Larkspur Investment Manager Reaches Plea Deal

The Larkspur manager of a hedge fund has agreed to pay more than $12 million in restitution to his clients after admitting to wire fraud. Lawrence R. Goldfarb, the general manager of BayStar Capital II, L.P., agreed to a deal with the United States Attorney's Office to avoid prosecution.

The case is the result of a two-year investigation by the Federal Bureau of Investigation.

Calls to Goldfarb's office for comment were not returned.

In his position, Goldfarb had unlimited authority to make "Special Situation Investments," or “side pockets,” as long as he notified the investors about any realized gains. Goldfarb failed to disclose to most of the investors the extent of the distributions in the side pocket and how he used and invested those distributions.

“Hedge fund managers may not use side pockets to obscure their activities from investors,” Robert Kaplan, co-chief of the asset management unit of the S.E.C.’s enforcement division, told the New York Times. “Managers need to honor their obligations to investors, and investors should pay close attention to the discretion that managers wield over side-pocketed investments.”

BayStar invested $8.4 million in 2003 in Island Fund LLC, which specialized in domestic and foreign real property. Between 2004-08, Island Fund yielded approximately $16 million in distributions, $12 million of which Goldfarb reinvested in companies he owned, including LRG Capital. Some of that money was used to invest in properties throughout Marin County.

Goldfarb's LRG Racing team competed for one season in 2007 on the American Federation of Motorcyclists circuit.

Goldfarb, 52, must repay $12,112,416 and will be barred from "association with any broker, dealer, investment advisor, municipal securities dealer, municipal advisor, transfer agent or nationally recognized statistical organization" for three years. Goldfarb has also agreed to a settlement with the SEC on a related complaint.

Goldfarb was elected in February to the Easter Seals Board of Directors.