201006 BN Bayou - manchestercf.com · 201006_BN_Bayou.doc Page 2 of 2 the words “Suicide is...
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201006_BN_Bayou.doc Page 1 of 1 Briefing Note “…Panel deems just and proper.” June 26, 2010 In the United States, FINRA has announced the result of Dispute Resolution 08-01763 between the unsecured creditors of Bayou Group LLC (a hedge fund that exploded spectacularly in 2005 to the tune of USD450-million) and Goldman Sachs (prime broker to Bayou Group LLC from 1999 to 2005). The Bayou creditors believed that Goldman Sachs should have known that the Bayou hedge funds it served were fraudulent Ponzi schemes. Goldman Sachs countered that the investors in Bayou hedge funds were “highly sophisticated investors” who should have known better and that it wasn’t the responsibility of the prime broker to monitor the “…honesty and the finances…” of their account holders. According to the Bayou creditor complaint, Goldman Sachs employees “…have repeatedly claimed that they had no obligation to concern themselves with what had occurred at the Bayou Hedge Fund at anytime.” At the conclusion of the arbitration, the FINRA panel awarded the Bayou Group LLC creditors USD20,580,514.52 from Goldman Sachs, a sum “…the Panel deems just and proper.” 1 As a result of this decision by FINRA, those who offer banking and brokerage services to financial fraudsters can not longer shrug their shoulders when facing defrauded investors and claim caveat emptor . This represents a turning point in financial crime risk management for industry players, as they will be forced to bear the some of the burden for servicing financial fraudsters that their staff failed to identify, report and shun. On September 29 th , 2005, the two principals of the Bayou Group LLC – founder Samuel Israel III and Chief Financial Officer Daniel E. Marino - pleaded guilty to fraud charges in Federal District Court in White Plains, New York. The hedge fund founded by Israel in 1997 (after a couple of false starts) raised USD450-million from investors over its lifetime. The Ponzi scheme collapsed once investors demanded reimbursement. The Securities and Exchange Commission’s charges are a catalogue of greed and financial ineptitude. 2 Israel became a media sensation after his vehicle was found on June 9 th , 2008 (the date he was to turn himself in to federal prison in Massachusetts) on Bear Mountain Bridge, north of New York City, with 1 http://finraawardsonline.finra.org/turing.aspx?doc=43920 2 http://www.sec.gov/news/press/2005-139.htm ManchesterCF Suite 501 125-720 King St. West Toronto, Ontario Canada M5V 3S5 www.manchestercf.com +1.416.388.6051 [email protected]
Transcript of 201006 BN Bayou - manchestercf.com · 201006_BN_Bayou.doc Page 2 of 2 the words “Suicide is...
201006_BN_Bayou.doc Page 1 of 1
Briefing Note
“…Panel deems just and proper.” June 26, 2010 In the United States, FINRA has announced the result of Dispute Resolution 08-01763 between the unsecured creditors of Bayou Group LLC (a hedge fund that exploded spectacularly in 2005 to the tune of USD450-million) and Goldman Sachs (prime broker to Bayou Group LLC from 1999 to 2005). The Bayou creditors believed that Goldman Sachs should have known that the Bayou hedge funds it served were fraudulent Ponzi schemes. Goldman Sachs countered that the investors in Bayou hedge funds were “highly sophisticated investors” who should have known better and that it wasn’t the responsibility of the prime broker to monitor the “…honesty and the finances…” of their account holders. According to the Bayou creditor complaint, Goldman Sachs employees “…have repeatedly claimed that they had no obligation to concern themselves with what had occurred at the Bayou Hedge Fund at anytime.” At the conclusion of the arbitration, the FINRA panel awarded the Bayou Group LLC creditors USD20,580,514.52 from Goldman Sachs, a sum “…the Panel deems just and proper.”1 As a result of this decision by FINRA, those who offer banking and brokerage services to financial fraudsters can not longer shrug their shoulders when facing defrauded investors and claim caveat emptor. This represents a turning point in financial crime risk management for industry players, as they will be forced to bear the some of the burden for servicing financial fraudsters that their staff failed to identify, report and shun. On September 29th, 2005, the two principals of the Bayou Group LLC – founder Samuel Israel III and Chief Financial Officer Daniel E. Marino - pleaded guilty to fraud charges in Federal District Court in White Plains, New York. The hedge fund founded by Israel in 1997 (after a couple of false starts) raised USD450-million from investors over its lifetime. The Ponzi scheme collapsed once investors demanded reimbursement. The Securities and Exchange Commission’s charges are a catalogue of greed and financial ineptitude.2 Israel became a media sensation after his vehicle was found on June 9th, 2008 (the date he was to turn himself in to federal prison in Massachusetts) on Bear Mountain Bridge, north of New York City, with
1 http://finraawardsonline.finra.org/turing.aspx?doc=43920 2 http://www.sec.gov/news/press/2005-139.htm
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201006_BN_Bayou.doc Page 2 of 2
the words “Suicide is Painless” etched into the hood. Israel’s quote of the song from the 1970 film M*A*S*H about a fake suicide was a telling indicator that Israel’s methods were primitive. The judge presiding over Israel’s trial once he’d turned himself into police after camping out in a motor home under the false identity of David Clapp described Israel’s exploits as “…one of the stupidest crimes out there.” Whether a financial fraudster is as inept and greedy as Israel or as devious and calculating as Bernard L. Madoff, they cannot perpetrate their crimes without the assistance of a prime broker, investment dealer, banker or financial institution to process their transactions or provide credit facilities. Some fraudsters weave elaborate lies and webs of deceit in order to convince financial institutions to execute their instructions. In other cases, bankers realise that they earn spectacular amounts of money from fraudsters and are unwilling to expose the crime for fear of cutting off valuable revenue streams. Ivy Asset Management, an investment advisor wholly-owned by Bank of New York Mellon, was on the receiving end of a lawsuit in May 2010 from the Attorney General of New York, Andrew Cuomo, for its involvement with the Bernard L. Madoff fraud.3 Between 1998 and 2008, Ivy received USD40-million in commissions for advice and due diligence services from clients with large Madoff investments. Yet internal Ivy email uncovered by the United States Attorney General of New York reveals that senior principals at Ivy did not publically voice their concerns about Madoff for fear of the impact on Ivy’s bottom line, let alone the impact on their own personal reputational risk. Had they voiced their concerns, Madoff may have outed sooner, preventing billions in investor losses and ruining fewer lives. Anti-money laundering and counter-terrorist financing training programs were first implemented at financial institutions to satisfy regulatory requirements imposed by laws enacted to defend the financial system from abuse by organised crime and terrorist groups. Now these same training programs can prevent an investment dealer from incurring the penalties associated with enabling a financial fraudster. Staff trained in recognising the patterns of financial crime will raise red flags and alert management to the possible existence of fraudulent transactions, Ponzi schemes or other criminal activity being perpetrated at or routed through a financial institution’s operations. ManchesterCF produces the Financial Crime in Capital Markets training program for investment dealers around the globe. By examining the latest developments in money laundering, terrorist financing and financial fraud throughout the globe, sales, trading, risk management and other staff can be made aware of the latest patterns in financial crime. Case studies are pulled from some of the most interesting financial crimes perpetrated during the past decade. ManchesterCF provides financial crime risk management training progams, advisory services and project management to financial institutions and government agencies in Canada and around the globe. Our risk management professionals hold solid experience in a wide variety of fields, including financial intelligence, international banking, financial sector supervision and law enforcement. For further information and samples of our training programs, visit the Client Login section of the ManchesterCF website:
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3 http://www.ag.ny.gov/media_center/2010/may/may11a_10.html
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