A federal judge on Thursday sentenced a 45-year-old former New Canaan resident to 13 years in prison for his role in a Ponzi scheme that saw investors defrauded out of hundreds of millions of dollars.
Francisco Illarramendi will face three years of supervised release following his imprisonment, which also defrauded the creditors of hedge funds that he managed, according to a press release issued by the office of the United States Attorney, District of Connecticut.
Francisco Illarramendi is accused of obstructing the investigation into his conduct, according to the U.S. Department of Justice.
For more than five years, his “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,” First Assistant U.S. Attorney Michael J. Gustafson said in the press release.
“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.”
Patricia M. Ferrick, Special Agent in Charge of the New Haven Division of the Federal Bureau of Investigation—who recently visited New Canaan for a “lunch with the chief” of our police department here—said in the release that Illarramendi “violated his fiduciary duties by swindling millions from investors.”
“This case sends a clear message that no one is above the law, least of all those in the securities industry.”
He had pleaded guilty in March 2011 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, the release said.
Court documents and statements he made show that in 2005, Illarramendi “founded and became a partner in Highview Point Partners 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, 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.”
The press release continues: “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.”
He created fraudulent documents, including a “bogus debt instrument and a phony letter purporting to have been issued by an investment bank,” officials said, as well as” a fictitious asset verification letter falsely representing that one of the hedge funds, the Short Term Liquidity Fund, 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.”
To keep his fraud hidden and secure an investment of about $100 million, official say, Illarramendi paid $3.4 million in bribes to two officials of the Venezuelan state-owned oil company, Petroleos de Venezuela, S.A. “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.”
He personally obtained more than $20 million during the course of the scheme, and used about $5 million of the funds to construct a home here in New Canaan, according to the DOJ.
On Jan. 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.”
A court-appointed receiver so far 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, officials say.
Illarramendi has been detained since Jan. 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.