Connecticut Hedge Fund Adviser Sentenced to 13 Years in Federal Prison for Running Massive Ponzi Scheme
FRANCISCO ILLARRAMENDI, 45, formerly of New Canaan, was sentenced today by U.S. District Judge Stefan R. Underhill in Bridgeport to 156 months of imprisonment, followed by three years of supervised release, for orchestrating a Ponzi scheme that defrauded investors and creditors of hedge funds he managed out of hundreds of millions of dollars, and for obstructing the ensuing investigation of his conduct.
“For more than five years, Francisco Illarramendi’s severely misguided attempt to conceal an initial loss of $5 million ballooned into an elaborate fraud scheme that caused investors and creditors to lose hundreds of millions of dollars,” stated First Assistant U.S. Attorney Michael J. Gustafson. “Through it all, he still managed to live well, receiving more than $20 million in personal benefits. I want to thank our partners at the FBI and SEC for unravelling this complex scheme, and acknowledge the efforts of the court-appointed receiver who has recovered more than $300 million that will be distributed to the victims.”
“Mr. Illarramendi violated his fiduciary duties by swindling millions from investors,” stated Patricia M. Ferrick, Special Agent in Charge of the New Haven Division of the Federal Bureau of Investigation. “This case sends a clear message that no one is above the law, least of all those in the securities industry.”
On March 7, 2011, ILLARRAMENDI pleaded guilty to two counts of wire fraud, one count of securities fraud, one count of investment advisor fraud, and one count of conspiracy to obstruct justice, to obstruct an official proceeding and to defraud the U.S. Securities and Exchange Commission (SEC).
According to court documents and statements made in court, in 2005, ILLARRAMENDI founded and became a partner in Highview Point Partners (“HVP”) and began acting as an investment adviser to certain hedge funds. HVP was registered with the SEC as an investment advisor and eventually relocated from New York City to Stamford. In 2006, ILLARRAMENDI founded, and became a partner in, Michael Kenwood (“MK”), which was also located in Stamford, but was not registered with the SEC. In late 2005, one hedge fund he advised lost approximately $5 million of the money he was charged with investing. Rather than disclose to his investors the truth about the losses incurred, ILLARRAMENDI concealed this information by engaging in a scheme to defraud and mislead his investors and creditors. As a result of the scheme, the hedge funds and related entities managed and advised by ILLARRAMENDI had outstanding liabilities that greatly exceed the true value of their assets, causing the funds’ investors, creditors and service providers to lose more than $700 million.
As part of the scheme to defraud investors, creditors and, ultimately, the SEC, ILLARRAMENDI created fraudulent documents, including a bogus debt instrument and a phony letter purporting to have been issued by an investment bank, as well as a fictitious asset verification letter falsely representing that one of the hedge funds, the Short Term Liquidity Fund (“STLF”), had at least $275 million in credits as a result of outstanding loans, when ILLARRAMENDI and others knew it did not have any such credits. In addition, ILLARRAMENDI misled investors, creditors and the SEC about the true performance of the funds, the assets under management by the funds and the transactions being conducted by the funds and related entities. At times, ILLARRAMENDI used money provided by new investors to the funds to pay out the returns he promised to earlier investors, made false representations to his investors and creditors in an effort to obtain new investments from them and to prevent them from seeking to liquidate their investments, improperly commingled the investments in each individual hedge fund with investments in the other hedge funds, and engaged in transactions that were not in the best interests of the funds.
In order to keep his fraud hidden, and to secure an investment of approximately $100 million, ILLARRAMENDI paid $3.4 million in bribes to two officials of the Venezuelan state-owned oil company, Petroleos de Venezuela, S.A. (“PDVSA”). ILLARRAMENDI also paid a Venezuelan accountant, Juan Carlos Guillen Zerpa, and a purported Florida businessman, Juan Carlos Horna Napolitano, $1.25 million to assist him in the creation of the fictitious asset verification letter that falsely represented that STLF had at least $275 million in credits as a result of outstanding loans. ILLARRAMENDI used the letter in an attempt to mislead and deceive the SEC regarding whether there was sufficient capital and credit to protect the investors of STLF.
ILLARRMENDI personally obtained more than $20 million during the course of the scheme, and used approximately $5 million of the funds to construct a home in New Canaan.
On January 14, 2011, the SEC filed a civil action seeking, among other things, to enjoin ILLARRAMENDI and MK-related entities from violating the federal securities laws and to submit an accounting of investor funds. Subsequent to the filing of the SEC civil action, U.S. District Judge Janet Bond Arterton appointed, and sought input from, business advisers and a court-appointed receiver to ascertain the assets and liabilities of the hedge funds affiliated with MK, among other tasks.
To date, the court-appointed receiver has recovered more than $300 million of the funds that were lost, including the vast majority of the bribe payments. The receiver also has sold ILLARRAMENDI’s New Canaan residence for approximately $3 million. Judge Underhill will issue a restitution order after further court proceedings.
ILLARRAMENDI has been detained since January 25, 2013, after his bond was revoked, in part because he had failed to disclose to the Court that he had received and spent a Connecticut state tax refund of more than $630,000 while he was awaiting sentencing.
Guillen and Horna both pleaded guilty to conspiring to obstruct an SEC proceeding, received prison terms of 14 months and forfeited the $1.25 million they received from ILLARRAMENDI.
This matter was investigated by the Federal Bureau of Investigation with the assistance of the U.S. Securities and Exchange Commission, Boston Regional Office, and Internal Revenue Service—Criminal Investigation Division.
The case was prosecuted by Senior Litigation Counsel Richard J. Schechter and Assistant U.S. Attorney Paul A. Murphy, with the assistance of the U.S. Attorney’s Office for the District of Massachusetts.
Citizens are encouraged to report any financial fraud schemes by calling, toll free, 855-236-9740, or by sending an e-mail to firstname.lastname@example.org.