NEW YORK (Reuters) - A former hedge fund manager has been charged with defrauding investors of at least $12.6 million in a federal indictment on Friday, nearly two years after the fund collapsed under the weight of failed real estate loans.
Lloyd Barriger continued to promise investors an 8 percent return, even as the fund, Gaffken & Barriger, defaulted on a $20 million line of credit and held an increasingly delinquent portfolio, according to the indictment, which was unsealed on Friday.
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In addition, the U.S. Securities and Exchange Commission issued its own charges against Barriger, claiming he defrauded both investors in Gaffken & Barriger and in a second fund he managed, Campus Capital Corp. According to the SEC complaint, Barriger raised money from Campus to prop up Gaffken & Barriger without disclosing it to Campus investors.
The case represents one of the few noteworthy criminal prosecutions to grow out of the housing crisis. The Justice Department has faced criticism for moving too slowly to bring cases against top executives at financial institutions.
Federal prosecutors are seeking a minimum of $1.07 million in forfeited assets, while the SEC is demanding that Barriger return all "ill-gotten gains" and pay civil penalties.
"In the midst of the credit crisis, Barriger chose to lie about the solvency and liquidity of his fund rather than admit the somber truth of a collapsing business," said George Canellos, director of the SEC's New York Regional Office, in a statement.
"He continued to solicit new investor funds based on the same misrepresentations up until the day before the fund collapsed."
Barriger's attorney in the SEC matter, Brian Dickerson of Roetzel & Andress, said in an email that his client had no comment.
The 55-year-old surrendered to FBI agents on Friday morning and was arraigned in the afternoon in White Plains federal court. He was released on a $250,000 bond. Prosecutors say he faces at least $5 million in fines and up to 40 years in prison.
Gaffken & Barriger, based in Monticello, New York, was formed to hold securitized real estate loans and raised $20 million from investors from its inception in 1998 until its demise in 2008, including $12.6 million from 2006 to 2008 "under false pretenses," according to the court papers.
By early 2007, the fund was facing "significant liquidity problems" as its borrowers -- mostly real estate developers -- began to default more frequently, the indictment said. In March, the fund officially defaulted on a $20 million line of credit, thanks to a growing percentage of overdue loans.
None of that information was made available to investors, prosecutors alleged. But Barriger was misrepresenting the fund's performance well before the economic downturn began, according to the SEC. In 2005, the fund lost money, yet investors were never informed and account statements continued to reflect an 8 percent increase, the SEC said.
As Gaffken & Barriger careened toward catastrophe in early 2008, Barriger maintained to investors the fund weathered the subprime mortgage storm and would continue to provide a healthy return, according to the court filings.
A January 31 letter to investors announced a distribution bonus to all fund partners that signaled, in Barriger's words, "increasing confidence in the fund's future and profitability," the criminal complaint claimed.
On March 3, two days before Barriger sent a letter to investors announcing he had frozen the fund, the fund transferred $20,000 to a management firm controlled by Barriger, according to prosecutors. A day later, the management firm sent $18,000 to Barriger's personal bank account, the indictment alleged.
At the time the fund was frozen, it had a cumulative operating cash shortfall exceeding $11 million, according to the SEC.
Both the indictment and the SEC papers also make reference to an unnamed "co-conspirator" who served as the fund's vice president, but who is now deceased. That individual appears to be Andrew McKean, whose estate was named as a defendant in a civil complaint filed by investors against Barriger in 2008.
McKean committed suicide in September 2008, according to the lawsuit. The civil case was dismissed in January 2010 under an agreement between the parties.
The criminal case is U.S. v. Barriger, U.S. District Court, Southern District of New York, No. 11-cr-416.
The SEC case is SEC v. Barriger, U.S. District Court, Southern District of New York, No. 11-cv-111.
(Reporting by Joseph Ax; editing by Gerald E. McCormick, Matthew Lewis and Andre Grenon)