Merrill Lynch & Co. said Thursday it had invested in a money management firm that is tangled up in the high-profile collapse of Connecticut hedge fund Bayou Group LLC.
Merrill Lynch agreed to make an investment in Sterling Stamos Capital Management L.P., which manages more than $4 billion for institutions and wealthy people. Investors include Fred Wilpon, owner of the New York Mets baseball team.
Merrill's investment in Sterling Stamos dovetails with its strategy to find higher returns through alternative investments that include hedge funds. Terms of the deal were not disclosed.
Sterling Stamos began investing in Bayou in 2003 and ultimately committed about $15.75 million to a hedge fund involved in a massive Ponzi scheme, U.S. prosecutors say. The money manager redeemed most of its investment several months before Bayou shut down in 2005.
Hundreds of other investors, however, lost an estimated $250 million, court papers show.
Lawyers for Sterling Stamos say the investment company was not tipped off to the fraud. The company is fighting claims by the trustee in the Bayou bankruptcy case to return funds to the estate.
In court papers, Sterling Stamos' lawyers say the firm received a legitimate disbursement from Bayou and there is no evidence it accepted money in bad faith.
Bayou's founders have pleaded guilty to fraud.
Bayou gave investors phony financial statements and used money from new investors to pay investors who were cashing out, prosecutors say. In all, Bayou attracted about $450 million in investment in its hedge funds. About $250 million was left unpaid to hundreds of investors, court papers say.
