Samuel Israel, co-founder of the bankrupt hedge fund company Bayou Management, was sentenced to 20 years in prison on Monday, among the harshest sentences ever meted out in the US for white-collar crime, for his role in defrauding investors out of more than $400m.

A Federal court in the southern district of New York also ordered him to pay $300m in restitution.

Mr Israel’s sentencing came after Daniel Marino, former finance chief of the fund, was also sentenced to 20 years in prison and James Marquez, co-founder of several of Bayou’s hedge funds, was sentenced to 51 months after pleading guilty to conspiracy.

The case, which led to calls for greater regulatory scrutiny of hedge funds, was presided over by US District Judge Colleen McMahon, who has allowed Mr Israel to remain free before his June 9 surrender date.

His sentencing brings to a close the legal proceedings stemming from the hedge fund company’s collapse in 2005.

It filed for bankruptcy in May 2006, prompting several lawsuits claiming it operated a so-called “Ponzi scheme” to pay old investors with money from new investors.

Mr Israel, who suffers from health problems, faced up to 30 years in prison but the judge decided to let him serve sentences for three separate charges concurrently. He was sentenced to five years for investor adviser fraud, five years for conspiracy and 20 years for mail fraud.

Mr Israel and Mr Marino pleaded guilty in September 2005 to charges connected with a scheme to defraud investors by improper inflation of the value of Bayou’s funds. They also allegedly created a fake accounting firm which they used to audit Bayou’s annual financial statements.

The fraud at Bayou came to light when an investor, Silver Creek Capital Management, sought to withdraw $53m in August 2005. Mr Israel allegedly told Mr Marino to write a cheque, even though Bayou did not have sufficient funds.

According to Bradley Simon, a former federal prosecutor turned white-collar criminal defence lawyer, who represented Mr Marquez, the huge disparity between the latter’s sentence and the 20-year sentences handed down to the other pair, both of whom co-operated with the government, represented a clear rejection by the court of the government’s efforts to lump Mr Marquez in with the other two Bayou principals.