Francisco Illarramendi, principal of Connecticut-based investment advisory firm MK Capital Management, LLC, recently pled guilty in U.S. District Court to securities fraud and other charges relating to his role in defrauding investors and creditors of various hedge funds he managed at the firm (U.S. v. Illarramendi, D. Conn., Cr. No. 3:11-CV-0078, 1/14/2011). In connection with this matter, the U.S. Justice Department announced that two others — Juan Carlos Guillen Zerpa and Juan Carlos Horna Napotitano — have been charged in connection with their roles in the scheme.

In a related development, the SEC announced that it had filed an amended civil complaint against Mr. Illarramendi and his firm alleging that they misappropriated at least $53 million in investor funds.

In the criminal case, Mr. Illarramendi pled guilty to two counts of wire fraud, one count of securities fraud, one count of investment advisory fraud, and one count of conspiracy to obstruct justice.

In its report on the matter, the Justice Department stated that the scheme started in 2006 when a hedge fund being managed by Mr. Illarramendi lost millions of dollars. Instead of reporting the losses to the fund's investors, Mr. Illarramendi intentionally concealed those losses by engaging in a scheme to deceive both the investors and creditors of the fund. As a result, this fund and other hedge funds managed by Mr. Illarramendi have liabilities that far exceed the value of their assets. In connection with the SEC's investigation, the SEC alleges that Mr. Illarramendi, assisted by Mr. Guillen and Mr. Horna, sought to mislead the SEC by giving the SEC a verification letter that one of the hedge funds had at least $275 million in credits as a result of outstanding loans to various entities. Mr. Illarramendi, according to the SEC, has admitted that the verification letter was false as the fund had no such outstanding loans, and that he had agreed to pay Mr. Guillen and Mr. Horna more than $3 million for preparing the letter and creating false support for the $275 million in loans.

By pleading guilty, Mr. Illarramendi admitted that he and others obstructed the SEC's investigation by fraudulently attempting to substantiate a fictitious listing of assets. He faces up to 70 years in prison, fines, restitution and forfeiture of assets. The SEC also is seeking permanent injunction, disgorgement of ill-gotten gains, interest, and civil penalties from the other defendants.