Fugitive ex-hedge fund manager Israel surrenders

2/07/2008 - 20:42

By Svea Herbst-Bayliss and Scott Malone

BOSTON (Reuters) - Fugitive former hedge fund manager Samuel Israel III drove a motor scooter to a Massachusetts police station on Wednesday and surrendered, ending a four-week nationwide manhunt after he faked his own death to avoid a 20-year prison sentence.

"He surrendered at 9:30 this morning," said Peter Coe, dispatcher with the Southwick police, confirming the arrest of the convicted millionaire who engineered the most brazen and longest-running fraud in the $2 trillion hedge fund industry.

Israel, who had been hiding out in a mobile home, showed up at the Southwick police station on a Yamaha scooter after his mother had convinced her 48-year-old son to turn himself in, the U.S. Marshals service said.

His mother also tipped off U.S. Marshals that her son was ready to end the chase.

"Sam Israel was in contact with his mother right before he came in and she called us to let us know," said Dave Turner, a Marshals spokesman. "He gave up because of the intense pressure of the manhunt."

Southwick is a small town in the Pioneer Valley near the Connecticut border, about 100 miles southwest of Boston.

It is not far from where Israel was to report to federal prison in Ayer, Massachusetts, on June 9 -- the day his GMC Envoy was found parked on a bridge above the Hudson River, its engine idling and the words "suicide is painless" etched in dust on its hood.

He was scheduled to face a federal judge in Springfield, Massachusetts, on Wednesday, a court official said. What happens to him after that remains unclear, officials said.

After his disappearance, police ruled out suicide and issued a "wanted" poster for Israel, the co-founder of Bayou Group, a Connecticut-based hedge fund. He had pleaded guilty in 2005 and was sentenced in April for his role in a scheme to fabricate returns and cheat investors out of $450 million.

The scion of a prominent New Orleans family, Israel had told investors, including Mets baseball team owner Fred Willpon, that he had years of experience in hedge funds.

Ten days after Israel disappeared, authorities arrested his girlfriend on charges of aiding and abetting his disappearance. She admitted to helping Israel pack his belongings in a recreational vehicle and attach a blue motor scooter to the back, and driving him on the day he vanished.

Bayou's collapse still ranks as the hedge fund industry's longest-running fraud, with Israel and his partners fabricating performance numbers and making up a fake auditor to sign off on the data.

"Investors are ready for him to report to jail. It's been a long, difficult process for them and I hope this will be the last chapter," said Ross Intelisano, a partner at Rich & Intelisano, a New York law firm that represented investors defrauded in the Bayou scandal.

"I think he thinks that he's sick enough that he would have died in jail in 20 years anyway, so he thought he had nothing to lose," Intelisano said. "I wonder why he turned himself in. He's got serious medical problems. I wonder if he just ran out of medicine."

Israel suffers from back problems and has been addicted to pain medication.

The U.S. attorney who prosecuted Israel said on Wednesday $115.6 million of the funds have been found and will be returned to harmed investors.

(Editing by Jason Szep/Gerald E. McCormick/Braden Reddall)

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