United States District Court, D. Connecticut
RULING ON PLAINTIFF'S MOTION FOR SUMMARY
Bond Arterton, U.S.D.J.
Securities and Exchange Commission (the "SEC" or
the "Commission") moves [Doc. # 1017] for Summary
Judgment against Defendant Francisco A. Illarramendi
("Mr. Illarramendi") on Claims for Relief Two,
Three, and Four of the Second Amended Complaint [Doc. # 190]
for violations of the antifraud provisions of the Investment
Advisers Act of 1940 ("Advisers Act") and seeks an
order enjoining him from future violations of the Advisers
Act, requiring disgorgement, and imposing a civil
penalty. For the reasons that follow, the Court
GRANTS the Commission's Motion for Summary Judgment and
imposes injunctive relief, disgorgement, and a civil penalty
as set forth below.
argues that Mr. Illarramendi's guilty plea to violation
of the same provisions of the Advisers Act before Judge
Stefan Underhill in the companion criminal case, United
States v. Illarramendi, 11-cr-41 (SRU), should
collaterally estop him from challenging liability in this
case, including the material facts presented as undisputed.
In the alternative, the SEC argues that Mr.
Illarramendi's sworn testimony in this case given in the
preliminary injunction proceedings in connection with the
asset freeze concedes the material facts necessary to
D. Conn. L. Civ. R. 56(a)2 statement ("56(a)2
Stmt."), Mr. Illarramendi denies many of the factual
allegations set forth by the SEC but neglects to point to
supporting evidence in the record, as required by Local Rule
56(a)(3). See D. Conn. L. Civ. R. 56(a)3 ("Each
denial in Plaintiffs Local Rule 56(a)2 Statement must be
followed by a specific citation to (1) the affidavit of a
witness competent to testify as to the facts at trial and/or
(2) evidence that would be admissible at trial"). The
rule specifically states that "Counsel and pro
se parties are hereby notified that failure to provide
specific citations to evidence in the record as required by
this Local Rule may result in the Court deeming certain facts
that are supported by the evidence admitted."
Defendant's failure to comply with Local Rule 56(a)3,
given his pro se status, the Court has independently
reviewed the summary judgment record to determine whether it
contains support for Mr. Illarramendi's denials, but
found only conclusory, speculative and self-serving denials
of his admissions made at his criminal plea allocution or
unparticularized references to threats and extortion not
supported by evidence. This is insufficient to defeat a motion
for summary judgment, especially where Defendant has admitted
these material facts either before this Court or in the court
of his criminal prosecution. Plaintiff "cannot create a
triable issue of fact merely by stating in an affidavit the
very proposition [he is] trying to prove." Hicks v.
Baines, 593 F.3d 159, 167 (2d Cir. 2010); see also
Jeffreys v. City of New York, 426 F.3d 549, 554 (2d Cir.
2005) (The nonmoving party "may not rely on conclusory
allegations or unsubstantiated speculation") (internal
quotation marks and citations omitted); McPherson v.
N.Y.C. Dep't of Educ, 457 F.3d 211, 215 n. 4 (2d
Cir.2006) ("[S]peculation alone is insufficient to
defeat a motion for summary judgment"); Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 256 (1986) (the
nonmovant must offer "concrete evidence from which a
reasonable juror could return a verdict in his favor.").
review of the summary judgment record, the Court has found
the following facts established, either through
Defendant's admissions before this Court, or at his
guilty plea. The Court separates these two sets of admissions
because, although it finds summary judgment would be
appropriate based solely on the admissions made in
proceedings in this case, the admissions Mr. Illarramendi
made in his criminal case provide additional and independent
grounds to find Mr. Illarramendi liable for the violations
Admissions to this Court
testimony before this Court at the hearing on the SEC's
motion seeking to freeze Defendants' assets, including
funds controlled by Highview Point Partners, Mr. Illarramendi
stated that he spent the first ten years of his career in the
securities industry at Credit Suisse, worked for a year as a
financial adviser to Petroleos de Venezuela, S.A.
("PDVSA"), and in the early 2000s moved to Highview
Point Partners and the Michael Kenwood Group, where he
managed funds including the Highview Point Master Fund.
(See Ex. H ("05/25/2011 TRO Tr.") to Mot.
for Summ. J. [Doc. # 1017-12] at 319:11-19.) While at Credit
Suisse, he developed a form of financial transaction that
enabled participants to exploit the difference between the
official Venezuelan Bolivar - U.S. Dollar exchange rate and
the unofficial rate, called the "permuta" exchange
rate. (Id. at 320:21-321:8.)
moving to the Michael Kenwood Group, Mr. Illarramendi
directed the funds under its advisement to engage in the same
kind of foreign exchange arbitrage transactions.
(Id. at 329:11-21.) He explained how the transaction
worked to his co-workers and to investors in the fund,
including the lead investor, and he solicited new investors
on the basis of representations about this transaction.
(Id. at 327:24-328:24; 335:21-336:7.)
Illarramendi testified that in October 2005, after a
counterparty backed out of part of an arbitrage transaction,
he was forced to sell an instrument at a much lower price
than anticipated, thereby incurring a $5 million loss for
Highview Point Master Fund. (Id. at 359:4-23.) He
did not disclose this loss to investors or to his partners
and principals. (Id. at 360:10-25.) Instead of
disclosing the loss, he "tried to recover the money and
. . . failed to do so, thereby . . . increasing ... the
amount of the mismanagement between assets and liabilities to
approximately $30 million." He later explained that he
tried to cover the loss "through options trading and
other transactions, and they didn't go well."
(Id. at 360:10-25; 361:20-23.) Mr. Illarramendi
stated that the $30 million "hole" was
"created by me" and that "part of [the hole]
was money that essentially was Highview Point's money and
part of which was money from other investors that
participated in transactions with us." (Id. at
361:9-14.) Mr. Illarramendi conceded that the
"hole" may have grown to as much as $300 million.
(Id. at 355:10-22.)
Illarramendi testified that he agreed with his supervisor
that they would conceal the loss and not disclose it to
investors, and that Mr. Illarramendi would try to "raise
as much money as possible to be able to make it so that the
gains from ... the additional money would eventually cover
the loss." (Id. at 364:3-25.) He explained that
"the way I tried to solve the problem was to run ... a
unified treasury function ... where the money, no matter
where it came from, was used either to invest in transactions
or to pay... investors that were lending to the pot."
(Id. at 365:23-366:3.)
Illarramendi admitted that he used a "commingling
account" "for paying off other investors that the
pot owed money to .. . [or] for making investments in a
private equity venture so it would generate a gain to cover
the hole." (Id. at 398:19-24).
hearing, Mr. Illarramendi tried to excuse his actions while
still accepting some quantum of responsibility for them:
"I'm going to use certain terms that describe a
frame of mind .... obviously, you are not forced to do any of
the things you did, but essentially the circumstances
compelled me to do or to act in a way that I shouldn't
have acted in." (Id. at 368:1-5.) Mr.
Illarramendi did not testify that he was extorted into
entering any transactions or that his life or the lives of
people he loved had been threatened.
Illarramendi admitted that he received more in management
fees than he was entitled to and that the management fees
paid to Highview Point partners were "inflated."
(Id. at 385.) He explained that these fees were
calculated on the Net Asset Value ("NAV") of each
of the funds and that "the NAVs as calculated . . .
included profits from transactions that I had the Master Fund
enter into which I-which were fictitious." (Id.
at 384.) "At the end of each year we would discuss what
were the numbers. We had meetings with the team ... and we
would discuss what numbers were going to be shown, and
normally at the end of each year we would essentially modify
the numbers so that we would receive more compensation than
we were really entitled to if you looked at it under strict
terms." (Id. at 387-88.)
Defendant's Guilty Plea
on March 27, 2011, Mr. Illarramendi pleaded guilty to a five
count criminal information, including counts for investment
advisor fraud in violation of 15 U.S.C. §§ 80b-6
& 80b-17, securities fraud in violation of 15 U.S.C.
§§ 78j(b) & 78ff, and 17 C.F.R. §
240.10b-5, as well as two counts of wire fraud and one count
of conspiracy to obstruct justice, to obstruct an official
proceeding, and to defraud the SEC. (Ex. C ("Plea
Agreement") to Mot. Summ. J. [Doc. # 1017-7] at 1.) He
was sentenced to 156 months' imprisonment on the wire
fraud and securities fraud charges, and 60 months on the
advisers act and conspiracy charges, to run concurrently, as
well as an amount of restitution later determined to be $370,
482, 716.54, and a special assessment of $500.00.
of his plea agreement, Mr. Illarramendi stipulated that he
(1) acted as an investment adviser; (2) employed a device,
scheme or artifice to defraud clients or prospective clients,
or engaged in a transaction, practice, or course of business
which operated as a fraud or deceit upon a client or
prospective client, or engaged in an act, practice, or course
of business which was fraudulent, deceptive or manipulative;
(3) acted willfully and knowingly and with intent to defraud;
and (4) used the mails or another instrumentality of
interstate commerce. (Id. at 2.) The stipulation of
offense conduct appended to the plea agreement and signed by
Mr. Illarramendi sets forth facts to which Mr. Illarramendi
The defendant acted as an investment adviser to certain hedge
funds. In or about 2006, the defendant lost millions of
dollars of the money he was charged with investing. Rather
than disclose to his investors the truth about the losses
incurred, the defendant intentionally chose to conceal this
information by engaging in a scheme and artifice to defraud
and mislead his investors and creditors to prevent the truth
about the losses from being discovered.
[Mr. Illarramendi] made materially false and misleading
representations and omissions to investors, creditors and the
SEC about the true performances of the hedge funds (the
"Funds") the assets under management by the Funds
and the transactions being conducted by the Funds and related
entities. The defendant: (a) used money provided by new
investors to the Funds to pay out the returns he promised to
earlier investors ... [and] (c) made false representations to
his investors and creditors in an effort to obtain
investments from them and to prevent them from seeking to
liquidate their investments.
... During 2010, the defendant used approximately $53 million
from two funds he managed and controlled, by transferring the
money to entities affiliated with the Michael Kenwood Group,
LLC ("MK Group"), an entity that he also
controlled, without disclosing the use of this money to all
of the investors. Thereafter, in an effort to generate a
sufficient return to fill the hole in the Funds' assets,
the defendant used the approximately $53 million to invest in
private equity companies. The investments were made in the
name of entities affiliated with the MK Group, and not in the
name of the Funds.
(Plea Agreement at 13-14.)
plea and waiver of indictment hearing, Mr. Illarramendi
agreed that the statements set forth in the stipulation of
offense conduct were "true and accurate." (Ex. E
("Waiver and Plea Tr.") at 37:18-19.) Judge
Underhill asked the prosecutor to summarize how he would
prove that Mr. Illarramendi engaged in the charged illegal
conduct and after hearing the prosecutor's summary, Mr.
Illarramendi agreed "with everything that [the
prosecutor] says that [Mr. Illarramendi] did."
the hearing, Mr. Illarramendi stated that he understood that
entering a guilty plea would waive his right to trial
(id. at 17:19-22) and that pleading guilty meant
"there will be no trial of any kind and there will be no
jury that decides any issue in your case." (Id.
at 18:6-11.) Immediately following Mr. Illarramendi's
agreement to plead guilty and forego trial, Judge Underhill
emphasized, "[j]ust to be sure, if there are disputed
issues in your case, for example, what is the amount of loss,
what is the amount payable as restitution, so forth, those
types of factual issues are issues that I, as the sentencing
judge, will decide at the time of your sentencing, and
it's easier for the government to prove a fact to me than
to prove that same fact to a jury for three reasons."
Mr. Illarramendi then agreed with Judge UnderhilTs statement
that "if you plead guilty today, any issues of fact that
need to be resolved at your sentencing are issues that I will
decide ... without regard to the rules of evidence and by a
preponderance of the evidence standard." (Id.
Illarramendi stated that no one sought to coerce him,
intimidate him, or force him in any way to sign the plea
agreement. (Id. at 38.) He further stated that no
one had tried to force him or coerce him into pleading guilty
at the hearing and that it was Mr. Illarramendi's own
decision to plead guilty. (Id. at 38:19-24.) He
agreed that he had decided to plead guilty because he had, in
fact, committed each of the five offenses set forth in the
criminal information. (Id. at 38:25-39:3.)
moves for summary judgment on Counts Two, Three, and Four of
its Second Amended Complaint. On the basis of both Mr.
Illarramendi's admissions to this Court, as well as the
preclusive effect of his guilty plea, the Court finds that
there are no genuine issues of material fact
remaining. Mr. Illarramendi's Opposition, like
his 56(a)2 Statement, relies on unsupported assertions of
fact to attempt to raise such issues, but an opposing party
"must do more than simply show that there is some
metaphysical doubt as to the material facts."
Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
475 U.S. 574, 586. "[T]he nonmovant cannot rest on
allegations in the pleadings and must point to specific
evidence in the record to carry its burden on summary
judgment." Salahuddin v. Goord, 467 F.3d 263,
272 (2d Cir. 2006) (citing Celotex, 477 U.S. at 324;
Matsushita, 475 U.S. at 586).
Section 206 of the Advisers Act (15 U.S.C.
§§ 80(b)-6(1), (2) &
alleges that Mr. Illarramendi violated Section 206 of the
Investment Advisers Act of 1940 (the "Advisers
Act"), which prohibits an investment adviser from using
the mails or any means of interstate commerce, directly or
indirectly, "(1) to employ any device, scheme or
artifice to defraud, (2) to engage in any act, transaction,
practice or course of business which operates as a fraud or
deceit upon any client or prospective client-----[or] (4) to
engage in any act, practice, or course of business which is
fraudulent, deceptive, or manipulative." See 15
U.S.C. §§80b-6(1), (2), (4); Aaron v. SEC,
446 U.S. 680, 691-93, 697 (1980). These antifraud provisions
apply equally to registered and unregistered investment
advisers. See 15 U.S.C. § 80(b)-2(ll) (defining
'investment adviser'). Scienter is required for a
claim under § 206(1) but not 206(2). See SEC v.
Pimco Advisors Fund Mgmt. LLC, 341 F.Supp.2d 454, 470
206(4) directs the SEC to promulgate rules and regulations
that define and prescribe means for preventing such acts,
practices or business. 15 U.S.C. §80b-6(4).
Consequently, the SEC promulgated Rule 206(4)-8, which
provides that it shall constitute a fraudulent, deceptive, or
manipulative act, practice or course of business within the
meaning of Section 206(4) of the Act for an adviser to a
pooled investment vehicle to
(1) Make any untrue statement of a material fact or to omit
to state a material fact necessary to make the statements
made, in the light of the circumstances under which they were
made, not misleading, to any investor or prospective investor
in the pooled investment vehicle; or
(2) Otherwise engage in any act, practice, or course of
business that is fraudulent, deceptive, or manipulative with
respect to any investor or prospective investor in the pooled
17 C.F.R. §275.206(4)-(8)(a)(1) & (2). Rule 206(4)-8
provides an expansive definition of a "pooled investment
vehicle, " defining the term to mean any investment
company as defined in Section 3(a) of the Investment Company
Act of 1940 (15 U.S.C. §80a-3(a)) (the "40
Act") or any company that would fit the definition of a
pooled investment vehicle but for an exclusion under Section
3(c)(1) or Section 3(c)(7) of the '40 Act. The Highview
Funds and Michael Kenwood Funds that Mr. Illarramendi advised
both satisfy this definition of "pooled investment