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Update: Cops Nab Fugitive Hedge Fund Manager

A hedge fund swindler who set off a national manhunt when he faked his suicide to avoid reporting to prison surrendered Wednesday to small-town police in Massachusetts after three weeks in which authorities suspected he was hiding out in RV parks and highway rest areas. Authorities say his own mother helped broker the surrender.

Samuel Israel III, 48, walked into the police station in Southwick, Mass., at about 9:15 a.m. wearing a colored T-shirt and shorts, identified himself and said he was a fugitive wanted by the federal government, officials said.

Sam Israel WANTED poster, Captured
CNBC
Sam Israel WANTED poster, Captured

Israel was expected to be taken to the federal courthouse in Springfield, Mass., where he would be arraigned at 3 pm New York time, CNBC learned.

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

Israel disappeared June 9 just hours before he was to report to prison to begin serving a 20-year sentence handed down in April for his role in the collapse of the 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 "MASH" television show, scrawled in dust on the hood.

Prosecutors said he and two other men scammed investors into putting $450 million into the funds by announcing nonexistent profits and providing fake audits, and made millions in commissions on trades that lost money for the investors. The collapse of the funds prompted calls for stricter oversight.

Frank Dawson, public information officer for the U.S. Marshals Service in Boston, said Israel was talking to his mother on his cell phone when he surrendered. He said the marshals' service had been in contact for several days with Israel's mother in Illinois and as a result, the surrender was "more or less expected."

"Obviously, she probably had some kind of influence, which mothers usually do," Dawson said. "He knew they were getting close to him, so he probably did the right thing."

Officials said the recreational vehicle in which Israel fled was found in nearby Granville, Mass. Israel had planned to surrender in Granville but the town's part-time police department was closed, so he rode a motor scooter to Southwick to turn himself in, they said.

Israel was expected to appear in federal court in Springfield, Mass., later Wednesday. A call to his lawyer, Lawrence S. Bader, wasn't immediately returned.

Almost as soon as Israel's SUV was found, its key in the ignition, authorities suspected he had faked his disappearance. No body was found beneath the 150-foot-high bridge.

Officials said Israel fled in the RV with a scooter and other belongings. He was thought to be staying at RV parks, campgrounds or highway rest areas.

His girlfriend, Debra Ryan of Armonk, was arrested 10 days after his disappearance and charged with aiding and abetting his escape.

Ryan told authorities that on the day Israel was to surrender, she drove her car and he drove the RV to a rest area. Israel parked the RV there, and the two drove back to their home.

After Israel stopped on Bear Mountain Bridge, near West Point about 40 miles north of New York City, surveillance video showed a second car slowly pass his SUV and then stop.

That could explain how he got from the bridge to the rest area, but authorities have never confirmed reports that the driver of the second car had been questioned.

Ryan could face as many as 10 years in prison if convicted in the scheme to help Israel flee.

According to Ross Intelisano, a partner at Rich & Intelisano, a New York law firm that represented 20 investors defrauded in the Bayou scandal, "They were very confident that the government was going to find Israel, and now they are relieved and really looking forward to him serving a very, very long jail sentence."

Intelisano's clients lost $25 million in the scandal, after Israel gained their trust by showing them records of false returns. The government will compensate the clients about 50 cents for each dollar they lost, he said.

Intelisano still isn't sure why Israel turned himself in.

Southwick, where Israel turned himself in, is near the Connecticut line about 100 miles southwest of Boston. It is also about 95 miles away from the federal prison in Ayer, Mass., where Israel was to report.

Already facing a length prison term for conspiracy and fraud, Israel was likely to be charged with failing to surrender to serve a federal sentence, authorities said.

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.

- AP contributed to this report.