Sullivan County Hedge Fund PresidentPleads Guilty To Securities Fraud

Preet Bharara, the United States Attorney for the Southern District of New York, announced today that LLOYD BARRIGER, former president and principal shareholder of the Gaffken & Barriger Fund LLC (the “Fund”), which was a hedge fund based in Monticello, New York, pled guilty today in White Plains federal court to a four-count Superseding Indictment charging him with securities fraud, conspiracy to commit securities fraud, mail fraud, and conspiracy to commit mail fraud in connection with a $12.6 million investment fraud scheme.

Manhattan U.S. Attorney Preet Bharara said: “Once again, belief in hedge funds by hopeful investors proved to be sadly misplaced. In this case, the perpetrator was not in a sleek Manhattan building but rather in Sullivan County. Mr. Barriger's guilty plea brings to an end his fraud. We hope that all our cases big and small exposing frauds in hedge funds will convince other fund operators to adhere to the duties of trust and honesty that they owe their investors.”

According to the Superseding Indictment filed in White Plains federal court:

From July 2006 through March 2008, when he froze the Fund, BARRIGER solicited approximately $12.6 million dollars from over 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 percent 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. The Preferred Return was supposed to be funded by the Fund’s net income and thus subject to the Fund’s actual performance. However, BARRIGER knew that the Fund’s actual performance did not justify these performance claims.

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 any 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 in the Fund’s loan portfolio spiked to over approximately 25% in July 2007 and increased to approximately 34% 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% and that there was a total reduction in investors’ capital accounts from $25,538,530 to $15,003,208.

BARRIGER, 57, of Damascus, Pennsylvania, faces a maximum sentence of 65 years in prison. The Government notified BARRIGER in the Superseding Indictment that it would seek to forfeit at least $12.6 million from him, representing the proceeds of his charged crimes. BARRIGER is scheduled to be sentenced by U.S. District Court Judge Cathy Seibel on November 15, 2013.

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 Attorneys Jeffrey Alberts and John P. Collins, Jr. are in charge of the prosecution.

U.S. v. Barriger, Lloyd S1 Indictment