by May 2005 when Arizona officials were alerted to a $100 million transfer. They seized the money, believing that it was part of a financial fraud.
Bayou collapsed in August 2005. In September 2005, Bayou founder and Chief Executive Samuel Israel and Chief Financial Officer Daniel Marino pleaded guilty to federal criminal fraud charges involving various Bayou funds. They are scheduled to be sentenced in January.
The money Arizona seized has been put into a fund to help repay victims. Lee, representing the Fort Worth pension fund, said that if it has to pay back the money, it will try to tap that money.
According to documents filed in federal court to support the criminal case against Israel and Marino, the fraud began as early as 1996, when the two men engaged in a flurry of trades so they could earn commissions. They made false returns to cover huge trading losses. Marino, an accountant, also opened an auditing firm to create false books.
As the scheme fell apart, "the remaining investor funds under the Bayou Entities' control vanished in a final act of deception and fraud," the lawsuit states.
"In attempt to conceal the ongoing fraud ... hinder, delay or defraud other current prospective investors, Bayou paid the redeeming investors the inflated amount reflected in the falsified financial statements, including non-existent principal and fictitious profits, not a redeeming investors' true depleted account balances," according to the suit.
When the pension fund redeemed its investment, it knew or should have known that Bayou entities were fraudulent and insolvent because of several red flags, the lawsuit states.
A Star-Telegram examination in April reported that the pension fund's decision to invest in Bayou pointed to weaknesses in some fundamental safeguards that could undermine the fund.
IN THE KNOW
Hedge funds
Hedge funds can execute complex trading maneuvers that are often off-limits to mutual funds and can borrow money to make investment bets. They can win big and lose big.
The risks are compounded because hedge funds are largely unregulated by U.S. securities laws. There is a lack of verifiable financial information, and the funds often carry very high fees.
--------------------------------------------------------------------------------
Yamil Berard, 817-390-7239 yberard@star-telegram.com
www.dfw.com/mld/dfw/news/16160330.htm