U.S. SECURITIES AND EXCHANGE COMMISSION
Securities and Exchange Commission v. Francisco Illarramendi, Highview Point Partners, LLC and Michael Kenwood Capital Management, LLC, as Defendants, and Highview Point Master Fund, Ltd., Highview Point Offshore, Ltd., Highview Point LP, Michael Kenwood Asset Management, LLC, Michael Kenwood Energy and Infrastructure LLC, and MKEI Solar, LP, as Relief Defendants, Civil Action No. 3:11cv00078 (D. Conn., January 14, 2011)
SEC CHARGES CONNECTICUT-BASED HEDGE FUND MANAGER IN PONZI SCHEME
On May 10, 2011, the Securities and Exchange Commission charged Highview Point Partners, LLC, a Connecticut-based investment adviser, with engaging in a multi-year Ponzi scheme involving hundreds of millions of dollars. Highview was added as a defendant to a case the SEC previously filed in January 2011, and three hedge funds managed by Highview were named as relief defendants because, according to the SEC’s charges, they are in possession of funds tainted by the Ponzi scheme. After a hearing, the Honorable Janet Bond Arterton, U.S. District Judge for the District of Connecticut, entered a consented-to order on May 13, 2011 temporarily freezing the assets of Highview and the three hedge funds it advises. A hearing on the SEC’s motion for a preliminary injunction is set for May 23, 2011.
The SEC previously charged Francisco Illarramendi and his unregistered investment advisory firm MK Capital Management LLC on January 14, 2011, and obtained an asset freeze against them, alleging that they had misappropriated at least $53 million in investor assets. The SEC subsequently amended that complaint on March 7, 2011, to allege that Illarramendi and MK Capital Management 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. Since the filing of the original complaint on January 14, 2011, Judge Arterton entered an order on January 28, 2011, freezing the assets of Illarramendi, MK Capital Management and several affiliated entities. On February 3, 2011, Judge Arterton appointed John J. Carney of Baker Hostetler LLP as the receiver in the case.
On May 10, 2011, the SEC filed a second amended complaint adding Highview as a defendant, and charging that Illarramendi conducted his alleged fraud while he was a partial owner of Highview, a Commission-registered investment adviser, and that he used the two advisory firms (Highview and MK Capital Management) in tandem to conduct the scheme. In particular, the second amended complaint alleges, among other things, that Highview Point Partners, acting through Illarramendi, misappropriated money from the three hedge funds it advised: Highview Point Master Fund, Ltd., Highview Point Offshore, Ltd., and Highview Point LP. The second amended complaint alleges that Illarramendi hid the misappropriation in the Highview hedge funds by misappropriating money from different hedge funds managed by MK Capital Management. According to the second amended complaint, this acted as a fraud on both sets of clients, in that Illarramendi used money from one set of investors to repay earlier investors.
The SEC’s second amended complaint charges Illarramendi, Highview Point Partners, LLC, 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, and also charges Highview Point Partners, LLC with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also names the following entities as relief defendants, alleging that they received investor funds to which they have no right: Highview Point Master Fund, Ltd., Highview Point Offshore, Ltd., and Highview Point LP, 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.
On March 7, 2011, Illarramendi pled guilty to several criminal counts in a parallel criminal action brought by the United States Attorney for the District of Connecticut relating to the same misconduct as well as for obstruction of justice for deliberately misleading the SEC staff during its investigation. On May 4, 2011, Juan Carlos Guillen Zerpa, a Venezuelan accountant associated with Illarramendi, pled guilty to one count of conspiracy to obstruct the SEC’s investigation for his role in creating false documents purporting to verify the existence of hedge fund assets during the SEC’s investigation.
The SEC’s investigation is ongoing. The SEC acknowledges the assistance of the U.S. Attorney’s Office for the District of Connecticut and the Federal Bureau of Investigation.