Blue Bayou (Case Study) Bayou Management LLC was a hedge fund company established in 1996 by Samuel Israel and James Marquez. The underlying ethical issue of Bayou was that the two founders had established a Ponzi scheme in which money was paid to original investors from money received by subsequent investors. The net result was that the investment money given by the new investors became the "profit" for the original investors. Named after Charles Ponzi, the Ponzi scheme allowed the unethical founders to keep the money from the investors instead of investing it in the promised high yield investments. The net result is that some of the original investors got their money back and more and the founders receive a large percentage of the money given by the new investors. The exit strategy of a Ponzi scheme is very simple. You take the money and run. As was the case with Bayou, a Ponzi scheme can only survive for a short period of time before the new investors start complaining that they have not received any profits. At this point, the Ponzi organizers pull the plug on Bayou and tried to disappear. The critical selling point for any Ponzi scheme is that the founders have scheme is that the founders have guaranteed above average returns on the investment. Any person who is familiar with finance theory knows that it is IMPOSSIBLE to guarantee ABOVE AVERAGE returns. This is a promise that can not be kept. However, the Ponzi organizers realize that the greed within the investors convinces the rational side of the investor that Bayou DOES have the answers on how to beat the market continuously. The Bayou collapse occurred by accident. Arizona officials became suspicious when Samuel Israel had transferred $100 million from Bayou in his own name to another financial management company, Majestic Capital Management. The suspicion was raised when the principal owner of Majestic Capital Management, Karl Johnson, went to number financial firms trying to deposit money from Majestic Capital Management and gave a different reason why he had the money at each financial institution The net result was that Bayou quickly started losing their financial strength since they were unable to sustain the payouts to its investors. On September 30, 2005, both Bavou's CEO. Samuel 30, 2005, both Bayou's CEO, Samuel Israel and CFO Daniel Marino plead guilty to fraud. On May 31, 2006, Bayou filed for bankruptcy protection to help investors try to recover $250 million. On December 14, 2006, Bayou's other founder, James Marquez pleaded guilty to conspiracy to defraud investors. Resul Players in the Bayou Fraud: Title Charges Samuel CEO Cofounder Conspiracy Investor Advisor Prod Gail Fraad prison *$300 fine James Marquez Co-Founder Conspiracy 451 prison *562 fine Daniel Marino CFO 20 y Compiracy Investor Advisor Red Mail Fred Wire Prand prison Update On January 22, 2008, Bayou co-founder, James Marquez was sentenced to 51 months in prison and ordered to pay $6.2 million for his role in the Bayou fraud. Marquez told the court that he took the easy way out when things became difficult. A week later, on January 29, 2008, former Bayou CFO Daniel Marino was sentenced to 20 years in prison with 3 additional years of supervised release following his prison term. The judge was sentenced to 20 years in prison with 3 additional years of supervised release following his prison term. The judge described Marino as the "linchpin of the fraud". In April 2008, Samuel Israel was sentenced to 20 years in prison and ordered to pay a fine of $300 million for his role in the Bayou fraud. The judge stated she could have sentenced Israel to up to 30 years in prison. Support your answers to the following questions with specific information from the case and text or with other information you get from the Web or other sources. Total marks awarded in this exam are 25 points As an investor in Bayou, what would your reaction have been to the letter from Israel stating 100 percent of the money that you had invested in the company would be returned to you? Also discuss some How the fraud occurred for such a long time? Blue Bayou (Case Study) Bayou Management LLC was a hedge fund company established in 1996 by Samuel Israel and James Marquez. The underlying ethical issue of Bayou was that the two founders had established a Ponzi scheme in which money was paid to original investors from money received by subsequent investors. The net result was that the investment money given by the new investors became the "profit" for the original investors. Named after Charles Ponzi, the Ponzi scheme allowed the unethical founders to keep the money from the investors instead of investing it in the promised high yield investments. The net result is that some of the original investors got their money back and more and the founders receive a large percentage of the money given by the new investors. The exit strategy of a Ponzi scheme is very simple. You take the money and run. As was the case with Bayou, a Ponzi scheme can only survive for a short period of time before the new investors start complaining that they have not received any profits. At this point, the Ponzi organizers pull the plug on Bayou and tried to disappear. The critical selling point for any Ponzi scheme is that the founders have scheme is that the founders have guaranteed above average returns on the investment. Any person who is familiar with finance theory knows that it is IMPOSSIBLE to guarantee ABOVE AVERAGE returns. This is a promise that can not be kept. However, the Ponzi organizers realize that the greed within the investors convinces the rational side of the investor that Bayou DOES have the answers on how to beat the market continuously. The Bayou collapse occurred by accident. Arizona officials became suspicious when Samuel Israel had transferred $100 million from Bayou in his own name to another financial management company, Majestic Capital Management. The suspicion was raised when the principal owner of Majestic Capital Management, Karl Johnson, went to number financial firms trying to deposit money from Majestic Capital Management and gave a different reason why he had the money at each financial institution The net result was that Bayou quickly started losing their financial strength since they were unable to sustain the payouts to its investors. On September 30, 2005, both Bavou's CEO. Samuel 30, 2005, both Bayou's CEO, Samuel Israel and CFO Daniel Marino plead guilty to fraud. On May 31, 2006, Bayou filed for bankruptcy protection to help investors try to recover $250 million. On December 14, 2006, Bayou's other founder, James Marquez pleaded guilty to conspiracy to defraud investors. Resul Players in the Bayou Fraud: Title Charges Samuel CEO Cofounder Conspiracy Investor Advisor Prod Gail Fraad prison *$300 fine James Marquez Co-Founder Conspiracy 451 prison *562 fine Daniel Marino CFO 20 y Compiracy Investor Advisor Red Mail Fred Wire Prand prison Update On January 22, 2008, Bayou co-founder, James Marquez was sentenced to 51 months in prison and ordered to pay $6.2 million for his role in the Bayou fraud. Marquez told the court that he took the easy way out when things became difficult. A week later, on January 29, 2008, former Bayou CFO Daniel Marino was sentenced to 20 years in prison with 3 additional years of supervised release following his prison term. The judge was sentenced to 20 years in prison with 3 additional years of supervised release following his prison term. The judge described Marino as the "linchpin of the fraud". In April 2008, Samuel Israel was sentenced to 20 years in prison and ordered to pay a fine of $300 million for his role in the Bayou fraud. The judge stated she could have sentenced Israel to up to 30 years in prison. Support your answers to the following questions with specific information from the case and text or with other information you get from the Web or other sources. Total marks awarded in this exam are 25 points As an investor in Bayou, what would your reaction have been to the letter from Israel stating 100 percent of the money that you had invested in the company would be returned to you? Also discuss some How the fraud occurred for such a long time
