St. Thomas Law Review

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Investment Manager, Sam Israel, launched the Bayou Group LLC, a hedge fund, hoping to produce large returns for high net worth investors. After months of losses, it became clear to Israel that Bayou would never garner the types of returns he had promised investors. Instead of altering strategies or closing Bayou, Israel decided to convert Bayou into a Ponzi scheme. When Ponzi schemes fail, they present unique challenges for courts, regulators, creditors, and interested parties. One choice stakeholders will have to make is whether to appoint a receiver to marshal assets and seek a recovery for defrauded investors and creditors, or whether to place the Ponzi scheme into bankruptcy and seek the appointment of a trustee. Typically, receivers are required to turn over possession to a trustee upon filing for bankruptcy. However, the United States Court of Appeals for the Second Circuit changed this rule when it decided In re Bayou Group, LLC. This Note examines when a receiver is not required to turn over possession to a bankruptcy trustee. The Introduction discusses Bayou Group. Part I of this Note discusses the challenges of Ponzi scheme bankruptcies, the appointment of a receiver, and the app ointment of a bankruptcy trustee. Part II discusses the Bayou framework. Part III discusses receivership after Bayou. Part IV discusses how Bayou creates value for bankruptcy estates and when courts are most likely to extend Bayou. This Note concludes by summarizing the importance of the Bayou decision.