The hedge fund founded and until recently run by billionaire environmentalist Tom Steyer was deeply involved in an alleged Ponzi scheme that siphoned tens of millions of dollars from foreign investors, an analysis of public records shows.
Steyer, the founder and former senior managing partner of Farallon Capital Management, was listed as a top corporate officer of a Farallon fund that was named as a defendant in a 2005 lawsuit filed by those investors.
Other parties allegedly involved in the scheme have since been arrested on charges of financial fraud involving the project that allegedly provided the vehicle for the scheme.
Details of Farallon’s involvement came to light through a civil lawsuit in Texas alleging that Farallon and a number of other individuals and corporate entities were complicit in a scheme to defraud German real estate investors of $67 million.
Farallon’s status as a defendant in the case was first reported by the Washington Free Beacon earlier this week, but newly acquired court documents provide additional details about its alleged involvement.
Farallon denies any wrongdoing, and says it was only tangentially involved in the project. But allegations will likely receive attention as Steyer becomes more active in American politics. He has pledged to raise $100 million to elect environmentalist Democrats to Congress through expenditures by his political group, NextGen Climate Action.
Farallon was never found to have violated the law in connection with the scheme. Allegations against the company were dismissed on jurisdictional grounds before the court could rule on the merits of plaintiffs’ claims.
However, the lack of a definitive exoneration on the specific allegations could allow those allegations to come up in a political context as conservatives try to counter the massive amounts of money Steyer plans to pour into federal elections this year.
In the mid-1990s, according to the Texas complaint, German national Michael Vogelbacher approached hundreds of individuals to solicit equity investment for a shopping mall project near Seattle.
A number of those defendants later sued Vogelbacher and a handful of other individuals and corporations, including Farallon, for allegedly absconding with those funds.
"Vogelbacher structured the Washington Supermall Project as a multi-leveled limited partnership that provided Vogelbacher and his American partners…with virtually unlimited control over the Project, and a virtually unlimited ability to use (and ultimately take) the German investors’ monies," according to the complaint.
The plaintiffs sought $30 million in damages, less than half of what they said was invested by the plaintiffs and others who Vogelbacher had approached, but who didn’t sign on to the lawsuit.
Vogelbacher set up a subsidiary of his real estate fund, Rosche Finanz, as a general partner in the supermall project. According to plaintiffs, he "ran" the master partnership spearheading the project "both directly and through…Rosche Finanz."
The plaintiffs alleged that Vogelbacher and his partners extracted "fees" from the master partnership, drew loans from its pooled funds, and prolonged the scheme by paying investors from the pool of funds to which they had contributed, even though the project was losing money.
They dubbed this arrangement a "Ponzi scheme," whereby Vogelbacher and his partners "prop[ped] up the borrowing partnerships when they needed money to pay a ‘return’ to its investors."
In late 1996, the project was in financial trouble, and Vogelbacher and Rosche began looking to sell it. According to plaintiffs, the project’s partnership agreement required that returns from the sale be distributed to the German investors.
However, they say that all revenue from the sale—$12,560,000 paid in cash—went to Rosche and affiliated companies, and to two limited partners: Wells Fargo Foothill Capital Corp., and Farallon Capital Partners L.P.
Farallon became involved after it guaranteed a line of credit to a lender in the project. It was listed as a limited partner, but the Texas plaintiffs said it operated as a "de facto general partner" by exercising significant control over the operations of the master partnership.
That distinction was significant for the purposes of corporate liability. Under Texas law, a limited partner is not liable for a business’ debts unless it exercises control over its operations or financial decisions.
Documents filed in Texas court suggest that Farallon Capital Partners and Wells Fargo Foothill, frequently referred to in partnership documents as the LC (letters of credit) providers, did exercise such control.
The partnership needed Farallon’s approval, according to a document detailing its terms, "for any sale of the project, refinancing of the project, entering into or modifying any major lease, entering into any agreement with any partner or borrower or any affiliate thereof and with respect to any other major decision."
"The approval of [Farallon and Foothill] will be required for major decisions relating to the Project," the document said. "The structure is designed to minimize the consequences to … Farallon Capital Management Inc. … of a bankruptcy."
Farallon spokesman Steve Bruce downplayed the hedge fund’s involvement in the supermall project.
"Farallon’s role was limited to providing a passive letter of credit alongside other financial institutions in support of a transaction that was sponsored, developed and controlled by third parties," Bruce said in an emailed statement.
However, others involved in the project saw a level of involvement by Farallon exceeding its ostensible role as a limited partner.
"LC Provider’s control over WSMI elevates it to general partner status under general partnership law," wrote Rosche Finanz’s attorneys in another document filed in court.
According to the plaintiffs, Farallon "used this control … to acquire an improper preferential distribution of monies from the limited partnership."
Bruce denied any such improper conduct. "The allegations made against Farallon had no merit," he wrote in his statement.
The court dismissed the case on jurisdictional grounds. An appellate court upheld that ruling, agreeing with Farallon that it had not operated in Texas and therefore was outside of the court’s domain.
As Washington law firm K&L Gates explained, Farallon and other defendants did not have "sufficient minimum contact" with Texas entities "even though they had, among other things: (1) held a meeting in Texas but did not discuss any business relationship; (2) conducted negotiations with Texas-based entities by fax and telephone; (3) received legal opinions from Texas lawyers; and (4) conducted due diligence regarding Texas entities."
Bruce emphasized the jurisdictional issue in his statement. "The lawsuit against Farallon Capital Partners, L.P. was properly dismissed by the Texas trial court and confirmed on appeal in 2008," he wrote.
Though it was not legally operating in Texas, Farallon Capital Partners appears to have reserved itself some control over the supermall partnership’s operations. Tom Steyer, meanwhile, was in a position to direct the internal operations of Farallon Capital Partners LP, the fund that acted as limited partner.
The LP is run by Farallon Partners LLC, its general partner, which is owned by Farallon Capital Management.
Documents filed with the Securities and Exchange Commission (SEC) list Steyer as the LLC’s "senior managing member." All of the LP’s listed partners were Farallon employees and listed the hedge fund’s mailing address on SEC filings.
In the Washington supermall project, Farallon had partnered with an individual who would later be arrested on allegations of financial fraud involving a number of projects, including the Washington supermall.
Conservative political groups have sought to tie politicians and political organizations that Steyer supports to what those groups say are socially or environmentally destructive business practices.
Phil Kerpen, president of the conservative group American Commitment and a frequent Steyer critic, was unsparing in his assessment.
Steyer "learned to rip off regular middle class workers by participating in a criminal Ponzi scheme," he said in an email.
Kerpen compared his criticism of Steyer to an ongoing campaign by congressional Democrats to vilify libertarian philanthropists Charles and David Koch, and tie alleged misdeeds on their parts to groups and politicians that they support.
"Steyer is clearly the worst actor in American politics, the genuine article ‘malefactor of great wealth’ that Democrats can only pretend conservative donors are," Kerpen wrote.
Steyer’s political group, NextGen Climate, did not return a request for comment by press time.