A key focus of SEC Enforcement in recent months has been
investment fund fraud and Ponzi scheme cases. Once considered difficult to
detect in the past the Commission brought few actions. Now, however, seldom a
week goes by without at least one and sometimes several investment fund fraud
actions being filed. Typically the cases follow a pattern of investors being
told of unbelievable returns from some trading scheme which is later revealed
to be a sham. Unfortunately most of their hard earned savings is gone by the
time the fraud is discovered. Frequently the cases involve Ponzi like payments
and the Commission's actions are brought in conjunction with parallel criminal
charges. Finding and prosecuting these cases is and important part of the SEC's
investor protection mission.
SEC v. Illarramendi,
Civil Action No. 3:11cv0078 (D. Conn. Filed Jan. 14, 2011) follows the familiar
pattern. The action was filed earlier this year against Francisco Illarramendi
and his controlled entity Michael Kenwood Capital Management, LLC. Mr.
Illarramendi manages several finds through this entity, including one which was
thought to have about $540 million under management. The initial action, as
discussed here, charged Mr. Illarramendi with improperly investing about $53
million of investor funds in accounts he controlled and then making
unauthorized investments. A freeze order was obtained
By the time the amended complaint was filed the
Commission had learned more. Not only had investors been defrauded but at least
for a time the defendants tried to deceive the agency. The amended complaint
claims that although it appeared one of the funds under management had $540
million in assets in there is substantially less. Portions of the funds had
been used to pay for investor redemptions. Furthermore, in December 2010 and
January 2011 as the Commission conducted its investigation Mr. Illarramendi
attempted to conceal the fact that there were missing assets by furnishing the
staff with a letter from an accountant in Venezuela. That letter supposedly
verified the existence of at least $275 million in assets held by the fund. The
assets do not exist according to the SEC. The letter is a fraud. The amended
complaint also alleges that substantial sums have been taken out of the fund as
compensation which is in reality fraudulent management fees. The amended
complaint, charges violations of Advisers Act Sections 206(1), (2) and (4).
The U.S. Attorney's Office for the District of
Connecticut unsealed parallel criminal charges at the time the Commission filed
its amended complaint. Mr. Illarramendi and others were charged with
conspiracy, wire fraud, securities fraud and conspiracy to obstruct justice.
According to Bloomberg, Mr. Illarramendi pleaded guilty to the charges. The
Commission's case is pending.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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