Judge: Bayou Investors Can Sue Luckier Investors

Aug 13 2007 | 8:57am ET

Investors burned by the collapse of the Bayou Group can continue to try to recoup money from those who got out early, a federal judge has ruled.

U.S. Bankruptcy Judge Adlai Hardin denied a pretrial motion by more than 20 former Bayou clients who got out before the fund went under in 2005, when its principals pleaded guilty to fraud, to toss lawsuits filed by Bayou investors who weren’t so lucky. The decision allows those lawsuits, which seek to recover the money to allow a more equitable distribution of what’s left to all former Bayou clients, to move forward.

Hardin ruled that Bayou’s investors are creditors of the failed hedge fund, rather than equity holders. As such, bankruptcy laws protect them from other creditors receiving favorable treatment.

Bayou’s receivers say that they are seeking money from 110 investors who redeemed early.

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