A key focus of SEC Enforcement in recent months has been investment fund fraud and Ponzi scheme cases. Once considered difficult to detect in the past the Commission brought few actions. Now, however, seldom a week goes by without at least one and sometimes several investment fund fraud actions being filed. Typically the cases follow a pattern of investors being told of unbelievable returns from some trading scheme which is later revealed to be a sham. Unfortunately most of their hard earned savings is gone by the time the fraud is discovered. Frequently the cases involve Ponzi like payments and the Commission’s actions are brought in conjunction with parallel criminal charges. Finding and prosecuting these cases is and important part of the SEC’s investor protection mission.

SEC v. Illarramendi, Civil Action No. 3:11cv0078 (D. Conn. Filed Jan. 14, 2011) follows the familiar pattern. The action was filed earlier this year against Francisco Illarramendi and his controlled entity Michael Kenwood Capital Management, LLC. Mr. Illarramendi manages several finds through this entity, including one which was thought to have about $540 million under management. The initial action, as discussed here, charged Mr. Illarramendi with improperly investing about $53 million of investor funds in accounts he controlled and then making unauthorized investments. A freeze order was obtained

By the time the amended complaint was filed the Commission had learned more. Not only had investors been defrauded but at least for a time the defendants tried to deceive the agency. The amended complaint claims that although it appeared one of the funds under management had $540 million in assets in there is substantially less. Portions of the funds had been used to pay for investor redemptions. Furthermore, in December 2010 and January 2011 as the Commission conducted its investigation Mr. Illarramendi attempted to conceal the fact that there were missing assets by furnishing the staff with a letter from an accountant in Venezuela. That letter supposedly verified the existence of at least $275 million in assets held by the fund. The assets do not exist according to the SEC. The letter is a fraud. The amended complaint also alleges that substantial sums have been taken out of the fund as compensation which is in reality fraudulent management fees. The amended complaint, charges violations of Advisers Act Sections 206(1), (2) and (4).

The U.S. Attorney’s Office for the District of Connecticut unsealed parallel criminal charges at the time the Commission filed its amended complaint. Mr. Illarramendi and others were charged with conspiracy, wire fraud, securities fraud and conspiracy to obstruct justice. According to Bloomberg, Mr. Illarramendi pleaded guilty to the charges. The Commission’s case is pending.