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Special Issue: The 'Hottest Issues' Get Hotter; The Bayou Hedge Funds Fraud

By Jeff J. Marwil

Investor confidence and market behavior can be impacted greatly by events that do not necessarily correlate. In the case of the Bayou Hedge Funds fraud, these unique and non-recurring events fueled a fire in the hedge fund industry that has spread, but not necessarily due to the particulars of the Bayou Hedge Funds failure. But, when dealing with significant investments made by pension funds, corporate entities, along with foundations and trusts, a healthy dose of skepticism is natural and appropriate. Not unlike the transition from the Enron scandal to the formation of the Public Company Accounting Oversight Board, hedge fund investors may extrapolate the troubles at the Bayou Hedge Funds to all hedge funds. As a result, questions of the need for regulatory oversight for a stronger accountability within the industry arise.

The underlying premise of this article is to identify and review the events that occurred in the Bayou Hedge Funds as a tool for identifying risk in other hedge fund situations. Every investor individually must determine the level of due diligence required to seek comfort in making an investment. Could additional regulation support that goal? It is a question that is being posed now by several major investor groups. Understanding the Bayou Hedge Fund fraud will provide additional ammunition in addressing issues that they may encounter. Following is a digest of the developments that took place in that case. [Note, the author of this article is the presiding corporate officer of each of the Bayou entities. H. Jeffrey Schwartz of the Dechert law firm, resident in its New York office, is lead counsel for the Bayou entities in the Chapter 11 Cases. The Honorable Adlai S. Hardin, Bankruptcy Judge, in the Southern District of New York, presides over the Chapter 11 Cases and the Lawsuits. Nothing herein shall be or be deemed to be an admission or waiver of any type or nature whatsoever, whether in connection with the Chapter 11 Cases, the Lawsuits or otherwise.]

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