Misfolded proteins in transgenic models of conformational diseases interfere with proteostasis machinery and compromise the function of many structurally and functionally unrelated metastable proteins. This collateral damage to cellular proteins has been termed 'bystander' mechanism. How a single misfolded protein overwhelms the proteostasis, and how broadly-expressed mutant proteins cause cell type-selective phenotypes in disease are open questions. We tested the gain-of-function mechanism of a R37C folding mutation in an endogenous IGF-like C.elegans protein DAF-28. DAF-28(R37C) is broadly expressed, but only causes dysfunction in one specific neuron, ASI, leading to a distinct developmental phenotype. We find that this phenotype is caused by selective disruption of normal biogenesis of an unrelated endogenous protein, DAF-7/TGF-β. The combined deficiency of DAF-28 and DAF-7 biogenesis, but not of DAF-28 alone, explains the gain-of-function phenotype-deficient pro-growth signaling by the ASI neuron. Using functional, fluorescently-tagged protein, we find that, in animals with mutant DAF-28/IGF, the wild-type DAF-7/TGF-β is mislocalized to and accumulates in the proximal axon of the ASI neuron. Activation of two different branches of the unfolded protein response can modulate both the developmental phenotype and DAF-7 mislocalization in DAF-28(R37C) animals, but appear to act through divergent mechanisms. Our finding that bystander targeting of TGF-β explains the phenotype caused by a folding mutation in an IGF-like protein suggests that, in conformational diseases, bystander misfolding may specify the distinct phenotypes caused by different folding mutations.