Former co-founder of hedge fund sentenced

   NEW YORK - 2/14/2013 - Steven Fortuna, who co-founded the hedge fund S2 Capital LLC (S2), was sentenced today to two years of probation for his participation in an insider trading scheme in which he obtained and traded on material, nonpublic information about various publicly-traded companies from employees at other hedge funds, announced U.S. Attorney for the Southern District of New York Preet Bharara. Fortuna pleaded guilty in October 2009 to three counts of conspiracy to commit securities fraud and one count of securities fraud under a cooperation agreement with the government. He was sentenced on February 13 in federal court by U.S. District Judge Sidney H. Stein.
   According to court documents, statements made during Fortuna’s guilty plea proceeding and the government’s sentencing submission in his case suggest that from July 2008 through March 2009, while working as a portfolio manager at a hedge fund he co-founded, Fortuna obtained inside information concerning various technology companies from employees at other hedge funds for the purpose of trading on that information. The inside information was disclosed by company insiders in breach of their duties to their respective employers.
   For example, in July and August 2008, Fortuna obtained inside information concerning Akamai Inc. from Danielle Chiesi, a portfolio manager at New Castle Partners, a hedge fund. Chiesi told Fortuna that Akamai planned to report that its revenue guidance for the following quarter would miss expectations and that, internally, the company believed that its stock price would fall following the quarterly earnings announcement. Fortuna executed trades based on that Inside Information, and earned approximately $2.4 million in profits for S2.
   As part of the conditions of his probation, Fortuna, 50, of Westwood, Mass., was ordered to serve six months on home confinement with electronic monitoring, and 120 hours of community service during each of the years of his probation. He was also ordered to pay forfeiture in the amount of $200,000, and a $400 special assessment fee.
   Mr. Bharara praised the investigative work of the FBI. He also thanked the U.S. Securities and Exchange Commission.
   This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force, on which Mr. Bharara serves as a Co-Chair of the Securities and Commodities Fraud Working Group. The case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorney Antonia M. Apps is in charge of the prosecution.

   Source: Financial Fraud Enforcement Task Force

Hedge Fund Managers Sentenced to Prison Terms

   NEW YORK – 9/19/2012 - Michael Katz and Christopher Fardella, two former hedge fund managers, were each sentenced on Sept. 19 to three years in prison for their roles in defrauding investors out of nearly $1 million, announced Preet Bharara, U.S. attorney for the Southern District of New York. Katz and Fardella each pleaded guilty in October 2011 to one count of conspiracy to commit securities fraud and mail fraud and one count of securities fraud before U.S. District Judge Laura T. Swain, who also imposed today’s sentences.
   “In order to lure investors, Michael Katz and Christopher Fardella created resumes and marketing materials for their phony investment fund out of whole cloth. Their sentences demonstrate to those who may consider similar schemes that smoke and mirrors will not fool law enforcement, and you will be held accountable for such fraudulent activity,” Bharara said.
   According to the information filed in Manhattan federal court, as well as statements made in court proceedings: From April 2005 through November 2006, Katz, Fardella and two other co-conspirators were partners in KMFG International LLC, a hedge fund located primarily in Florida with ties to New York. Katz was KMFG’s Portfolio Manager, and Fardella was KMFG’s Treasurer.
    Katz, Fardella and their co-conspirators used “cold calls” to solicit approximately $1.03 million from investors across the country. Investors were misled about KMFG’s principals and about the firm’s financial performance. For example, KMFG’s marketing materials falsely claimed that KMFG was operated by “a management team consisting of hedge fund managers, traders and top level executives from independent oil and gas companies” with a track record of generating substantial trading profits for KMFG’s investors. In fact, Katz, Fardella and their co-conspirators had no genuine experience running a hedge fund and were never top level executives in the oil and gas industry. KMFG’s marketing materials also falsely claimed that KMFG had generated “cumulative returns for 30 months of over 165 percent.” In truth, KMFG had no prior financial track record, and never made a profit for any of its investors.
    The defendants used investor funds for their own personal benefit without investor knowledge. Specifically, Katz and Fardella used investors’ funds to finance a lavish lifestyle by making personal cash withdrawals and using the funds for expensive meals and trips to Las Vegas.
    To conceal the fact that Katz, Fardella and their co-conspirators were misappropriating investor funds and the fact that KMFG was never profitable, the defendants submitted false financial statements to their clients that indicated their investments were making profits when they were not. KMFG clients continued to invest hundreds of thousands of dollars with KMFG after receiving the false financial statements. In total, Katz, Fardella and their co-conspirators either lost or spent $981,000 out of the $1,031,086 collected in investor funds.
    In addition to their prison terms, Katz, 33, of Brooklyn, N.Y., and Fardella , 34, of Fort Lauderdale, Fla., were each sentenced to three years of supervised release and ordered to forfeit $981,000.
    Co-conspirator Kristian Murphy-Fuhse, who was charged in a separate information for his role in the same scheme, pleaded guilty in January 2012 and is awaiting sentencing before U.S. District Judge Thomas P. Griesa.
    Bharara praised the work of the U.S. Postal Inspection Service.
    These cases were brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force, on which U.S. Attorney Bharara serves as a Co-Chair of the Securities and Commodities Fraud Working Group.
    This case is being handled by the U.S. Attorney’s Office for the Southern District of New York’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorney Jason P. Hernandez is in charge of the prosecution.
   Source: National Fraud Enforcement Task Force

Insider Trading Sentence is Longest in History

   NEW YORK – 11/14/2011 - Raj Rajaratnam was sentenced Oct. 13 in Manhattan federal court to 11 years in prison stemming from his involvement in the largest hedge fund insider trading scheme in history, announced U.S. Attorney for the Southern District of New York Preet Bharara.

   Rajaratnam was the managing member of Galleon Management LLC, the general partner of Galleon Management L.P. and a portfolio manager for Galleon Technology Offshore Ltd. and certain accounts of Galleon Diversified Fund Ltd. He was convicted on May 11 of all 14 counts of conspiracy and securities fraud with which he was charged, following an eight-week jury trial. Rajaratnam was sentenced today by U.S. District Judge Richard J. Holwell. 

   It is the longest sentence imposed for insider trading in history.
   “Two years ago, Raj Rajaratnam stood at the summit of Wall Street, commanding his own financial empire. Then he was arrested, tried and convicted by a jury. Mr. Rajaratnam stood convicted 14 times over of felonies, his empire exposed as a web of fraud and corruption that entangled many,” U.S. Attorney Bharara said. “Today, Mr. Rajaratnam stood once more and faced justice which was meted out to him. It is a sad conclusion to what once seemed to be a glittering story. We can only hope that this case will be the wake-up call we said it should be when Mr. Rajaratnam was arrested. Privileged professionals do not get a free pass to pursue profit through corrupt means. The message is the same for everyone no matter who you are or how much money you have – obey the law or face the fate of those who don’t.”
   According to the superseding indictment filed in Manhattan federal court, other court documents and statements made during related court proceedings:
   From 2003 to March 2009, Rajaratnam repeatedly traded on material, nonpublic information pertaining to upcoming earnings forecasts, mergers, acquisitions and other business combinations. As the evidence at trial showed, the inside information was given as tips by insiders and others at hedge funds, public companies and investor relations firms – including Goldman Sachs, Intel, International Business Machines (IBM) Corporation, McKinsey & Company, Moody’s Investor Services Inc., Market Street Partners, Akamai Technologies Inc. and Polycom Inc. Based on the inside information, Rajaratnam executed trades in the stock of public companies, including Goldman Sachs, Clearwire, Akamai, AMD, Intel, Polycom and PeopleSupport. The court found Rajaratnam earned “well over $50 million” from his illegal trading.
   The evidence at trial included, among other things, recordings of wiretapped phone calls between Rajaratnam and his various co-conspirators, including: Anil Kumar, a former senior partner and director at McKinsey; Rajiv Goel, a former employee of Intel; Adam Smith, a former portfolio manager and analyst at Galleon; and Danielle Chiesi, a former employee of the hedge fund New Castle Partners. Rajaratnam engaged in overlapping conspiracies to commit securities fraud with these individuals, as well as with Mark Kurland, a co-founder at New Castle Partners, Robert Moffat, a former senior vice president at IBM, and Roomy Khan, who traded securities on her own behalf.
   In addition to his prison term, Rajaratnam, 54, of New York was sentenced to two years of supervised release and ordered to pay forfeiture in the amount of $53,816,434 and a $10 million fine. Rajaratnam will surrender to authorities on Nov. 28, 2011.
   During the sentencing proceeding, Judge Holwell said that insider trading “is an assault on our free markets,” and added that “the crimes and scope of the crimes (committed by Rajaratnam) reflect a virus in our business culture that needs to be eradicated.”
  Chiesi, Kurland, Moffat, Kumar, Goel, Smith and Khan have all pleaded guilty to their involvement in the insider trading schemes. Chiesi was sentenced to 30 months in prison, Kurland to 27 months in prison and Moffat to six months in prison. Kumar, Goel, Smith and Khan are awaiting sentencing.
   Bharara praised the investigative work of the FBI and thanked the U.S. Securities and Exchange Commission for its extraordinary assistance.

   The case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Jonathan Streeter and Reed Brodsky, and Special Assistant U.S. Attorney Andrew Michaelson are in charge of the prosecution.

   Source: Financial Fraud Enforcement Task Force

Hedge Fund Adviser Confesses to Ponzi Scheme

   NEW HAVEN, Conn. – 3/16/2011 - Three men have been charged with various offenses stemming from a scheme to defraud investors and creditors of Fairfield County, Conn., hedge funds managed by one of the defendants, Francisco Illarramendi, 42, of New Canaan, Conn., announced David B. Fein, U.S. attorney for the District of Connecticut, and Kimberly K. Mertz, special agent in charge of the New Haven Division of the FBI.  As a result of the scheme, the investors and creditors of Illarramendi’s funds face potential losses of hundreds of millions of dollars.
   On March 7, Illarramendi waived his right to indictment and pleaded guilty before U.S. District Judge Stefan R. Underhill in Bridgeport, Conn., 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 U.S. Securities and Exchange Commission (SEC).
   On March 3, 2011, special agents from the New Haven, Conn., and Miami Divisions of the FBI arrested Juan Carlos Guillen Zerpa, 43, and Juan Carlos Horna Napolitano, 40, in Florida on federal criminal complaints charging each with engaging in a conspiracy to obstruct justice, to obstruct an official proceeding and to defraud the SEC.  Guillen is an accountant and a citizen of Venezuela, and Horna is a Venezuelan citizen living in Pembroke Pines, Fla.
   According to court documents and statements made in court, Illarramendi acted as an investment adviser to certain hedge funds.  Around 2006, one hedge fund he advised lost millions of dollars of the money he was charged with investing.  Rather than disclose to his investors the truth about the losses incurred, Illarramendi intentionally chose to conceal this information by engaging in a scheme to defraud and mislead his investors and creditors to prevent the truth about the losses from being discovered.  As a result of this scheme, the hedge funds and related entities managed and advised by Illarramendi currently have outstanding liabilities that greatly exceed the true value of their assets.
   “This investigation has revealed that Francisco Illarramendi operated a massive Ponzi scheme that has defrauded foreign investors of hundreds of millions of dollars,” Fein stated. “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.  I want to commend the FBI and the SEC for their forceful pursuit of this fraud, and for their partnership in the Connecticut Securities, Commodities and Investor Fraud Task Force, which is actively investigating this and other financial fraud schemes.”
    From approximately 2006 to February 2011, Illarramendi engaged in a scheme to defraud his investors, creditors and the SEC by creating fraudulent documents, including a bogus debt instrument and a phony letter purporting to have been issued by an investment bank, as well as a fictitious asset verification letter falsely representing that one of the hedge funds, the Short Term Liquidity Fund (STLF), had at least $275 million in credits as a result of outstanding loans, when Illarramendi and others knew it did not have any such credits.  In addition, Illarramendi misled investors, creditors and the SEC about the true performance of the funds, the assets under management by the funds and the transactions being conducted by the funds and related entities.
   In pleading guilty, Illarramendi admitted that he used money provided by new investors to the funds to pay out the returns he promised to earlier investors, created fraudulent and misleading documents related to the funds’ assets, made false representations to his investors and creditors in an effort to obtain new investments from them and to prevent them from seeking to liquidate their investments, improperly commingled the investments in each individual hedge fund with investments in the other hedge funds and engaged in transactions that were not in the best interests of the funds and agreed to pay kickbacks to persons connected with those transactions.
   For example, on one occasion around 2008, Illarramendi created a fraudulent letter that purported to be a representation by an investment bank that assets of the funds and related entities were segregated from one another at the investment bank.   Illarramendi created the letter by using the letterhead of the investment bank.  Today, Illarramendi admitted that this document, which he sent from Connecticut to numerous foreign investors, was false.  Also in 2008, Illarramendi sent an e-mail to a creditor attaching a bogus debt instrument, which purported to be a credit linked note issued by the same investment bank with a face value of $30 million.  This document, too, was fabricated by Illarramendi.
   In addition, in 2010, Illarramendi 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, Illarramendi 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.
   Beginning in 2010, the SEC sought information and documentation from Illarramendi and the MK Group.  As part of its enforcement authority, the SEC served a subpoena for records upon, among others, MK Group.  In December 2010 and January 2011, the SEC conducted an enforcement-directed review of MK Group and related entities as part of its official enforcement investigation.  On Jan. 14, 2011, the SEC filed a civil action (SEC v. Illarramendi, et al., 3:11-CV-00078), seeking, among other things, to enjoin Illarramendi and entities related to MK Group from violating the federal securities laws and to submit an accounting of investor funds.  Subsequent to the filing of the SEC civil action, U.S. District Judge Janet Bond Arterton appointed, and sought input from, business advisers and a receiver to ascertain the assets and liabilities of the hedge funds affiliated with MK Group, among other tasks.
   In connection with the SEC investigation, Illarramendi, Guillen and Horna allegedly conspired to obstruct the SEC and the filed court action.  As set forth in court documents, with the assistance of Guillen and Horna, Illarramendi gave the SEC a fictitious asset verification letter.  That document represented that STLF had at least $275 million in credits as a result of outstanding loans to various companies.  Illarramendi has admitted that this representation was false: STLF had not made those loans and was not owed that money.
   Illarramendi has admitted that he agreed to pay Guillen and Horna more than $3 million for fabricating the letter and creating false support for the $275 million in loans.  It is alleged that on Jan. 24, 2011, $1 million was wired from a Swiss bank account to an account allegedly associated with Horna.  Court documents reveal consensual recorded telephone calls and other communications in which Guillen and Horna allegedly agree to create documentation so that the companies that purportedly owe the money would support the story if contacted by the SEC.  Further, it is alleged that, in January 2010, Guillen personally spoke to the SEC, told them that he had been asked to verify the existence of the loan portfolio, and reported that he had spoken to all of the companies and had begun receiving confirmation from them.  In pleading guilty, Illarramendi admitted that he and others conspired to obstruct the SEC investigation and civil court proceedings by creating and fraudulently attempting to substantiate a list of fictitious assets.
   When he is sentenced, Illarramendi faces a maximum term of 70 years in prison, fines, restitution for the full amount of the losses suffered by investors and creditors and forfeiture of assets.  A sentencing date has not been scheduled.
   Guillen and Horna are each charged with one count of conspiracy and one count of obstruction of an official proceeding.  They are both detained.  If convicted of the charges in the criminal complaint, Guillen and Horna each faces a maximum term of 25 years in prison.
U.S. Attorney Fein stressed that a complaint is only a charge and is not evidence of guilt.  Charges are only allegations, and each defendant is presumed innocent unless and until proven guilty beyond a reasonable doubt.
   This matter is being investigated by the FBI with the assistance of the SEC, Boston Regional Office.
This case is being prosecuted by Senior Litigation Counsel Richard J. Schechter and Assistant U.S. Attorney Paul A. Murphy.
   U.S. Attorney Fein also acknowledged the substantial assistance provided by the U.S. Attorney’s Office for the Southern District of Florida.
   In December 2010, the U.S. Attorney’s Office and several law enforcement and regulatory partners announced the formation of the Connecticut Securities, Commodities and Investor Fraud Task Force, which is investigating matters relating to insider trading, market manipulation, Ponzi schemes, investor fraud, financial statement fraud, violations of the Foreign Corrupt Practices Act, and embezzlement.  The Task Force includes representatives from the U.S. Attorney’s Office; FBI; Internal Revenue Service – Criminal Investigation; U.S. Secret Service; U.S. Postal Inspection Service; U.S. Department of Justice’s Criminal Division, Fraud Section and Antitrust Division; SEC; U.S. Commodity Futures Trading Commission; Office of the Special Inspector General for the Troubled Asset Relief Program; Office of the Chief State’s Attorney; State of Connecticut Department of Banking; Greenwich, Conn., Police Department and Stamford, Conn., Police Department.
   Citizens are encouraged to report any financial fraud schemes by calling the FBI toll free, 855-236-9740, or by sending an email to ctsecuritiesfraud@ic.fbi.gov.
   Source: U.S. Department of Justice release