Hedge Funds Hit With $13 Million Jury Verdict In Bayou Case

May 17 2011 | 1:56am ET

Victims of the Bayou Group Ponzi scheme will split another $13 million after the hedge fund’s estate defeated two hedge funds and four other Bayou investors in federal court.

A jury sided with the Bayou estate against Redwood Growth Partners and Heritage Hedged Equity, as well as the other investors. The defendants didn’t prove that they had conducted good-faith due-diligence into Bayou before redeeming the $13 million.

“This is the first time that a Ponzi scheme estate has been successful at a trial in defeating an investor’s good-faith defense and thus recovering the full principal, or amount paid to the redeeming investor,” Gary Mennitt, a lawyer for the estate, told Bloomberg News.

David Baum, who represents Redwood and Heritage Hedged, said his clients would appeal.

Bayou collapsed in 2005, costing investors $450 million. Several of the firm’s executives, including founder Samuel Israel, were convicted of fraud; Israel, who spent several weeks on the run in the summer of 2008 after faking his suicide, was sentenced to 20 years.

All told, the Bayou estate has recovered more than $60 million for the Ponzi scheme’s victims.

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