Disbarment In The Side Pocket

An attorney was disbarred by the New York Appellate Division for the First Judicial Department as a result of a felony conviction

Respondent’s conviction stems from conduct arising from his activities as the managing partner of Baystar Capital II, L.P. (Baystar), a private investment fund. Baystar primarily made short-term investments but it also invested in several illiquid, difficult-to-value investments, referred to as “side pockets.” When these investments were realized, or deemed realized, gains or losses were allocated to investors’ capital accounts.

In 2003, Baystar made an $8.4 million “side pocket” investment in Island Fund LLC. By 2006, the Island Fund side pocket investment had generated a return of more than $16 million to Baystar before deductions for expenses and taxes. Without consulting or informing the investors in Baystar, respondent used “a substantial amount” of those funds to invest in other entities, including some in which he had an economic interest. Respondent accounted for such diversions by, inter alia, creating loan notes between the other entities and the Island Fund side pocket. Further, in response to investor inquiries regarding whether Island Fund had made distributions to Baystar, respondent intentionally failed to disclose that such distributions had been made because he did not want investors to question him about his use of the funds. Additionally, respondent admitted that monthly fund updates sent to investors at his direction failed to disclose the monies remitted to Baystar by Island Fund and respondent’s use of such funds.

In March 2011, respondent entered into both a deferred prosecution agreement with the U.S. Attorney’s Office and a consent judgment with the SEC whereby he agreed to disgorge approximately $12 million and pay a civil fine of $130,000 pursuant to an agreed upon payment schedule. By decision and order of June 20, 2012, respondent was found in civil contempt for failing to comply with the terms of the consent judgment. The court found that, after making some of the agreed upon payments, respondent spent hundreds of thousands of dollars on personal indulgences, including private air travel and vacations (2012 WL 2343668, 2012 US Dist LEXIS 85628 [ND Cal 2012]). By subsequent order, the court appointed a receiver to identify and take control of respondent’s assets and income, and to sell those assets to pay down the judgment (2013 WL 4504271, 2013 US Dist LEXIS 118942 [ND Cal 2013]). Respondent’s failure to make the required payments under the judgment not only resulted in a contempt finding, but it was deemed a breach of his deferred prosecution agreement and the criminal case against him was allowed to proceed. As noted, respondent plead guilty to wire fraud in that prosecution.

He had failed to report the conviction as required. (Mike Frisch)