Hedge Funds

Prosecutors allege fraud, seek to seize assets at Bayou

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Federal prosecutors filed a civil suit yesterday alleging that Bayou Management committed a massive fraud, using a phony auditor to overstate its investment performance and its assets for the last seven years.

The suit, filed by U.S. Attorney for Manhattan David N. Kelley in the Southern District of New York, seeks the forfeiture of all of Bayou's assets, including $100 million seized by the state of Arizona in May.

Bayou founder Samuel Israel III in July told investors that he was shutting down his four short-term trading funds for personal reasons, and would in August return the more