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Securities & Exchange Commission v. Illarramendi

United States District Court, D. Connecticut

April 13, 2017



          Wet Bond Arterton, U.S.D.J.

         Plaintiff 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.[1] 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.

         I. Background

         The SEC 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 establish liability.

         In his 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." Id.

         Notwithstanding 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.[2] 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.").

         After 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 claimed here.

         A. Admissions to this Court

         In 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.)

         After 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.)

         Mr. 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.)[3]

         Mr. 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.)

         Mr. 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).

         At the 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.

         Mr. 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.)

         B. Defendant's Guilty Plea

         Earlier, 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.

         As part 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 pleaded:

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.)

         At his 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." (Id. 44:19-21.)

         During 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. at 18:16-19:22.)

         Mr. 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.)

         II. Legal Standard

         The SEC 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.[4] 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).

         A. Section 206 of the Advisers Act (15 U.S.C. §§ 80(b)-6(1), (2) & (4))

         The SEC 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 (S.D.N.Y. 2004).

         Section 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 investment vehicle.

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 vehicle" ...

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