Baystar, Goldfarb Charged With Diverting Side-Pocket Funds

Mar 2 2011 | 10:01am ET

Hedge fund Baystar Capital Management and founder Lawrence Goldfarb were charged yesterday with using a side-pocket to divert money into unauthorized investments and into Goldfarb's own accounts.

But Goldfarb needn't worry about doing any jail time if he can keep his nose clean: The hedge fund manager struck a deferred-prosecution deal, meaning if he cooperates, pays back the full $12 million he took and doesn't break the law again, the wire fraud charges against both him and Larkspur, Calif.-based Baystar will be dropped.

Goldfarb also reached a settlement with the Securities and Exchange Commission, agreeing to pay the $12 million in restitution, as well as another $2 million in prejudgment interest and penalties. Goldfarb is also barred from associating with investment advisers or broker-dealers for the three years of the deferred prosecution agreement.

According to prosecutors, Goldfarb moved some $12 million kept in a side-pocket of his $100 million Baystar Capital II fund into unauthorized investments in a real-estate fund and record company he controlled. He also used some of the money to pay for personal entertainment expenses and charitable donations.

"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, head of the SEC's San Francisco office, said. The "limited visibility" of the side-pocket helped Goldfarb conceal his actions from investors, Fagel added.

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