Matthew Goldstein

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Charity Says It Was Bayou Fund Victim

Matthew Goldstein

Think the well-publicized travails of the Bayou hedge fund only matter to a bunch of jet-setters who should've known better? Think again.

The Jewish Federation of Metropolitan Chicago, a major Chicago-area philanthropic organization, claims in a lawsuit that it lost $4 million on an investment it made last year in the onetime $400 million Connecticut-based hedge fund.

The Jewish organization, in a lawsuit filed Friday in federal court in Connecticut, accuses Bayou and hedge fund manager Samuel Israel III of crafting a scheme to "fraudulently convert and misappropriate'' its money. Bayou is currently being investigated for fraud by state and federal authorities.

The lawsuit is believed to be the first filed by a not-for-profit investor against Bayou, which claimed to have about 100 investors.

"The Jewish Federation wanted to take all appropriate steps to recover the significant investment it had in the funds,'' says William Prickett, the attorney for the organization.

The list of investors in Bayou includes a number of well-known so-called fund-of-funds managers including Hennessee Group, which reportedly had tens of millions of dollars in client assets in the hedge fund. Other past and present investors included Silver Creek Capital Management, a Seattle-based investment firm, and Sterling Stamos, the $2 billion investment fund founded by New York Mets owner Fred Wilpon. TheStreet.com previously reported that Sterling Stamos redeemed its investment in Bayou in February.

Last week, federal prosecutors in New York filed a civil forfeiture suit against Bayou, seeking to lay claim to $100 million of the hedge fund's money that was seized earlier this year by Arizona regulators. Arizona officials seized the money after detecting a series of suspicious bank transfers by Bayou and other parties.

The $100 million, which currently sits in a Wachovia bank account in a Pennsylvania branch office, is believed to be all the money that remains in the Bayou hedge fund.

Federal prosecutors allege that Bayou, almost from the day it opened in 1997, was a fraud. Prosecutors contend Israel and his associates made a variety of false statements over the years to induce investors to sink their money into Bayou and remain in the fund, even though they had the option of withdrawing at the end of each month.

The Jewish Federation, in its lawsuit, says it began investing in Bayou in March 2004, with an initial investment of $2 million. Four months later, the organization invested an additional $2 million.

The organization says it had no reason to believe its investment was in jeopardy because Bayou sent it eight monthly statements that "purported to show a consistent growth'' in value. Beginning in April 2005, the monthly gains stopped, but Bayou kept reporting no change in the value of the Jewish Federation's investment.

In July, Israel notified all of Bayou's investors that the fund would be shut down and they would soon get all of their investment. But no investor has received any money to date.

Other investor lawsuits are in the works.

Ross Intelisano, who represents eight investors with between $10 million to $12 million in losses, says he is continuing to investigate the apparent fraud. He says, "Once we have obtained all the necessary information, we will decide when and where to file a claim.''