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Restraining Order at Bayou Fund

Sam Israel mustn't withdraw, transfer, or encumber money from the troubled hedge fund.

Sam Israel's hold on what's left of his scandal-tarred Bayou Management hedge fund is growing more tenuous by the moment.

On Thursday, a New York state judge signed a restraining order preventing Israel and his management team from "withdrawing, transferring, or encumbering" any of the remaining assets in his onetime $400 million fund.

Justice Charles Ramos imposed the preliminary injunction after a brief hearing, during which no lawyer for Israel or Bayou appeared in court. South Cherry Street, a Denver-based money-management firm that had invested in Bayou on the advice of the Hennessee Group, a prominent hedge fund-consulting firm, had sought the restraining order.

In a related development, the

New York Post

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reported Thursday that Hennessee, whose clients invested up to $70 million in Bayou, is planning to file its own lawsuit against the hedge fund.

Of course, just how much money is left in the Connecticut-based hedge fund is a matter of dispute, and the subject of an investigation by state and federal authorities. Investors fear that much of the money in the fund has simply disappeared through a combination of bad trades and possible fraud.

But earlier this week, Arizona authorities disclosed they may have identified at least $100 million of the missing money. In May, Arizona Attorney General Terry Goddard went to court to seize those funds, after determining the money was being used in a likely bank fraud scheme.

Israel has filed a legal challenge to the action taken by Arizona officials. But in new court papers filed Thursday supporting their move, Arizona regulators contend Israel is "not a fit representative" of the interests of Bayou's investors.

Goddard's office charges the apparent bank scheme was either part of an "attempt to recover previously misinvested funds or was an attempt to create an apparent loss to show investors how the money disappeared."

On Thursday, an Arizona judge allowed the lawyers who had been representing Israel and the Bayou funds to step down from the case. The judge has given the beleaguered hedge fund manager until Sept. 21 to find a new lawyer, or he will dismiss the legal challenge to the Arizona action.