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A Connecticut hedge fund manager pleaded guilty in federal court Monday to multiple fraud counts and other charges in what prosecutors called a massive Ponzi scheme that could potentially cost investors hundreds of millions of dollars.
Francisco Illarramendi, 42, of New Canaan appeared in U.S. District Court in Bridgeport. He faces up to 70 years in prison, restitution to investors and forfeiture of assets. A sentencing date has not been set.
"While the precise dollar losses will not be known for some time, based on this fast-moving investigation, we believe this case represents the largest white-collar prosecution ever brought by this office," Connecticut U.S. Attorney David B. Fein said in a statement.
Messages were left Monday afternoon for Illarramendi and his New York lawyer, John Gleason.
Federal prosecutors said Illarramendi, who operated Stamford-based Michael Kenwood Capital Management, ran the illegal scheme from about 2006 up until last month. They say he defrauded investors, creditors and the federal Securities and Exchange Commission by creating fake documents to bolster bogus claims about investment funds.
One of the fraudulent documents, prosecutors said, was a fictitious asset verification letter that falsely claimed one hedge fund, the Short Term Liquidity Fund, had credits totaling $275 million, when Illarramendi and others knew the credits didn't exist. Other funds involved in the scheme included the MK Venezuela Fund and the MK Special Opportunities Fund, authorities said.
Prosecutors said Illarramendi basically did the same thing disgraced financier Bernard Madoff did: He ran a Ponzi scheme in which new investors' money was used to pay returns promised to earlier investors. The 72-year-old Madoff is serving a 150-year prison sentence for his multibillion-dollar fraud.
The SEC began looking into Illarramendi and Michael Kenwood Capital Management last year and filed a civil action against him on Jan. 14. The SEC won a court order in January freezing Illarramendi's assets after the agency alleged he used at least $53 million from clients to enrich himself.
The SEC has expanded its previous civil lawsuit against Illarramendi to include the allegations announced in the criminal investigation on Monday. The agency is seeking unspecified penalties and restitution from Illarramendi.
At his court appearance Monday, Illarramendi waived his right to indictment by a grand jury and 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 SEC. The Connecticut Post reported that he posted bail by putting up several properties as collateral; the bail amount wasn't immediately available.
Authorities on Monday also announced that two Venezuelan citizens were arrested in Florida on Thursday in connection with Illarramendi's scheme. Federal agents charged Juan Carlos Guillen Zerpa, 43, an accountant, and Juan Carlos Horna Napolitano, who lived in Pembroke Pines, Fla., with engaging in a conspiracy to obstruct justice, to obstruct an official proceeding and to defraud the SEC.
Prosecutors said Illarramendi admitted that he agreed to pay more than $3 million to Guillen and Horna for fabricating the asset verification letter and creating other false support for the $275 million in loans.
Guillen and Horna, who are both being detained, face up to 25 years in prison apiece if convicted of the charge lodged against them.
AP Business Writer Marcy Gordon in Washington, D.C., contributed to this report.