Bayou Group Hedge Fund

I read in Forbes that a hedge fund called Bayou Group went into Chapter 11 bankruptcy, after allegedly hiding losses with phony profit statements.

Now a reciever for the fund is suing investors who got out of the fund early.

There is a precedent for forcing innocent investors to return their profits. The issue is called "fradulent conveyance", which goes back to an English case from 1601 where a man gave his sheep to a relative to avoid creditors.

But, in this case, the reciever not only wants the investors to return their profits, but also their principle.

All the money would be divided equally among all the investors. This would mean that the investors who got out early with a profit would now have a loss.

To claim the principal, the receiver has to turn to a different part of the law. In this case, they are trying to use a section of bankruptcy law that can force unwitting participants to give back all the money if they should have known something is wrong, because of red flags.

If the case goes against investors, it will be one more risk you would have to consider if you want to invest in a hedge fund.