An Order Finding Defendants In Civil Contempt has been issued by a judge in the United States District Court for the Northern District of California against defendants Lawrence R Goldfarb (Goldfarb) and Baystar Capital Management, LLC (Baystar Capital) in the proceeding entitled Securities and Exchange Commission v. Lawrence R. Goldfarb, et. al, Case No. C-11-00938-WHA.
The Order found that defendants failed to pay disgorgement in compliance with the provisions of a Final Judgment entered against them on 16 March, 2011 and furthermore failed to demonstrate that they reasonably attempted to comply with their disgorgement obligations.
Previously, on 1 March, 2011, the Commission filed a Complaint against investment advisers Goldfarb and Baystar Capital alleging that they violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 by engaging in a fraudulent scheme with respect to their funds [15 U.S.C. §§ 80b-6(1), (2)]. The Complaint also alleged that Goldfarb and Baystar Capital made material misstatements and omissions, and engaged in a fraudulent scheme, with respect to investors in a pooled investment vehicle in violation of Sections 206(4) and Rule 206(4)-8 of the Advisers Act [15 U.S.C. § 80b-6(4); 17 C.F.R. § 275.206(4)-8]. These violations were based upon allegations that defendants took USD12 million in proceeds from an investment under their management and misappropriated those proceeds for their own use, rather than distributing those proceeds to investors.
At the same time that it filed the Complaint, the Commission also filed the written Consents of Goldfarb and of Baystar Capital to the entry of a Final Judgment against them. Without admitting or denying the Complaint’s allegations, defendants agreed, among other things, to pay USD12,112,416 in disgorgement and USD1,967,371 in prejudgment interest to the court’s registry within 365 days of entry of the Final Judgment. Defendants also agreed to make four progress payments, including a USD1.025 million payment due within 180 days of entry of the Final Judgment. Defendants eventually made three progress payments totaling USD80,000 in disgorgement, but failed to make the USD1.025 million progress payment or the final payment.
In April 2012, the Commission filed an Application with the Court for an order for defendants to show cause why they should not be found in civil contempt of the Final Judgment.
In its Order dated June 20, 2012, the Court found that the defendants were in breach of the Final Judgment by failing to pay the disgorgement amounts ordered. The Court also found that defendants had failed to establish a good faith effort to fulfil their disgorgement obligations because, among other things, they used available funds for large personal expenses such as courtside seats to Golden State Warriors games, charters of aircraft for personal trips, Goldfarb’s mortgage payment and numerous personal vacations, rather than to pay disgorgement.
In the Order, the Court also approved the appointment of a receiver over defendants’ assets and reaffirmed its prior order limiting Goldfarb’s monthly spending.