New Canaan Man Pleads Guilty to Hedge Fund Fraud, Faces 70 Years in Jail

Three men have been charged with various offenses stemming from a scheme to defraud investors and creditors of Fairfield County hedge funds managed by a New Canaan man.

As a result of the Ponzi scheme, the investors and creditors of Francisco Illarramendi, 42, of New Canaan, face potential losses of hundreds of millions of dollars according to David B. Fein, United States Attorney for the District of Connecticut, and Kimberly K. Mertz, Special Agent in Charge of the New Haven Division of the Federal Bureau of Investigation.

Illarramendi waived his right to indictment and pleaded guilty before United States District Judge Stefan R. Underhill in Bridgeport 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.

On March 3, special agents from the New Haven 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.

From approximately 2006 to February 2011, federal officials said 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, 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. 

U.S. Attorney Fein said in a statement that the investigation revealed Illarramendi operated a “massive Ponzi scheme” that has defrauded foreign investors of hundreds of millions of dollars.

“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,” Fein said.

FBI Special Agent in Charge Mertz said the case should be an example to others involved in fraudulent activity.

“This investigation should serve as fair warning to those, whether in Connecticut, elsewhere in the United States, or overseas, who would attempt to victimize an increasing number of American and foreign investors,” Mertz said. “The Connecticut Securities, Commodities, and Investor Fraud Task Force will continue to aggressively investigate these criminals and protect the rights of the investing public.”

According to court documents and statements made in court, Illarramendi acted as an investment adviser to hedge funds, one of which he was charged with investing lost millions of dollars.  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, according to federal officials.

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.

When he is sentenced, Illarramendi faces a maximum term of imprisonment of 70 years, 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 and are both being detained.  If convicted of the charges in the criminal complaint, Guillen and Horna each faces a maximum term of imprisonment of 25 years.

This case is being investigated by the Federal Bureau of Investigation with the assistance of the U.S. Securities and Exchange Commission, Boston Regional Office.

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.