SEC Sues Hedge Fund Manager for $12 Million

SAN FRANCISCO (CN) - A Bay Area hedge fund manager diverted more than $12 million to himself and companies he controlled, instead of returning it to investors, the SEC says. It sued Lawrence Goldfarb and his company Baystar Capital Management, in Federal Court.

Goldfarb, 52, of San Anselmo, "since 2001 has served as a managing manager of Baystar Capital Management, LLC, the investment adviser to a private investment fund, Baystar Capital II, L.P.," the SEC says in its complaint. "Goldfarb also ran LRG Capital, LLC, which promotes itself as a global investment, banking, and advisory boutique. In testimony, Goldfarb asserted his Fifth Amendment rights and refused to answer the Commission staff's questions about his management of Baystar Capital II, L.P."

The SEC claims that since at least 2006, Goldfarb and Baystar "have been misusing the proceeds from one of their fund's highly profitable 'side pocket' investments. Rather than return to investors more than $12 million in proceeds that belonged to the fund, Goldfarb and BCM instead secretly diverted the cash to other entities Goldfarb owned and controlled. Ultimately, they diverted approximately $6 million to a separate real estate fund, $2 million to a San Francisco record company, and another $3 million to various other private companies. None of these transactions were authorized by the fund's offering documents. Goldfarb also deposited proceeds from the side pocket investment into the bank account of one his related entities, which he used to pay for unauthorized personal expenses, including entertainment and charitable donations.

"For more than four years now, investors repeatedly have asked Goldfarb and BCM about the status of their investment and when they will be repaid. Goldfarb and BCM, however, concealed their fraud by distributing to investors false and misleading account statements and written updates, all of which failed to disclose the significant profitability of the original investment and the misuse of the proceeds. As of the date of this complaint, Goldfarb and BCM still have failed to repay investors the money they are owed.

"The Commission seeks an order enjoining Goldfarb and BCM from future violations of the securities laws, requiring them to disgorge ill-gotten gains with prejudgment interest, and requiring Goldfarb to pay a civil monetary penalty."

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