By Leslie Gevirtz and Martha Graybow
NEW YORK (Reuters) - A U.S. judge sentenced the "mastermind" behind the collapsed hedge fund Bayou Group to 20 years in prison on Monday, a sentence that reflects the big losses suffered by investors in the $400 million fund.
Samuel Israel III, 48, is the last of three officials at the defunct fund to be sentenced for their role in bilking investors in Connecticut-based Bayou out of millions. The fund's demise rocked the $1.8 trillion hedge fund industry and led to calls for more oversight.
U.S. District Judge Colleen McMahon rejected requests for leniency by Israel's lawyer -- who cited the Bayou founder's lengthy list of medical problems, including a bad back, heart problems, and gout -- and said it would be difficult for him to endure a lengthy prison term. She said he was the "mastermind of this scheme."
"You were, in every meaning of the sense, a career criminal," McMahon told Israel, who leaned on the defense table for support and repeatedly wiped sweat from his bald head and neck.
"You ruined lives," she said, saying investors had lost their retirement funds and money for their children's and grandchildren's education. "They want justice," she said.
"Financial fraud, white-collar crimes are every bit as heinous as every other type of crime and they will be punished severely," McMahon said.
Israel was also ordered to make $300 million in restitution. In addition, the judge ordered him to forfeit his interests in a Bank of America Corp
Israel pleaded guilty in September 2005 to charges of conspiracy and fraud in connected with stealing from Bayou investors over an eight-year period.
Israel and his co-defendants, former Bayou Chief Financial Officer Daniel Marino and co-founder James Marquez, admitted that they lied to customers about their funds' profits and losses, fabricated audits and financial statements, and created a brokerage that, while executing money-losing trades for clients, generated millions in commission for themselves.
Marino received 20 years in prison. Marquez, who left the fund in 2001, was held less responsible for the long-term fraud and sentenced to four years and three months.
The sentences for Israel and Marino are among the longest ever handed down in a white-collar case. Their punishments were particularly severe because federal sentencing guidelines call for long sentences when there are substantial economic losses to investors in a financial fraud.
Former Adelphia Communications Corp finance chief Timothy Rigas is serving a 20-year prison term; former WorldCom chief executive Bernard Ebbers received a 25-year sentence; and ex-Enron CEO Jeffrey Skilling got 24 years.
Under the guidelines, the judge could have sentenced Israel to up to 30 years in prison.
"When I went into this exercise, I thought you would do all of those 30 years or close to it," she told him. But citing the government's statements that Israel had cooperated, she ordered him to serve 20 years, followed by three years of supervised release. He must report to prison on June 9.
Ron Geffner, a lawyer for hedge funds and a former enforcement official at the U.S. Securities and Exchange Commission, said Israel's lengthy sentence should serve as a deterrent.
"I don't think the sentence is excessive given the fraud that he's convicted of and that it impacted the financial well-being of potentially hundreds of people," said Geffner, a partner at New York law firm Sadis & Goldberg. "The judge is sending a message at a time our country is struggling economically."
(Additional reporting by Svea Herbst-Bayliss in Boston; Editing by Andre Grenon and Gerald E. McCormick)