Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, March 1, 2011

California Hedge Fund Manager Settles Charges He Misappropriated Investors' Funds

The SEC today settled charges that  Lawrence R. Goldfarb, a hedge fund manager,concealed more than $12 million in investment proceeds that he owed investors in his fund.  The SEC alleges that Goldfarb and his company, Baystar Capital Management LLC (BCM), diverted the cash to other entities he controlled, ultimately funding a real estate venture and a San Francisco record company. Goldfarb also comingled investor funds in a bank account that he used to pay for unauthorized personal expenses including entertainment and charitable donations.

According to the SEC’s complaint, Goldfarb and BCM were able to carry out their fraud in part because the investment was maintained in a “side pocket” into which investors in the hedge fund – Baystar Capital II, L.P. – had limited visibility. A side pocket is a type of account that hedge funds use to separate particular investments that are typically illiquid from the remainder of the investments in the fund. Goldfarb’s side pocket investment became profitable in 2006, but he diverted the proceeds for other uses rather than paying the fund’s investors. None of his transactions were authorized by the fund’s partnership agreement or offering documents.

Without admitting or denying the SEC’s allegations, Goldfarb and BCM consented to permanent injunctions against violations of certain provisions of the federal securities laws and to pay disgorgement of $12,112,416 and prejudgment interest of $1,967,371, which will be distributed to the fund’s investors. Goldfarb also agreed to pay a $130,000 penalty, be barred from associating with any investment adviser or broker (with the right to reapply in five years), and be barred from participating in any offering of penny stock.

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