Bayou Investors went broke a few years ago because their founders defrauded the company. Some of the investors thought that they had smelled a rat in time. Yesterday, they found out that getting out isn't good enough. They couldn't take their profits and go home, because there were no profits to take. The judge said they had to put the money back so the creditors could get paid first (it appears they will now get about half of what they were owed, the investors are likely to get nothing).
Hedge fund managers have become increasingly powerful on Wall Street as they manage to run their investment funds with minimal regulation. A bankruptcy decision yesterday by Adlai Hardin, Jr., a judge in U.S. Bankruptcy Court for the Southern District of New York concerning Bayou Investors has to make every single investor in the hedge funds concerned whether the promise of great riches is worth the risk, when he said that the money that was cashed out by investors prior to bankruptcy had to be returned to the bankruptcy trustee as money received as a fraudulent conveyance under the bankruptcy statute.
This certainly isn't the average fare for DailyKos, but one of the recurring problems in business that affects politics and us is the amount of unregulated business activity. Much of it was invented to get around rules that were designed to protect investors and the people that the businesses are doing business with. Hedge funds fit into a clear gap in the regulations. They were designed to allow sophisticated, rich investors to speculate or invest in these lightly regulated investment pools. Of course, the problem with the lack of regulation is that the hedge fund promoters are able to sell Ponzi schemes (as Bayou Investors appears to have been) and blue sky along with legitimate investments and speculations and there is no government agency to protect these investors.
Well, these people knew they could be defrauded, but expected that they might be able to bail before everything went bad -- now, with this decision, Judge Hardin has said that everyone who played is still on the hook at least to the extent of the value of their investments for any debts that were incurred during the course of the the fund, even if they cashed out. The Wall Street Journal has an article (subscription only) that discusses this decision. (The decision itself is not currently on the district court's website or on the site of the trustee.)
It should be interesting to see what the reaction is from the Masters of the Universe when they are reminded of one more downside to having unregulated investment and fraud opportunities.