Ponzi Scheme Accountant Pleads Guilty in Connecticut

A Venezuelan pension plan had invested $500 million – or 20% of its assets – in an unregistered investment vehicle for which the accountant provided falsified documents.

(May 8, 2011) – Another conspirator in an international Ponzi scheme that preyed upon a Venezuelan pension plan has pleaded guilty in a Connecticut courtroom.

According to Dow Jones, Juan Carlos Guillen Zerpa – the accountant for investor Francisco Illarramendi, who in March admitted to running a pyramid scheme – pleaded guilty to one count of conspiracy of obstructing the Securities and Exchange Commission (SEC) in an investigation of Michael Kenwood Group, an unregistered investment advisor based in Stamford, Connecticut. Guillen Zerpa, according to Dow Jones, has admitted to writing a letter to the SEC in which he falsely claimed that $275 million in assets existed, when, in fact, they had been misappropriated by Illarramendi.

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The fund – which was seeded by Petroleos de Venezuela (PDVSA), Venezuela’s national oil company, in the tune of $500 million – was raided of tens of millions of dollars by Illarramendi. The PDVSA has a total of $2.5 billion in assets, meaning that upward of 20% of its assets were with this one fund.

“Guillen agreed in December to prepare an asset verification letter that would falsely indicate one of Illarramendi’s funds had made outstanding loans to Venezuelan companies,” according to Dow Jones. “For this effort, he expected to be paid $1 million.”

According to the original lawsuit against the fund, Illarramendi, of New Canaan, was accused of numerous fraud counts and other charges in what prosecutors called a massive Ponzi scheme, potentially costing investors hundreds of millions of dollars. While a sentencing date has not been determined, Illarramendi faces up to 70 years in prison, compared to the 72-year-old Bernie Madoff’s 150-year prison sentence.

“Illarramendi treated his clients’ money like it was his own, diverting millions of dollars that did not belong to him,” said David P. Bergers, Director of the SEC’s Boston Regional Office, in a January statement. “He abused his position of trust with his clients and breached his responsibilities as an investment adviser.

The criminal case is U.S. v. Illarramendi, U.S. District Court, District of Connecticut. The SEC case is SEC v. Illarramendi.

To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>

A Congressional Budget Office brief suggests that valuing assets and liabilities via more reasonable accounting assumptions will provide a clearer picture of America’s pension underfunding problem.

(May 8, 2011) – A recently released Congressional Budget Office (CBO) brief suggests that American public pensions should alter the way they calculate plan liabilities, asset values, and funding ratios.

According to The Underfunding of State and Local Pension Plans, public pensions should use a fair-value method that incorporates a discount rate used on future cash flows to discern their liabilities to future workers, as opposed to the current GASB guidelines.

“For assets, the fair value is what an investor would be willing to pay for them—that is, the current market value (or an estimate when market values are unavailable); it is not the averaged, or smoothed, market values that are reported under GASB guidelines,” according to the brief. For pension liabilities, the fair value can be thought of as what a private insurance company operating in a competitive market would charge to assume responsibility for those obligations.”

Their reasoning is one often cited by those in the pension plan space. “In the case of state and local pension plans, the discount rate for future benefit payments using the fair-value approach is lower—and, therefore, the estimated present value of those payments is higher—than under the GASB approach,” the brief says, explaining why it is suggesting a change to accounting and valuation methods. “Under the fair-value approach, future cash flows are discounted at a rate that reflects their risk characteristics. Hence, for pension liabilities, the discount rate reflects the fact that the cash flows associated with accrued liabilities are fixed and carry little risk; it is very unlikely that the liabilities will not be honored.”

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Any move toward changing pension accounting would have a material impact on the overall funding levels of the public pension system, of course. “It’s widely reported to be a $1 trillion problem, but if you dig into the numbers, it’s a $2 to $3 trillion problem,” David Kelly, an actuary at Mercer Investment Consulting’s Financial Strategy Group, told aiCIO in April. “The reported liabilities are understated by using an optimistically high discount rate,” the result being a misstatement of what the plans actually owe. Kelly’s assessment is supported by another prominent pension actuary. According to Steve Alpert, Chair of the American Academy of Actuaries Pension Accounting Committee, fair-value accounting methods increase the deficit so substantially because “a general rule of thumb regarding pension accounting is that when a rate-of-return assumption drops 1% it can cause a 10% to 15% change in liabilities.”

To see aiCIO’s profile of the New York City pension system – and how pension accounting is creating a hidden liability nation-wide – click here.

To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>