A Venezuelan-American hedge fund manager's plea for leniency that he was "certainly not Bernie Madoff" backfired when a federal judge sentenced him to serve 13 years in federal prison. Francisco Illarramendi received the sentence from U.S. District Judge Stefan R. Underhill after previously pleading guilty to two counts of wire fraud and one count each of securities fraud, investment advisor fraud, and conspiracy to obstruct justice. While Illarramendi was initially released on bail following his guilty plea, Judge Underhill later revoked bail in January 2013 after it was discovered that Illarramendi had used a state tax refund to pay off his Mercedes-Benz car loan. Prosecutors had sought a sentence of at least 12 years.
From 2005 to 2011, Illarramendi was associated with Highview Point Partners, LLC ("Highpoint") and Michael Kenwood Capital Management, LLC ("MKCM"). Both entities were investment advisers to several hedge funds. Illarramendi made repeated false representations that one of the hedge funds, Short Term Liquidity Fund ("STLF") had at least $275 million in assets and had a history of attractive performance relative to the market. Indeed, investors were advised that Illarramendi's funds had experienced 40 straight months of profits from 2005 to 2008. Illarramendi also provided numerous fraudulent documents to investors. Illarramendi's victims included not only individuals and other hedge funds, but also a large chunk of the pension fund of Venezuela’s state-owned oil company, Petroleos de Venezuela ("PVDSA"). Losses from the scheme were pegged in the hundreds of millions of dollars when Illarramendi was arrested in 2011.
Illarramendi later admitted that he began his fraudulent scheme in 2006 in an effort to shield a multi-million dollar loss from investors. Using a series of extraordinarily complex transactions between a series of entities he controlled, Illarramendi attempted to mask these transfers as purchases and sales of various corporate bonds and debt. Illarramendi continued this shell game in 2010, and also diverted tens of millions of dollars for his own personal use - including the purchase of a $5 million private jet. Illarramendi also faced a charge for conspiracy to obstruct justice after submitting a fictitious asset verification letter purporting to affirm the existence of $275 million in assets to the Securities and Exchange Commission during a 2010 investigation.
A Happier Outcome For Investors
A development that has gone somewhat unnoticed has been the multi-year campaign by the court-appointed receiver, John J. Carney, that recently culminated in court approval of an "ultimate distribution plan" that will result in the extraordinary recovery of 92% of each investor's losses. Starting with approximately $11 million in assets after his appointment in February 2011, Carney's efforts have since spanned the globe and resulted in the expansion of the receivership to ultimately encompass 24 domestic and international entities. Carney brought dozens of actions against individuals and entities accused of aiding the scheme or wrongfully receiving scheme proceeds, and to date has recovered more than $400 million. While initially receiving more than $2.3 billion in claims, Carney and his team were able to negotiate those claims down to approximately $700 million. Approved claimants initially received a distribution representing 82% of their approved losses, with subsequent distributions ultimately bringing the total to 92%. Additionally, given the existence of additional pending litigation brought by Carney, there is the possibility that the total recovery could be even higher. The 92% recovery places Carney's efforts among the highest ever.
The Receiver's website is here.