Washington, D.C., March 7, 2011 – The Securities and Exchange Commission today amended its complaint against a Stamford, Conn.-based investment adviser and its principal, Francisco Illarramendi, to additionally charge them with engaging in a multi-year Ponzi scheme involving hundreds of millions of dollars.
The SEC previously charged Illarramendi and his firm MK Capital Management LLC in January and obtained an asset freeze against them, alleging that they had misappropriated at least $53 million in investor assets.
In a parallel action today, the U.S. Attorney’s Office of the District of Connecticut unsealed criminal charges against Illarramendi for the same misconduct as well as for obstruction of justice for deliberately misleading the SEC staff during its investigation.
“Illarramendi knew that the SEC was onto his scheme and compounded his fraud by attempting to mislead the Commission’s staff,” said David P. Bergers, Director of the SEC’s Boston Regional Office.
The SEC alleges that Illarramendi and MK Capital Management – which is not registered with the SEC – have misappropriated investor assets and misused two hedge funds they manage for Ponzi-like activity in which they used new investor money to pay off earlier investors. During the SEC’s investigation in December 2010 and January 2011, Illarramendi attempted to hide the fact that his hedge funds were missing assets by providing the SEC staff with a false letter from an accountant in Venezuela that purported to verify the existence of approximately $275 million in assets held by one of the funds. Those assets do not exist.
According to the SEC’s amended complaint filed in U.S. District Court for the District of Connecticut, Illarramendi is the majority owner of the Michael Kenwood Group LLC – a holding company for investment adviser Michael Kenwood Capital Management LLC among other entities. Through this adviser entity, Illarramendi manages several hedge funds, including one that purportedly held up to $540 million in assets. The SEC’s complaint alleges that due to Illarramendi’s misappropriation and his Ponzi activity, the funds hold assets worth substantially less than that amount.
Since the filing of the original complaint on Jan. 14, 2011, the Honorable Janet Bond Arterton, U.S. District Judge for the District of Connecticut, entered an order on Jan. 28, 2011, freezing the assets of Illarramendi and his firm. On Feb. 3, 2011, Judge Arterton appointed John J. Carney of Baker Hostetler LLP as the receiver in the case.
The SEC’s complaint charges Illarramendi and Michael Kenwood Capital Management, LLC, with violating Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The complaint also names the following Illarramendi-controlled entities as relief defendants, alleging that they received investor funds to which they have no right: Michael Kenwood Asset Management LLC, Michael Kenwood Energy and Infrastructure LLC, and MKEI Solar LP. In addition to preliminary emergency relief, the SEC’s complaint seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest and penalties from the defendants, and disgorgement plus prejudgment interest from the relief defendants.
The SEC’s investigation is ongoing. The SEC acknowledges and appreciates the assistance of the U.S. Attorney’s Office for the District of Connecticut and the Federal Bureau of Investigation.