Suicide or Scam? Hedge Fund Faker Vanishes on Way To the Hoosegow

NEW YORK -- For nine years, Samuel Israel III did a terrific impersonation of a stock-market whiz as he ran Bayou Management, a hedge fund that collapsed in a big pile of fraud in 2005. But as much nerve as that performance took, authorities think that Israel has come up with a role that requires even more gall: suicide faker.

On Monday, Israel was expected to drive himself to federal prison to start a 20-year sentence for bilking clients out of some $300 million. Instead of turning up at the pokey, authorities found his GMC Envoy idling on the Bear Mountain Bridge in Westchester County, about 45 minutes north of New York City. There wasn't a note, but on the hood, scrawled in dust and pollen, were the words "Suicide is painless."

Tribute to the theme song from "M*A*S*H"? Possibly. Actual goodbye-cruel-world sign-off? Not likely, say the feds, who were skeptical from the start, because there were no reports of a jumper and because Israel's body has yet to turn up. U.S. Marshals have since announced a full-on manhunt, and on Thursday, Israel, 48, was granted official Super Bad Guy status courtesy of a "Wanted" flier that stated, perhaps theatrically, that he should be considered "armed and dangerous."

He's also balding, 5-11, weighs 200 pounds and has a tattoo on his hip, just FYI.

There were reports Thursday that authorities had interviewed the driver of a car, spotted with surveillance cameras, who slowed or maybe stopped on the bridge around the same time as Israel. It's unclear whether the driver knew Israel, let alone helped him. But suffice it to say, the search teams looking for a corpse in the Hudson River have called it quits and the focus is now on airports, border crossings and the area around Bear Mountain.

And so, to the list of people who may be embarrassed by the trust they put into Samuel Israel III we add the name of U.S. District Court Judge Colleen McMahon, who allowed this admitted con artist to drive himself to prison rather than be escorted there by officers. (She was swayed, court transcripts indicate, by extensive pleas related to his back pain, for which Israel has been surgically treated nine times.) Never mind that the man pled guilty to one of the more elaborate schemes to defraud investors in years. How does anyone drive himself to prison? Is there valet service in the Big House? Do they park it for you until you're sprung?

Until Israel snookered this judge -- or seemed to snooker, since we're not certain the man is alive -- his specialty was snookering the rich. Not many of them are eager to speak for attribution, preferring to keep their humiliation anonymous. But they all were startled by the implosion of Bayou, which was launched in 1996 and operated out of a waterfront cottage in Stamford, Conn.

Israel had just enough work experience on his résumé to sound like a legit prospect, including a stint at the much admired Omega Advisors, a fund in Manhattan. The chairman of that fund, Leon Cooperman, would later contend that Israel held a low-end job at the firm, and Cooperman told anyone who asked that Israel could barely tell the difference between a stock and a bond. But not many people asked. To add to the baubles on his résumé, Israel had an impressive lineage; his namesake grandfather was a onetime coffee importer from New Orleans who created a well-known commodities firm. To some people on Wall Street, Israel's name had the whiff of Rockefeller about it.

He could be brusque and abusive to underlings but charming enough to the people he needed to charm. One client, who would eventually lose $700,000, invited Israel to his houseboat for cocktails, to get the measure of the guy.

"I like to drink with people I invest with because you can find out a lot about people by the way they drink," this investor said. "There were about nine people there, and I remember Sam was self-deprecating, [but] liked being the center of attention. I remember at one point, he wrapped a napkin around his head and he did this impersonation of an Arab with a lot of oil money. And it could have come across as mean-spirited. But it didn't. It was amusing."

Most compelling of all, Israel had fake audits that "proved" his talent. The accounting firm behind those audits, it turns out, was run by a partner in Bayou who helped perpetrate the fraud. But for years, it looked as though Israel could reliably outpace the market, returning 20 percent in 2000, a year the S&P lost 9 percent. The statements he sent clients showed their investments were growing nicely, when in fact, their Bayou accounts were shriveling up.

It helped that Israel worked hard to seem like a guy with nothing to hide. He offered weekly updates, via e-mail, and conference calls a couple of times a year. Lee Hennessee, who runs a company that finds hedge funds for wealthy clients, says that any time she had a question, someone at Bayou was in touch right away. Israel was even friendly during surprise visits.

"When he had back surgery he reported to investors that he stopped trading for the month," she recalls. "I went to visit him at his office to view his recovery progress. He said the surgery was successful and even jumped to show me he was all better."

Visitors to Bayou would see a perfectly legitimate-looking operation, with 15 employees and a whole bunch of computer screens. And real stock trades were executed. They just weren't profitable ones. By 2003, rumors about irregularities at the firm started to circulate, and with funds being pulled out, Israel closed the company two years later, citing his divorce and need to spend time with his kids.

Three weeks after it closed its doors, Bayou was visited by a worried investor named Eric Dillon, who flew from Seattle to find out what was going on at the firm. When his knock wasn't answered, he went in the back door and found a full explanation of the fraud in a six-page letter written by chief financial officer Daniel Marino. It doubled as Marino's "suicide note and confession."

"If there is a hell," Marino wrote in one passage, "I will be there for an eternity."

Marino, for the record, is alive and well and doing time. (Flirtation with suicide seems to be a hallmark of this swindle.) Ultimately, $100 million of the roughly half a billion dollars that were invested with the fund were recovered and now are part of a bankruptcy proceeding. What's missing, of course, is Israel, or at least his body. Which few of the former investors think will be found any time soon.

"The only place this guy will wash up," says one, "is a beach in the Bahamas."