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Francisco Illarramendi also was sentenced by U.S. District Judge Stefan R. Underhill in Bridgeport to three years of supervised release.
“For more than five years, Francisco Illarramendi’s 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,” said First Assistant U.S. Attorney Michael J. Gustafson. “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 unraveling 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 FBI, said white-collar criminals will be pursued.
“Mr. 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.”
On March 7, 2011, Illarramendi pleaded guilty to two counts of wire fraud, one count of securities fraud, one count of investment adviser fraud, and one count of conspiracy to obstruct justice, to obstruct an official proceeding and to defraud the U.S. Securities and Exchange Commission.
Illarramendi has been detained since Jan. 25, 2013, after his bond was revoked, in part because he had failed to disclose to the court that he had received and spent a Connecticut state tax refund of more than $630,000 while awaiting sentencing.
According to court documents and statements made in court, in 2005, Illarramendi founded and became a partner in Highview Point Partners in Stamford and began acting as an investment adviser to certain hedge funds. In 2006, Illarramendi founded and became a partner in Michael Kenwood, in Stamford.
In late 2005, one hedge fund he advised lost $5 million of the money he was charged with investing. Rather than disclose the losses, 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.
As part of the scheme to defraud investors, creditors and, ultimately, the SEC, Illarramendi created fraudulent documents falsely representing that one of the hedge funds, the Short Term Liquidity Fund, had at least $275 million in credits as a result of loans.
In addition, Illarramendi misled investors, creditors and the SEC and used money from new investors to pay out the returns he promised to earlier investors and made false representations to investors and creditors.
To keep his fraud hidden, and to secure an investment of $100 million, Illarramendi paid $3.4 million in bribes to two officials of the Venezuelan state-owned oil company, Petroleos de Venezuela.
He also paid a Venezuelan accountant, Juan Carlos Guillen Zerpa, and a Florida businessman, Juan Carlos Horna Napolitano, $1.25 million to assist him in the creation of the fictitious asset verification letter.
Illarramendi personally obtained more than $20 million during the scheme, and used $5 million of the funds to construct a home in New Canaan.
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.
To date, the court-appointed receiver has recovered more than $300 million of the funds that were lost. The receiver also has sold Illarramendi's New Canaan residence for $3 million.
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.
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