MIAMI -- 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 a $500 million ponzi scheme that was responsible for Venezuelan state oil company Petroleos de Venezuela (PDVSA)'s pension funds in the US -- has filed 6 different lawsuits in US Federal Court in Connecticut seeking to recover almost $550 million dollars in bribes, kickbacks and ill-gotten gains from a host of individuals and companies, some of whom had not been identified as being involved until the lawsuits revealed the widening conspiracy. And the documents obtained by the Latin American Herald Tribune hint at more lawsuits and revelations to come.
In the first case, Francisco Illarramendi -- who pled guilty to the ponzi scheme last year -- and his family are being sued for over $300 million by the Receiver.
"Illarramendi owed the Receivership Entities a fiduciary duty to act in their best interest and in the best interest of the Funds that entrusted their money to him," argues Carney. "Illarramendi was, however, completely derelict in performing his duties and responsibilities. This failure makes Illarramendi liable for the full amount of the damages resulting from the Fraudulent Scheme, which must be returned to the Receiver for ultimate distribution to those who have been defrauded." The suit lists $22.8 million that directly went to Illarramendi and his wife Maria Josephina Gonzalez-Miranda, with $395,000 for his sister Adela Illarramendi.
Partners in the various asset managers that Illarramendi owned -- Highview Point and subsequently Michael Kenwood -- are also named in other suits. The lawsuit against Highview Point partners Francisco Lopez (and his sister Carolina Lopez Pelaez and her husband Carlos Manuel Barrantes Araya), partner Christopher Luth, and Chief Compliance and Financial Officer Victor Chong seeks $29,737,649.
In August 2004, Luth, Lopez and Illarramendi formed Highview Point Partners (HVP Partners) as a Delaware limited liability company, each holding a one-third ownership share. According to the LLC agreement signed by Luth, Lopez and Illarramendi, the stated purpose of HVP Partners was to act as the investment manager of an Offshore Fund.
Another suit for $7,594,093 against Odo Habeck, his wife Nancy Habeck and their joint company OGH Advisors. Habeck, who had worked with Illarramendi at Credit Suisse, became the President and CEO of Michael Kenwood Capital Management, which became another manager and shell to the funds.
Another smaller and more unusual suit is against a childhood friend of Illarramendi, Javier Marin, and his company, Hispanic News Press, Inc., and its former co-owner Luis Lugo and Merica Consulting, Inc. The relationship seems to puzzle Carney, who is suing for $1,686,000, and involves Illarramendi repeatedly bailing Marin -- who used to be an owner of cutting-edge, inside Venezuela gossip website Descifrado -- out of financial difficulties, from paying his rent to buying out his partners.
"Marin had aconstant need for money to support himself and his businesses, and repeatedly counted on his friend Illarramendi to bail him out of financial difficulties," argued Carney. "Time and again, Marin turned to Illarramendi for money. Often Marin would simply send Illarramendi emails with wire transfer instructions when he needed money, like a child to a parent. Other times, Marin would visit Illarramendi personally, at the offices of HVP Partners or the MK Group in Stamford, Connecticut to discuss the money he needed."
Away from the friends, family, partners and employees in the various Ponzi scheme ventures, Carney has filed suit against a host of co-conspirators outside of the company.
The second largest suit is for $172 million against Venezuelan banker Moris Beracha and entities associated with him.
"For nearly five years, Moris Beracha (“Beracha”) and his affiliated entities, described below, (the “Defendants”) participated in numerous, suspect transactions with Francisco Illarramendi (“Illarramendi”) and the Receivership Entities. Beracha and these affiliates received exorbitant fees, excessive and outlandish rates of interest, kickbacks and other improper payments," Carney writes.
"Beracha and his entities received this money as Beracha knowingly served as Illarramendi’s source of liquidity to perpetuate Illarramendi’s Ponzi scheme and pay debts and redemptions as they came due. Beracha’s funding came in various forms, including the loaning of money for short periods of time at annual interest rates often exceeding 80%, and the introduction to Illarramendi of investors and important Venezuelan government officials, bankers and financiers who could engage in transactions with Illarramendi. Beracha provided the money or access to money that kept Illarramendi and his scheme afloat."
Carney has also filed a suit against a former PDVSA investment manager, Juan S. Montes, that "seeks the return of bribes and other fraudulent transfers totaling $35,744,651." Montes -- who is often referred to by the codename "Black" in the exhibits -- was key to getting PDVSA investments, deals and money flowing into Illarramendi's scheme.
"It was a measure of Illarramendi’s desperation to maintain and conceal his fraud, and his fanciful belief that a financial windfall was right around the corner, that he was willing to pay exorbitant amounts in bribes and kickbacks to ensure that he was able to attract investments from and participate in transactions with PDVSA’s pension funds," Carney alleges in the complaint. "Illarramendi also made the bribe payments in order to hinder, delay or defraud his creditors as the transactions PDVSA participated in helped to keep the Ponzi scheme undetected."
According to the suit, until August 2010, Montes was the corporate manager of finance, investments, and property insurance at Venezuelan state oil company Petroleos de Venezuela, SA (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 with the aid of Beracha for the 5 trades analyzed in the lawsuit (see below). 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 $300 Million Against FRANCISCO ILLARRAMENDI, MARIA JOSEPHINA GONZALEZ-MIRANDA, ADELA M. ILLARRAMENDI
PDVSA Ponzi Receiver Suit for $35.7 Million Against PDVSA Manager JUAN S. MONTES, a.k.a. “BLACK,” and Moris Beracha Firm MOVILWAY S.L.
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:
2/8/2012 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