Wednesday, 23 July 2014
Last updated 22 min ago
Feb 4 2008 | 8:44am ET
Unsecured creditors of the Bayou Group won court approval to probe the collapsed hedge fund’s prime broker, looking for evidence that could lead to a claim against it.
A federal bankruptcy court judge in White Plains, N.Y., approved the request last week, allowing the creditors to see if the Stamford, Conn.-based hedge fund fraudulently transferred funds to Goldman Sachs Execution and Clearing.
“GSEC received funds from the debtors at a time when the debtors were insolvent and/or pursuing a fraudulent investment scheme,” the creditors committee alleged. “Accordingly, there is reason to believe that viable claims exist against GSEC for fraudulent transfers under state and federal law.”
Under federal bankruptcy law, the creditors can investigate the nature of the Goldman brokerage unit’s relationship with Bayou, its knowledge of the hedge fund’s financial condition, what it received from the hedge fund and whether it caused any injury to it, with the court ordering GSEC to turn over relevant documents.
According to the creditors committee, GSEC and Spear, Leeds & Kellogg—which Goldman acquired in 2000—served as Bayou’s prime broker since 2000.
Suing a prime broker in a hedge fund fraud case is not unprecedented: Bear Stearns last year was ordered to pay $125 million in a case involving the Manhattan Investment Fund, for which Bear served as prime broker. That case is still making its way through the courts.
Bayou’s top leaders pleaded guilty in 2005 to defrauding investors of $450 million. Daniel Marino, former chief financial officer of Bayou, was sentenced to 20 years in prison last week, and is expected to be hit with a nine-figure restitution order; earlier, co-founder James Marquez was sentenced to more than four years. Co-founder Samuel Israel is to be sentenced this month.
Jul 8 2014 | 10:48am ET
The surge in derivatives regulation is among the most complex challenges facing the financial services industry today. Northern Trust’s Joshua Satten recently spoke with FINalternatives to share insights into the challenges presented by new regulation and explore how the industry is responding. Read more…