Mini-Madoff Pleads Guilty in Ponzi Case

(March 9, 2011) — A Connecticut hedge fund executive has pleaded guilty in a massive Ponzi scheme to five criminal counts including securities fraud, wire fraud and conspiracy to obstruct justice and defraud the US Securities and Exchange Commission.

The mini-Madoff’s biggest investor in the $540 million hedge fund: an unnamed foreign company pension fund, which contributed 90% of the money in his funds. Other investors also were based offshore.

According to the lawsuit released by the Securities and Exchange Commission (SEC), Francisco Illarramendi of New Canaan, who operated Stamford-based Michael Kenwood Capital Management, is guilty 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.

“In December 2010 and January 2011, during the course of the Commission’s investigation in this matter, Illarramendi attempted to hide the missing assets of the Short Term Liquidity Fund by providing the Commission staff with a false letter from an accountant in Venezuela, purporting to verify the existence of at least $275 million in assets held there by the Short Term Liquidity Fund,” the lawsuit stated.

Federal prosecutors said the hedge fund manager orchestrated the illegal scheme from about 2006 up until last month. In January,  the SEC sued Illarramendi and his Michael Kenwood Group for allegedly misappropriating $53 million in investor assets, accusing Illarramendi of misleading investors about the value of his hedge funds.

“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.

Last year, partly response to the $50 billion Ponzi scheme carried out by the former money manager Madoff, the SEC issued new proposals for hedge fund registration that would implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC also proposed amendments to rules that would require disclosure of greater information by investment advisers and the private funds they manage, requiring information about assets, types of investors in their funds, and the services provided by the managers. Advisers will be forced to provide details about their employees, potential conflicts of interest, and advisory activities. To guard against such ponzi abuses, the SEC proposal requires fund managers to identify their auditors, prime brokers, custodians and administers, while forcing hedge-fund and private-equity managers to register and open their books to surprise examinations by the SEC.