Link doesn't work now so here is the article.
Published September 19, 2005
Collapse of US fund exposes global debt scam
Bayou seen caught in fraudsters' trap while trying to recoup losses.
By NEIL BEHRMANN
COURT records of the US$440 million collapse of Bayou, the Connecticut US based hedge fund, have disclosed an international scam involving high yield debt.
In delving into the Bayou fraud, Arizona's Attorney General discovered that US$101 million was transferred from the US to banking accounts in Germany, London and Hong Kong then back to London and the US again.
The Arizona authorities, legal firms and traders allege that the founder of Bayou, Samuel Israel 111, and other executives overstated profits and understated losses of the hedge fund.
In an attempt to recoup losses, Mr Israel invested in high yield debt and was caught in what is known as 'prime bank instrument fraud', lawyers believe.
This type of fraud has trapped investors around the world and has been explained fully in court documents relating to the Bayou scandal. In markets where interest rates have fallen to historically low levels, the court documents show that Singapore and other investors must be wary of promises about so called 'prime' high yield long and short term bonds.
'Prime bank instruments' also known as 'high yield investment' programmes are mythical fraudulent debt or bank instruments. The global fraud has been going on for several years.
Fraudsters attract investors because they claim that they give them access to high yield debt that is only traded by large, 'prime' European or other banks.
To justify the high yields on so called 'prime' or top quality bonds, the fraudsters claim that the World Bank, IMF and even the Federal Reserve bank back the so called 'prime debt' and claim that the banks trade in such debt at deep discounts to help finance stricken Third World countries and other worthy causes. according to court documents.
Common characteristics of a 'prime bank instrument' contract include overly complex language. The fraudsters claim that annual returns could range from 12 per cent to 200 per cent because of high income and potential capital appreciation.
Documents display large investor lists of attorneys and accountants that fraudsters claim to be investors. The victims become part of a 'select group' of investors and they must keep their unusual deal secret.
The fraudsters tend to operate as a worldwide network of contacts and partners who provide each other with essential services, such as rapid transfer of funds to off-shore accounts.
After selling the investor the fraudulent, worthless high yield paper, members of the network shift the investment rapidly from account to account and country to country. Investors wishing to retrieve their investments when they find that their promised profits aren't forthcoming, have to trace their money through many international and secret bank accounts.
The labyrinth of offshore accounts and entities makes the chase futile for the original investors.
When they try and recover money lost from one of the fraudsters, other members of the fraud network come into play.
They claim that the person investors are attempting to hold responsible is also a 'victim'.
In any event there are no longer any funds in the account because the money has moved on.
Fraudulent operators sometimes encourage investors to sue financial institutions that have handled their funds. In this way, scammers shift the blame on to financial institutions. When the fraud is unravelled the embarrassed bank sometimes settles and doesn't take legal action against the fraudsters because it fears bad publicity, say the court documents.