Financial fugitive Sam Israel in custody

July 3, 2008 4:06:12 AM PDT
A hedge fund swindler who set off a national manhunt when he faked his suicide to avoid reporting to prison rode his scooter to a small-town police station in Massachusetts on Wednesday and turned himself in while talking to his mother on his cell phone.Authorities say Samuel Israel III showed up at the police station in Southwick at about 9:15 a.m., after hiding out for the last three weeks in his RV. The U.S. Marshals Service had been in touch with the mother for several days as the feds zeroed in on her fugitive son.

"Obviously, she probably had some kind of influence, which mothers usually do," said Frank Dawson, public information officer for the U.S. Marshals Service in Boston. "He knew they were getting close to him, so he probably did the right thing."

Appearing in federal court in Springfield on Wednesday afternoon, Israel said he needed medical attention and asked the judge that he be sent to the federal medical prison in Massachusetts where he is supposed to be serving his sentence.

But the judge denied the request and sent him back to New York to face an additional charge related to his time on the run.

"I'm afraid you're going to have to go back to New York," Judge Michael Ponsor said.

Israel didn't have a lawyer with him during his court appearance. A call to his attorney, Lawrence S. Bader, wasn't immediately returned. His mother refused comment when reached at her home in Illinois.

The surrender was the latest twist in a bizarre saga that began on June 9, when the 49-year-old Israel was to report to prison to begin serving a 20-year sentence handed down in April for his role in the collapse of Stamford, Conn.-based Bayou hedge funds.

Israel's SUV was found abandoned on a bridge over the Hudson River in suburban New York City with the words "Suicide is Painless" - the theme song for the television show "M.A.S.H." - scrawled in dust on the hood.

Authorities scoured the river for a body and quickly determined that the suicide was all a ruse - that Israel was on the run in his white recreational vehicle carrying a scooter and his belongings.

He was thought to be staying at RV parks, campgrounds or highway rest areas. The government also arrested Israel's girlfriend on charges that she helped her lover elude the government.

Israel's RV was found in nearby Granville, officials said. He had planned to surrender in Granville, but the town's part-time police department was closed, so he rode a motor scooter to nearby Southwick to turn himself in, authorities said.

Israel walked into the police station wearing a T-shirt and shorts, identified himself and said he was a fugitive wanted by the federal government, officials said.

"He was polite, very contrite and a perfect gentleman at all times," said Southwick police Officer Paul Miles.

Prosecutors said Israel and two other men scammed investors into putting $450 million into the hedge funds by announcing nonexistent profits and providing fake audits, and made millions in commissions on trades that lost money for the investors. The case broke as hedge funds came under greater scrutiny from prosecutors.

Israel's investment banking career and management of the hedge funds brought him fabulous wealth - he once rented a house from Donald Trump for $32,000 a month.

Israel was charged Wednesday with failing to surrender to serve a federal sentence. That comes on top of the conspiracy and fraud charges that led to his prison sentence, and could lead to an increased sentence of up to 10 years.

In a separate development, federal prosecutors announced Wednesday that more than $115 million is available to pay back victims of the Bayou fraud. The money includes whatever was forfeited by Israel and his co-defendants as part of their sentences, plus interest. The total loss to investors was about $300 million.

Complicating Israel's time on the run were his medical problems.

He has had nine back surgeries, wears a pacemaker and is addicted to painkillers, according to prosecutors.

His ailments - along with 2½ years of cooperating with authorities - helped him get less than the maximum 30-year sentence. Judge Colleen McMahon also granted him two months to surrender to prison after he was sentenced.