Bayou co-founder sentenced to 20 years in prison

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. 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 (BAC.N: Quote, Profile, Research) account that held a little more than $100 million. She ordered Israel to surrender no later than June 9 to begin serving his sentence.

Israel pleaded guilty in September 2005 to charges of conspiracy and fraud in connection with stealing from Bayou investors over an eight-year period.