Sullivan County Hedge Fund President Sentenced in White Plains Federal Court to More Than Five Years in Prison in $12 Million Securities Fraud
|U.S. Attorney’s Office February 27, 2014|
Preet Bharara, the United States Attorney for the Southern District of New York, announced today that Llyod Barriger, former president and principal shareholder of the Gaffken & Barriger Fund LLC (the “fund”), which was a hedge fund based in Monticello, Sullivan County, New York, was sentenced today in White Plains federal court by U.S. District Judge Cathy Seibel to serve five-and-a-half years in prison for committing securities fraud, conspiracy to commit securities fraud, mail fraud, and conspiracy to commit mail fraud in connection with a $12 million investment fraud scheme. In addition, Barriger was ordered to forfeit $12,387,494.01 and make restitution of $9,370,416.08 to his victims. He was also ordered to surrender to start serving his prison term on April 28, 2014.
U.S. Attorney Preet Bharara stated, “The trust put in Lloyd Barriger, a Sullivan County hedge fund manager, by hopeful investors proved to be sadly misplaced. Barriger took in $12 million of investments by lying to investors about the hedge fund’s performance. We hope that the sentence imposed today will serve as deterrence for other fund operators who may be tempted to lie.”
According to the superseding indictment and other documents previously filed in White Plains federal court:
From July 2006 through March 2008, when he froze the fund, Barriger solicited more than $12 million dollars from approximately 70 investors by deceiving them about the fund’s performance. During this time period, the fund invested primarily in real estate collateralized commercial mortgage loans. Barriger described the fund to prospective investors as a safe and liquid investment that paid a minimum return of eight pecent per year, which Barriger referred to as the “preferred return.” He then reported this preferred return to investors as income on periodic account statements produced by the fund. In reality, the preferred return reported to the investors greatly exceeded the funds actual performance.
Barriger tricked investors into investing their money by concealing material information from them, including that (1) the fund had incurred a loss of $600,000 in 2005; (2) the fund lacked sufficient income to support the promised eight percent preferred return; (3) the fund only continued to pay the preferred return—when it actually paid the return rather than simply credit it to investors’ accounts—by funding payments with investor capital, rather than income; (4) the fund disguised the lack of income by creating a large and growing deficit in Barriger’s capital account with the fund; (5) as a result of the failure of its borrowers to repay their loans, the fund experienced a severe liquidity crunch and could not meet a substantial amount of withdrawal requests; (6) the fund had defaulted on its $20 million line of credit with a third party lender in March 2007 and remained in default for much of the period thereafter, which entitled the lender to prohibit distributions to investors and to seize the fund’s assets; and (7) delinquencies on the fund’s loan portfolio spiked to over approximately 25 percent in July 2007 and increased to approximately 34 percent in November 2007.
In a letter dated May 30, 2008, Barriger told the investors that the fund wrote down the value of the portfolio by approximately 40 percent and that there was a total reduction in investors capital accounts from $25,538,530 to $15,003,208.
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Mr. Bharara praised the work of the Federal Bureau of Investigation and thanked the U.S. Securities and Exchange Commission for its extraordinary assistance in the investigation.
This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force, on which Mr. Bharara serves as a co-chair of the Securities and Commodities Fraud Working Group. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch and, with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.
This case is being handled by the White Plains Division. Assistant United States Attorney John P. Collins, Jr. is in charge of the prosecution.