MIAMI – A portion of a $550 million dollar lawsuit related to a Venezuelan oil company’s ponzi scheme against Latin American and Spanish mobile telephone payments provider Movilway has been dismissed by a Federal court in Connecticut. In February, John J. Carney, the court-appointed receiver responsible for unwinding Francisco "Pancho" Illarramendi's Michael Kenwood and Highview Point hedge funds -- the asset management companies at the center of an alleged $500 million ponzi scheme that was responsible for Venezuelan state oil company Petroleos de Venezuela (PDVSA)'s pension funds in the US -- had filed 6 lawsuits in US Federal Court in Connecticut seeking to recover almost $550 million dollars in what it described as bribes, kickbacks and ill-gotten gains from a host of individuals and companies.
Earlier this month, in one lawsuit against Juan S. Montes, a former PDVSA pension fund manager, and Movilway, a subsidiary of Celistics Group that provides prepaid mobile phone services and banking applications around the world, the Federal Court in Connecticut quietly dismissed Movilway as a defendant. According to the co-founder of Movilway, which along with its parent Celistics, had revenues of $1.2 billion last year, the company returned the $5,080,636 that Carney sought to recover from the company.
“We have been trying to return this money since January of 2011,” Celistics chairman Moris Baracha told the Latin American Herald Tribune. “It has been held in an escrow account, waiting for the Receiver, after our compliance department at Movilway rejected it.”
According to Beracha, the money was meant to be an investment in his Spanish company Movilway on behalf of Juan Montes, but was incorrectly sent from one of Francisco Illarramendi’s hedge funds in July 2011. Under Spanish law, investments must come from the investor, not a third party, and so the funds were rejected, Beracha said. The Latin American Herald Tribune has seen bank account statements confirming that the amount of a little over $5 million was set aside by Movilway in a special account in 2011.
“The Receiver finally agreed to accept the return of the funds in March,” said Beracha, noting that the Receiver had probably spent $26 million in legal fees so far and that Movilway, which is now removed from the lawsuits, had been trying to return the money for over a year. A “Notice of Voluntary Dismissal with Prejudice” was filed in the Federal Court in Connecticut on July 3, and an amended complaint against Juan S. Montes was filed on July 11. In the section of the brief that discusses Movilway, the Amended Complaint now reads ”This payment to Movilway is not included among the Transfers that the Receiver is seeking to avoid in this Action.” The Amended Complaint is now seeking $31 million from Montes alone (The Full Text of the Amended Complaint is Below).
According to the suit, until August 2010, Montes was the corporate manager of finance, investments, and property insurance at Venezuelan state oil company PDVSA and its pension funds, as well as a member of PDVSA’s investment committee and was responsible for directing the investments of PDVSA's pension funds.
The suit alleges that Illarramendi bribed Montes to execute PDVSA trades with him, paying him atleast $35,744,651 for the 5 trades analyzed in the lawsuit (see below).
Although Movilway is off the hook, in another suit, the receiver is seeking $172 million from Beracha and his other companies 4A Star Corp, Bradleyville Ltd, Brave Spirit Ltd, Dobson Management Corp, Eastcoast Consultant Corp, Fractal Fund Management Ltd, Fractal L Holding Ltd, Fractal P Holding Ltd, Hermitage Consultants Inc, La Signoria Asests Corp, NetValue Strategy SA, Northwestern International, Rowberrow Trading Corp and Sunny Services Corp.
According to his resume, Beracha serves as the head of Fractal Fund Management Group, an investment firm; and Celistics. "Celistics Holdings continues to expand and recently experienced $1.2 billion in growth over a two-year period, " his resume lists. Fractal is listed in the list of investors claiming against Illarramendi entities Michael Kenwood and Highview Point for a total $76 million. Although Beracha was a director of Fractal Fund Management Group when it was created, he is only listed as a shareholder and investor in the company now.
“I am a victim of this thing,” says Beracha. “I and my companies have lost over $100 million.”
The Ponzi
Illarramendi's whole Ponzi scheme unravelled in January 2011, when the SEC charged him with engaging in a multi-year Ponzi scheme involving hundreds of millions of dollars. On March 7, 2011, Illarramendi pleaded guilty to two counts of wire fraud, one count of securities fraud, one count of investment advisor fraud, and one count of conspiracy to obstruct justice, to obstruct an official proceeding and to defraud the SEC, for which he is still awaiting sentencing.
“The U.S. Attorney’s Office, FBI and our Connecticut Securities, Commodities and Investor Fraud Task Force are committed to the aggressive investigation and prosecution of individuals who attempt to obstruct the SEC and its critically important mission of protecting investors and the integrity of American capital markets,” said U.S. Attorney Fein, who brought the charges.
According to court documents and statements made in court, Francisco Illarramendi of New Canaan, Connecticut acted as an investment adviser to hedge funds he co-owned. In approximately 2005, one hedge fund he advised lost millions of dollars and rather than disclose to his investors the truth about the losses incurred, Illarramendi decided to hide the losses by engaging in a long-running scheme to defraud and mislead his investors, creditors and the SEC to prevent the truth about the losses from being discovered.
"Based upon my review of documents and the testimony and admissions of Illarramendi, it is apparent that Illarramendi began the Fraudulent Scheme at least as early as October 2005 when he caused losses from the purchase and sale of a Credit Lyonnais bond with a nominal value of $50 million," forensic accountant Matthew Greenblatt explained to the court.
"In approximately mid-October 2005, I was in Venezuela to enter into supposedly a transaction to purchase a credit linked note from a Venezuelan financial institution through the arbitrage that I have described in my testimony in answering to Mr. Loewenson's questions," said Illarramendi during his guilty plea hearing. "And as a result of that, because of a number of issues, the bank that was purchasing the note from us backed out of the transaction, and because of market events that resulted in us, or me, having to sell the security at a much lower price than I had intended initially, and a loss being effectively incurred."
"Despite the fact that the Calyon Bond transaction resulted in a loss, HVP Partners transferred cash to each investor, other than HVP Offshore, in amounts greater than each investor’s initial investment," said Greenblatt. "For example, Lopez, and his sister Carolina Lopez, received approximately $2.55 million for their $2.5 million investment. Because Illarramendi distributed positive returns to the other investors, HVP Offshore only received approximately $14.1 million in cash and bonds for its original investment of approximately $18.8 million. Although only $14.1 million in value was received by HVP Offshore, its books and records were falsified to reflect the receipt of approximately $19.3 million of value from the investment. The difference between the $19.3 million falsely recorded and the $14.1 million in value actually received constituted a cash shortfall of approximately $5.2 million absorbed by HVP Offshore, which Illarramendi described to the Court as the beginning of the “hole” that his Fraudulent Scheme concealed."
Illarramendi then sought to make up the losses by engaging in options trading, but only made the situation worse. "By the end of August 2006, the hole stood at over $33 million, more than one third of the $95 million net asset value of the HVP Funds," says Greenblatt.
Under cross-examination in court when he entered his guilty plea last year, Illarramendi agreed that the loss could be over $300 million now.
- "Q. You've referred to this as the hole in your plea allocution?
- A. Yes, I believe so.
- Q. And the hole could, in your estimation, be in excess of $300 million?
- A. I believe so, yes."
But this month, the receiver filed a list of claimants (see below) totalling $2.2 billion, with a list of possible assets of only $729 million -- which includes the $550 million they are trying to recover in these 6 suits. The actual amount the receiver lists as "Potential Litigation Claims" is $658 million, meaning there may be atleast another $110 million in suits potentially unfiled so far.
To cover up the money gaps, Illarramendi engaged with others to create fraudulent documents, including a fictitious asset verification letter falsely representing that one of the hedge funds, the Short Term Liquidity Fund had at least $275 million in credits as a result of outstanding loans, when Illarramendi and others knew it had nothing.
A Venezuelan "fixer", Juan Carlos Horna Napolitano, was brought in for $3 million to find help paper over the gap and in late 2010, he persuaded Venezuelan accountant Juan Carlos Guillen Zerpa to prepare an asset verification letter that would falsely prove that the funds had made outstanding loans to Venezuelan companies. Guillen, a resident and citizen of Venezuela, was the managing partner of the local Venezuela affiliate of BDO, the world’s fifth-largest accounting network. Horna "and others" then worked to create a fraudulent list of loans and to incorporate this list into the asset verification letter to be signed by Guillen.
In January 2011, Guillen executed the false asset verification letter and sent it by e-mail to Illarramendi.
Guillen and Horna then learned that the false asset verification letter had been given to the U.S. Securities and Exchange Commission (SEC) to try and justify the missing money, and that the SEC saw through it, and initiated a civil action against Illarramendi and others (SEC v. Illarramendi, et al., 3:11-CV-00078).
Sticking to their story as the SEC closed in, Guillen, Illarramendi, Horna and others then had to create more fraudulent documentation to try to support the false information contained in the letter. Guillen even participated in a telephone call with representatives of the SEC in January 2011 in which he intentionally misrepresented that the assertions in the asset verification letter about the existence of the hedge funds’ assets were true.
Guillen expected to receive approximately $1 million for his willingness to sign the false asset verification letter. Horna maintained control of a Florida bank account in the name of Jeislo Real Estate Investments, LLC. Illarramendi had Beracha send two transfers of funds in the total amount of $1.25 million into this bank account. As partial payment for Guillen’s services in this conspiracy, Horna transferred $250,000 to a third party for the benefit of Guillen.
In a letter to the Court in accountant Guillen's trial, David E. Bergers, Regional Director of the SEC’s Boston Regional Office stated, “...the Defendant’s conduct delayed the Commission staff’s detection of a very serious financial fraud. It also resulted in the Commission staff expending additional government resources to uncover the fraud via other methods. We consider this kind of misconduct, especially by industry professionals such as the Defendant, to be particularly damaging to investors, to our capital markets and to the Commission’s investigative mission.”
The charade didn't last long, especially after Illarramendi admitted the fraud, turned State's evidence and began working with the SEC, including recording his co-conspirators for the FBI. Guillen and Horna were arrested by FBI special agents on March 3, 2011, in Florida. On March 7, 2011, Illarramendi pleaded guilty to two counts of wire fraud, one count of securities fraud, one count of investment advisor fraud, and one count of conspiracy to obstruct justice, to obstruct an official proceeding and to defraud the SEC. On May 4, 2011, Guillen pleaded guilty to one count of conspiracy to obstruct an official proceeding of the U.S. Securities and Exchange Commission. Horna pleaded guilty to the same charge on May 19, 2011.
Venezuelan accountant Juan Carlos Guillen Zerpa was sentenced to 14 months imprisonment followed by two years supervised release for his role in the conspiracy to obstruct the Commission’s investigation by US District Judge Stefan R. Underhill in Bridgeport, Connecticut on December 14, 2011. He was also ordered to pay a $10,000 fine and to forfeit the $315,000 he received.
Florida resident Juan Carlos Horna Napolitano was also sentenced by Judge Underhill to 14 months imprisonment, followed by two years supervised release, for his role in conspiring to obstruct a Commission investigation relating to Illarramendi. Horna was also ordered to forfeit the $935,000 he received.
Illarramendi -- who could face 70 years -- awaits sentencing.
Copies of the Lawsuits with Exhibits Filed by the Receiver
PDVSA Ponzi Receiver Suit for $31 Million Against PDVSA Manager JUAN S. MONTES, a.k.a. “BLACK”
PDVSA Ponzi Receiver Suit for $300 Million Against FRANCISCO ILLARRAMENDI, MARIA JOSEPHINA GONZALEZ-MIRANDA, ADELA M. ILLARRAMENDI
PDVSA Ponzi Receiver Suit for $171.7 Million Against Venezuelan Financier MORIS BERACHA; 4A STAR CORP.;BRADLEYVILLE LTD.; BRAVE SPIRIT LTD.;DOBSON MANAGEMENT CORP.; EASTCOAST CONSULTANT CORP.; FRACTALFUND MANAGEMENT LTD.; FRACTALFACTORING FUND; FRACTAL L HOLDINGLTD.; FRACTAL P. HOLDING LTD.;FRACTAL FACTORING II; HERMITAGECONSULTANTS INC.; LA SIGNORIA ASSETSCORP.; NETVALUE STRATEGY, S.A.;NORTHWESTERN INTERNATIONAL, LTD.;ROWBERROW TRADING CORP.; and SUNNYSERVICES CORP.
PDVSA Ponzi Scheme Receiver for $29.7 Million Against Illarramendi Partners (FRANCISCO LOPEZ, CAROLINA LOPEZ PELÁEZ, CARLOS MANUEL BARRANTES ARAYA, CHRISTOPHER LUTH, and VICTOR CHONG)
PDVSA Ponzi Scheme Receiver for $7.5 Million Against Illaramendi Partner ODO HABECK, NANCY HABECK, AND OGH ADVISORS, LLC
PDVSA Ponzi Scheme Receiver for $1.686 Million Against JAVIER MARIN, HISPANIC NEWS PRESS,INC., LUIS LUGO, and MERICA CONSULTING, INC
Statement by Receiver's Forensic Accountant Matthew Greenblatt, and relevant Excerpts from the SEC Case, including Illarramendi’s testimony, Illarramendi’s criminal plea agreement, excerpts of the transcript of his plea allocution and the Stipulation of Offense Conduct executed in connection with his guilty plea, and Highview Point and Fund LLC Agreements.
PDVSA Ponzi Receiver Accounting: Assets and List of Claimants
The Latin American Herald Tribune is one of the few newspapers that has been following this fraud since the beginning:
PDVSA Ponzi Scheme's US Receiver Sues to Recover $550 Million for Venezuela2/8/2012 VenEconomy: Venezuela's PDVSA Scandal is Back -- with a Vengeance1/31/2012 Venezuelan "Fixer" Sentenced to 14 Months in PDVSA Ponzi Scheme12/15/2011 Venezuela Head of BDO Accountants Sentenced to 14 Months in PDVSA Ponzi Scheme7/3/2011 US SEC Recovers $230 Million in Venezuela's PDVSA Pension Fund Ponzi Scheme 6/4/2011 Gustavo Coronel: Venezuela's Latest Half-Billion Dollar Scandal 5/19/2011 Another Venezuelan Pleads Guilty in Venezuela's PDVSA $500 Million Ponzi5/16/2011 US SEC Charges Highview Point Partners in Venezuela's PDVSA Ponzi Scam5/6/2011 Venezuelan Accountant Pleads Guilty in PDVSA $500 Million Ponzi in USA3/9/2011 VenEconomy: Those Who Authorized Him Are to Blame3/7/2011 US Charges Venezuela PDVSA Pension Fund Manager with Running Ponzi Scheme
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