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In New York State Court, the trustee for the Lipper Convertibles Investment Partnership filed suit to get money back from a trust fund of Henry Kravis’s children, Sylvester Stallone, John Cusack, and the former New York City Mayor Ed Koch.They had all invested in the partnership, and each of them withdrew their investment and thought they made money. Other investors in the partnership lost money in an alleged fraud. It seems the trustee wanted all investors, even former investors, to share in the pain, claiming the gains were “unjust enrichment.”23

The estate manager for the Bayou Group LLC was even more aggressive. Bayou had only about $100 million remaining of more than $300 million in original investments. Now Bayou’s past investors are being told they should have known that fraud had occurred, and they had no right to withdraw their money, even if they had withdrawn the money as much as three years before the fund collapsed.The estate manager is seeking not just their gains but even their original investments, so that presumably the pain will be shared on a pro rata basis. The coin is standing on end.

Bayou’s principals, Samuel Israel III and Daniel Marino, pleaded guilty to fraud charges after the fund suddenly closed in 2005. Lawsuits alleged Bayou operated a Ponzi scheme using money from new investors to pay old investors. When Israel received his 20-year prison sentence and was ordered to disgorge $300 million, he said: “I lied to you and I cheated you and I cannot put into words how sorry I am.”24 So, if he had not been caught, would he have put even the admission of his guilt into words? We may never know, but it seems he really hates to lose. Israel wanted a reduced sentence claiming infirmities, but the judge ruled: “He suffered from these ailments while he did the crime. He can deal with them while he does the time.”25

I learned that Samuel Israel III has a tattoo on his right hip, was born July 29, 1959, his Social Security number is 438-68-0727. It said so on the Wanted by U.S. Marshals notice issued by the U.S. Department of Justice.26 In June 2008, after Israel failed to report to serve his 20-year sentence, his abandoned car was found on the Bear Mountain Bridge (despite its name, the bridge is not in the vicinity of Dead Man’s Curve). The car contained what appeared to be a rambling suicide note or the first draft of a new hedge fund document. Scrawled on his car’s hood dust were the words “suicide is painless” from the MASH theme song, which probably doesn’t sound funny to the investors whose cash was mashed by Israel.27

Israel’s partner, Dan Marino, had earlier left a suicide note saying that he, Israel, and James Marquez, another partner, had “defrauded” investors. But Marino had not committed suicide, and many believed Israel did not either. Lee Hennessee, head of the Hennessee Group, said: “I believe he’s dead as far as I can throw him.”28 Greg Newton’s blog titled his review of “Scammy’s” disappearance: “Show Me the Corpse!”29 Twenty-three days after he faked his suicide, Samuel Israel turned himself in, faced an additional bail-jumping charge, and the $500,000 bail was forfeit.30

Hedge fund managers seeking fast money sometimes find their exit of the business is quick and final. Kirk Wright, the Harvard-educated 37-year-old founder and CEO of International Management Associates, (IMA) committed suicide by hanging himself in his jail cell, after being found guilty in May 2008 of securities fraud, money laundering, and other charges. Since 2001, he had allegedly inflated balances in investors’ accounts and lied to investors about the performance of the $150 million fund, which collapsed in 2006. He spent lavishly and drained the fund’s cash accounts as it collapsed. When taken into custody, he was using an alias and was arrested poolside at the Hilton in Miami Beach, Florida.31

If Wright had invested his clients’ money in T-bills and taken $3 million in management fees (2 percent of assets under management)