Bayou Offer to Investors: Give Back Half By IANTHE JEANNE DUGAN June 15, 2007; Page C3 Investors in Bayou Management LLC could be made whole again -- well, half, anyway -- under a plan filed by the failed Connecticut hedge fund in bankruptcy court. Under the plan, the hedge fund would settle lawsuits it brought against more than 100 investors who got out of the fund before Bayou imploded in 2005. Bayou is proposing that those investors give back half the money they took out -- rather than the full amount that the lawsuits are seeking. "It would put everybody on equal terms," says Ross Intelisano, who is representing 20 other Bayou investors who collectively lost $20 million. "But, people who decide not to settle will at the very least pay a ton of legal fees." Several defendants bristle at the idea of returning a penny. One investor asked, "Am I supposed to give back profits from a stock, too, if it goes down after I sell?" The outcome of the case holds broad ramifications for the hedge-fund business. Some $1 trillion is invested in these lightly regulated funds for institutions and wealthy individuals. Investors often pull their money out if they sniff out problems at a fund. If they are forced to give money back after getting out, it would increase the risks of investing in hedge funds in the first place. The phenomenon has been dubbed "Hotel California" after a line in the Eagles song: "You can check out anytime you like, but you can never leave." Bayou collapsed in 2005 after two founders admitted that they lied about the $450 million they claimed to have in the fund. The founders pleaded guilty to fraud and await sentencing. Last year, Bayou filed for bankruptcy protection. Among those being sued to give back money is fund manager Sterling Stamos. In early 2005, it withdrew tens of millions of dollars from Bayou, according to people close to the matter. Trustees liquidating Bayou are attempting to reclaim more than $140 million from investors who cashed out before the fund's failure. Only $16 million of that sum is profit. An additional $126 million is the original money the investors poured into Bayou. The proposal, filed Wednesday in U.S. Bankruptcy Court in the Southern District of New York, would let defendants settle by giving back all the fictitious profits, and half of the principal they originally put in. Then, along with all the other investors, they would receive a claim in the bankruptcy case and receive their share of the pool of money.