Hedge fund swindler's run to cost other criminals

By Svea Herbst-Bayliss - Analysis

BOSTON (Reuters) - U.S. financial criminals, who have the means and motive to flee, may soon face stiffer penalties after prosecutors ended an expensive and embarrassing manhunt for a hedge fund swindler this week.

Federal marshals and local police spent thousands of hours searching for Samuel Israel III, the millionaire felon who stole $450 million from investors in his Bayou Group hedge fund and jumped bail on June 9, the day he was to start a 20 year prison term.

Soon after Israel took his mother's advice, hopped on a scooter and surrendered to police in western Massachusetts on Wednesday, the message to other wealthy financial thieves was clear -- judges will be much tougher on them in the future.

"There is no judge in the country who wants to be known as the person who let some rich guy get away," said Todd Harrison, a former federal prosecutor who is now a partner specializing in white collar crime at law firm Patton Boggs.

For years, judges have treated white-collar criminals who cheated investors out of their life's savings more gently than murderers and armed robbers, often allowing them time to order their affairs before reporting to prison.

But those days are over now, not only because Samuel Israel ran but also because prosecutors are investigating prominent Wall Street investment banks and their wealthy bankers to pinpoint how they may have sparked the global credit crisis.

"We are seeing an increased level of enforcement right now because the country is roiling in the wake of how these managers packaged bad loans," said Robert Delahunt, a former state prosecutor who is now a partner in law firm Mintz, Levin's white-collar crime group.

Two weeks ago the government's tougher attitude was on display when agents handcuffed former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin to face charges that they had lied to investors about how safe their funds were.

Billions of dollars were lost when those portfolios collapsed in 2007, paving the way for Bear Stearns' eventual demise this year, when thousands of people lost their jobs.

Cioffi's bail was set at $4 million while Tannin's bail was $1.5 million, both unusually large figures, lawyers said.

"Heightened bail is a public policy statement these days and we will see more of it," Delahunt said, noting that judges now fear that sophisticated fund managers who traded millions every day had plenty of time to hide money offshore for themselves.

"These people have the motive and the means to run," said Randy Shain, a private investigator who works with hedge funds.

As trials proceed, law enforcement officials will also be watching white-collar crime defendants much more closely.

Monitoring devices like the one domestic style setter Martha Stewart had to wear after being convicted of lying about her sale of stocks may be used more often.

Samuel Israel was not required to wear one while he was free on bail for several weeks as prison officials readied the medications he needs for chronic back pain and other ailments.  Continued...