Accounting & Tax

Big Time for Bayou Fund CFO

Former Bayou CFO Daniel Marino gets a long sentence for creating a fake accounting firm to sign off on his hedge fund's phony financial reports.
Stephen TaubJanuary 30, 2008

A former hedge fund CFO who used his accounting credentials to create phony audits of his failing fund was sentenced Tuesday to 20 years in prison.

Daniel Marino of the Bayou hedge fund, which defrauded investors of more than $450 million pleaded guilty in September 2005 to conspiracy, investment adviser fraud, mail fraud and wire fraud.

Marino also was sentenced to three years of supervised release following his incarceration. The court ordered that Marino forfeit cash, property and interests in some of his partnerships. Marino was taken away immediately to begin serving his sentence.

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In imposing the sentence, United States District Court Judge Colleen McMahon said that she was sending a message that those entrusted with other people’s money have an obligation to be truthful and forthright, at whatever cost to themselves.

She described Marino as “the linchpin of the fraud,” according to an announcement from Michael J. Garcia, the United States Attorney for the Southern District of New York.

Bayou sustained consistent losses from the time its first fund opened in 1996 until August 2005, when a number of Bayou funds collapsed, according to Garcia. Yet, investors were regularly told that the funds were reaping substantial gains.

Marino admitted during his guilty plea that he and Bayou chief executive officer Samuel Israel, III, as well as James G. Marquez, who ran the first Bayou fund with Israel, conspired to defraud investors in 1998, after the fund sustained a second year of losses. The three agreed that Marino, a certified public accountant, would form a sham CPA firm called Richmond-Fairfield Associates to sign off on the fraudulent financial statements that were disseminated to future and current investors.

Then, beginning in 1999, they sent out financial statements in which Bayou falsely reported profits and falsely asserted that Richmond-Fairfield Associates was an independent auditor that had audited Bayou and certified its financial statements.

The Bayou funds ultimately collapsed in August 2005, after Israel and Marino tried to recoup their growing losses by investing fund assets in private placement transactions, which turned out to be frauds, according to Garcia’s announcement.

According to Reuters, Marino’s lawyer said the former finance executive suffered from health and self-esteem problems, was socially isolated and was intimidated at Bayou by Israel.

Israel pleaded guilty with Marino in September 2005 to conspiracy, investment adviser fraud and mail fraud. He is still awaiting sentencing.

Marquez pleaded guilty in December 2006 to conspiring to defraud Bayou investors between July 1996 and October 10, 2001. He was sentenced in January 2007 to 51 months in prison, to be followed by two years of supervised release. The Court also ordered him to forfeit property and securities and pay nearly $6.3 million in restitution to his victims.

Garcia’s press release also noted that about $100 million in Bayou funds were the subject of an Arizona state court seizure order. Those were the funds that had been transferred by Bayou in connection with purportedly legitimate private placement transactions that turned out to be a fraud.