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Guilty Pleas for Bayou Brass

The hedge fund's founder and CFO plead guilty to fraud charges.

Updated from 3:03 p.m. EDT

The wealthy investors who got duped in the

Bayou Management

hedge fund scandal got a measure of justice when two top executives entered guilty pleas Thursday.

Daniel Marino, the former chief financial officer of Bayou, pleaded guilty to four felony counts before a federal judge in White Plains, N.Y., early in the morning. A few hours later, Samuel Israel III, Bayou's founder and manager, did the same.

Federal prosecutors have accused both men of defrauding investors out of $300 million while running their hedge fund that at one time claimed to have more than $400 million in assets.

With both men pleading guilty, it brings a quick end to the criminal investigation in a hedge fund soap opera that has been playing out since mid-August. Both men pleaded guilty to a variety of mail fraud, wire fraud, conspiracy and investment adviser fraud charges.

In a related civil action, the

Securities and Exchange Commission

asked for the appointment of a receiver to dispose of the fund's remaining assets.

Earlier this month, prosecutors in New York filed a civil forfeiture suit against Bayou, seeking claim to $100 million of the hedge fund's money that was seized previously by Arizona regulators from a bank account. Arizona officials seized the money after detecting a series of suspicious bank transfers by Bayou and other parties.

Prosecutors say Bayou systematically overstated gains and losses and relied on a phony accounting firm to prepare false audits for investors for years. Israel and Marino sought to conceal the fraud by reporting "fictitious rates of return" in weekly newsletters sent to investors.

About 100 wealthy investors and smaller hedge funds invested $450 million in Bayou since its inception in 1996.

Investors suspect that Bayou, which was set up to primarily daytrade stocks, was losing money from the start. But instead of coming clean with their investors, Israel and Marino hatched a long-running scheme to cover up their losses and keep the hedge fund going.

Last week

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reported that

federal prosecutors are looking into a separate investment fund established by Israel and Marino called

IM Partners


reported that IM Partners had invested at least $25 million in a number of different companies in deals brought to them by

GH Venture Partners

, a New York investment banking boutique.

Attorneys for some of the Bayou investors want to know whether any of the hedge fund's money was diverted to IM Partners.

As part of his guilty plea, Marino agreed to forfeit his interest in IM Partners and another side venture called


. He was released on $500,000 bond and will be sentenced on Jan. 9.

At the court proceeding, there was little explanation about what happened to the missing $200 million. The lack of information is frustrating some investors.

"Investors are pleased the US attorney has moved quickly in getting guilty pleas," says Ross Intelisano, who represents a group of investors who sunk about $10 million in to Bayou. "But they still want to know what happened to the other $200 million."