Goldman Sachs, Still Playing in Bayou’s Mud — Fair Game

The following is an excerpt from an article in 

The New York Times
Sunday, August 19, 2012

Goldman Sachs, Still Playing in Bayou’s Mud — Fair Game

By GRETCHEN MORGENSON

THE story of the Bayou Group, the hedge fund firm that collapsed in a whirl of lies and drugs, was always a little weird. But it just keeps getting weirder.

You may recall Bayou — or at least its founder-turned-con man, Samuel Israel III. To the world, Mr. Israel was a trading whiz. Then, one August afternoon in 2005, the police responded to a 911 call from Bayou’s offices in Stamford, Conn., and found a note explaining how he had perpetrated a giant fraud.

Mr. Israel, it turned out, wasn’t managing a hedge fund at all. He was running a Ponzi scheme — a small-time version of the Madoff racket that, at that very moment, was still going strong. Mr. Israel, who said he’d become addicted to painkillers, was later sentenced to 20 years in prison — then two more for jumping bail, faking his suicide and going on the lam. His abandoned vehicle was found on the Bear Mountain Bridge over the Hudson River, the words “suicide is painless” written in the dust on the hood.

Now, as Mr. Israel sits in jail, this tale has taken yet another twist. It came late last month from, of all places, Goldman Sachs.

Goldman had executed and cleared trades for Bayou, and there were questions about how well Goldman supervised the account. On July 30, Goldman paid $20.7 million to roughly 200 Bayou investors in the United States. Those investors, unsecured creditors in a separate Bayou bankruptcy case, were awarded that amount by a securities arbitration panel in June 2010.

It was one of the few bright spots of the Bayou story, but it didn’t last. The same day Goldman paid the investors, the firm filed its own creditor’s claim for the same amount — $20.7 million — in the Bayou bankruptcy. Goldman contended that paying the award had made it, too, a Bayou creditor. If the court agrees, the investors who won their arbitration case — also unsecured creditors of Bayou — will be out of luck.

Ross B. Intelisano, a partner at Rich, Intelisano & Katz in New York who represented the Bayou investors, said they would fight Goldman’s latest filing.

I asked Goldman last week about the bankruptcy court filing. Michael DuVally, a spokesman, said Goldman never controlled the money at issue in the arbitration.

“Our claim is consistent with bankruptcy law,” he said in a statement. “The arbitration panel, which was not ruling on wrongdoing, determined that money the Bayou funds deposited with us while insolvent needed to be returned to the estate to distribute to creditors. With the ruling, we became a creditor entitled to compensation along with the other victims of the fraud.”

The statement continued: “We were harmed by the Bayou funds and those funds should bear responsibility for the actions we took on their behalf and at their direction.  At the end of the day, it was their fraudulent behavior that was the principal cause of any damage suffered by Bayou investors.”

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