updated 9/29/2005 5:38:59 PM ET 2005-09-29T21:38:59

Two top officers of the scandal-ridden Bayou hedge fund suddenly emerged from hiding Thursday and admitted engaging in a fraud that totaled hundreds of millions of dollars.

Samuel Israel III, who founded Bayou and was its chief executive, pleaded guilty in federal court to conspiracy, investment adviser fraud and mail fraud. His chief financial officer, Daniel Marino, pleaded guilty to those charges and wire fraud.

Neither Israel nor Marino had been charged before Thursday. Within a few hours, they surrendered at the courthouse, waived their right to have a grand jury consider their cases, heard the charges and pleaded guilty. The men, both 46, had disappeared this summer as fears of fraud mounted.

The executives admitted telling existing and prospective customers — in weekly, monthly, quarterly and annual reports — that Stamford, Conn.-based Bayou was generating significant profits when the fund was actually sustaining losses. They also set up a fake accounting firm to show that the fund was being properly audited.

The information “made it appear that Bayou was doing better than it really was,” Israel confessed to Magistrate Judge George Yanthis.

Eventually, they tried to stem losses by investing in highly speculative investments without telling investors.

Court papers said the fraud enticed $450 million in investments.

It was not immediately clear how much money investors could get back. Prosecutors said they were seeking control of a $100 million account in Arizona and claimed the defendants’ bank accounts and business interests — and Marino’s house in Westport, Conn. — without specifying their worth.

Ross Intelisano, an attorney who represents several investors, said after the guilty pleas, “I think everyone wants these guys to go to jail for a long period of time. They all feel they’ve been personally violated. But everyone’s wondering whether the investigation is finished or whether the U.S. attorney is still looking for assets.”

One investor, the Jewish Federation of Metropolitan Chicago, is seeking more than $4 million.

In a related action, the Securities and Exchange Commission filed a civil lawsuit Thursday charging Israel, Marino, Bayou Funds and the hedge fund’s management company with defrauding investors and, in the executives’ case, diverting millions in investor assets to their personal use.

Israel’s maximum sentence in the criminal case would be 30 years in prison, and Marino would face up to 50 years, but federal guidelines are likely to keep the sentences shorter.

Besides prison time, the maximum sentences could order restitution of up to $300 million on each count, said prosecutor Margery Feinzig.

Sentencing was set for Jan. 9. Yanthis ordered psychiatric evaluations as part of a pre-sentencing report after both men said in court that they were under psychiatric care; Marino wrote a suicide note this summer that was discovered by police. He was hospitalized briefly.

The U.S. attorney’s office said a third Bayou official, whose name was not made public, was also a conspirator.

Authorities began investigating after investors received a July 27 letter from Israel announcing that Bayou would return their money and shut its doors. The money did not arrive and investors said they could not reach anyone at the fund.

Bayou is the latest in what regulators say is a growing number of frauds involving hedge funds, which are largely unregulated. Hedge funds profit by using unconventional techniques, such as short-selling, or betting on falling markets to make a profit during market downturns.

In the last five years, the Securities and Exchange Commission brought 51 cases charging hedge fund advisers with defrauding investors of more than $1 billion.

Both defendants were given two weeks to arrange $500,000 bonds that would allow them to remain free pending sentencing.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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