A California hedge fund manager agreed to pay $14 million to settle claims by the U.S. Securities and Exchange Commission that he secretly diverted cash from investors to entities he owned and controlled.
Lawrence R. Goldfarb, 52, of Larkspur, California, and his company, Baystar Capital Management LLC, also reached an agreement with federal prosecutors deferring criminal prosecution. Goldfarb admitted committing wire fraud under the accord and will repay investors the diverted funds plus interest, the SEC said in an e-mailed statement.
Goldfarb diverted more than $12 million to fund a real estate venture and a San Francisco record company, the SEC said in a complaint filed in federal court in San Francisco. He also directed investor funds to a bank account from which he paid for unauthorized personal expenses, including entertainment and charitable donations, the SEC said. None of the transactions were authorized by the fund’s offering documents, according to the complaint.
“Goldfarb betrayed the trust of his hedge fund’s investors, keeping them in the dark about their investment profits so he could use their money as his own,” Marc Fagel, director of the SEC’s San Francisco office, said in the statement.
The SEC said Goldfarb was able to conceal the fraud because investments were maintained in a so-called side pocket, an account hedge funds use to separate less-liquid investments from others. Investors had “limited visibility” into the account, the SEC said.
Goldfarb is barred from associating with any broker, dealer or investment adviser for three years and agreed to cooperate under the deferred-prosecution agreement. Federal prosecutors won’t charge him for any other conduct arising from their investigation and will dismiss a wire fraud charge against him in three years if he doesn’t violate the accord, U.S. Attorney Melinda Haag said in a court filing today.
Goldfarb and his lawyers, Richard Nelson and Steven Katz, didn’t immediately return calls seeking comment.
The case is Securities and Exchange Commission v. Goldfarb, 11-cv-938, U.S. District Court, Northern District of California (San Francisco).
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