81025104 SEC Case Declaration of Receiver Matthew Greenblatt w Exhibits

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1 UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT SECURITIES AND EXCHANGE COMMISSION, Plaintiff, 11-CV-00078 (JBA) v. ECF CASE FRANCISCO ILLARRAMENDI, HIGHVIEW POINT PARTNERS, LLC and MICHAEL KENWOOD CAPITAL MANAGEMENT, LLC, DECLARATION OF MATTHEW GREENBLATT Defendants, and HIGHVIEW POINT MASTER FUND, LTD., HIGHVIEW POINT OFFSHORE, LTD., HIGHVIEW POINT LP, MICHAEL KENWOOD ASSET MANAGEMENT, LLC, MK ENERGY AND INFRASTRUCTURE, LLC, and MKEI SOLAR, LP, Relief Defendants. I, Matthew Greenblatt, pursuant to 28 U.S.C. § 1746, hereby declare as follows: 1. I am a Senior Managing Director at FTI Consulting, Inc. (“FTI”) where I have worked for more than 13 years. I have more than 17 years of experience in accounting, auditing and litigation consulting services, including forensic accounting and fraud investigations. I am a Certified Public Accountant, Certified in Financial Forensics, and a Certified Fraud Examiner. I am a member of the American Institute of Certified Public Accountants, the New York State Society of Certified Public Accountants and the Association of Certified Fraud Examiners. I have spoken on multiple panels in the area of forensic accounting and investigations, and currently serve as an adjunct professor with New York University in its forensic accounting Case 3:11-cv-00078-JBA Document 446-1 Filed 02/02/12 Page 1 of 22

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Transcript of 81025104 SEC Case Declaration of Receiver Matthew Greenblatt w Exhibits

Case 3:11-cv-00078-JBA Document 446-1

Filed 02/02/12 Page 1 of 22

UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. FRANCISCO ILLARRAMENDI, HIGHVIEW POINT PARTNERS, LLC and MICHAEL KENWOOD CAPITAL MANAGEMENT, LLC, Defendants, and HIGHVIEW POINT MASTER FUND, LTD., HIGHVIEW POINT OFFSHORE, LTD., HIGHVIEW POINT LP, MICHAEL KENWOOD ASSET MANAGEMENT, LLC, MK ENERGY AND INFRASTRUCTURE, LLC, and MKEI SOLAR, LP, Relief Defendants.

11-CV-00078 (JBA)

ECF CASE DECLARATION OF MATTHEW GREENBLATT

I, Matthew Greenblatt, pursuant to 28 U.S.C. 1746, hereby declare as follows: 1. I am a Senior Managing Director at FTI Consulting, Inc. (FTI) where I have

worked for more than 13 years. I have more than 17 years of experience in accounting, auditing and litigation consulting services, including forensic accounting and fraud investigations. I am a Certified Public Accountant, Certified in Financial Forensics, and a Certified Fraud Examiner. I am a member of the American Institute of Certified Public Accountants, the New York State Society of Certified Public Accountants and the Association of Certified Fraud Examiners. I have spoken on multiple panels in the area of forensic accounting and investigations, and currently serve as an adjunct professor with New York University in its forensic accounting

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certificate program. 2. FTI Consulting is the financial advisor to the Court-appointed receiver John J.

Carney, Esq. (the Receiver), assisting him in his on-going investigation (the Investigation) mandated by the Amended Order Appointing Receiver dated June 22, 2011. I make this

declaration summarizing information based on my personal review and analysis of voluminous documents and financial records and upon information communicated to me by other FTI forensic accountants and professionals relating to their review of the voluminous documents and financial records. 3. I make this Declaration for the limited purpose of providing certain evidentiary

support for the Receivers Motion for an Order Expanding the Receivership to Include the Highview Point Master Fund, Ltd., Highview Point Offshore Fund, Ltd., and Highview Point, L.P. I have not included all of the information known by me or by other FTI professionals about this matter, FTIs forensic investigation, or that is relevant to the proceedings. General Background 4. The prior testimony before this Court of Francisco Pancho Illarramendi

(Illarramendi), and his admissions in his plea proceedings, reflect that Illarramendi engaged in a massive Ponzi scheme (the Fraudulent Scheme) originally devised to conceal losses sustained investing money for HVP Offshore and other entities, and eventually done to hide increasing losses of the funds he managed. Attached hereto as Exhibit A is a true and correct copies of relevant excerpts of Illarramendis prior testimony in this case. Attached as Exhibit B are true and correct copies of Illarramendis criminal plea agreement, excerpts of the transcript of his plea allocution and the Stipulation of Offense Conduct executed in connection with his guilty plea. 2

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5.

Highview Point Partners, LLC (HVP Partners), a Delaware entity, was created

in August 2004 and began operating under an LLC Agreement in May 2005, executed by Illarramendi, Francisco Frank Lopez (Lopez) and Christopher Luth (Luth), each as members with a one-third interest in HVP Partners. The LLC Agreement, which enumerates one specific purpose for HVP Partners, namely acting as the investment manager of Highview Point Offshore Fund, Ltd. is attached hereto as Exhibit C. 6. Highview Point Offshore Fund, Ltd. (HVP Offshore) was incorporated in the

Cayman Islands in September 2004, approximately one month after the creation of HVP Partners. Operations commenced in May 2005, within one week of the execution of the HVP Partners LLC Agreement. Lopez was one of five directors of HVP Offshore in May 2005, nominally appointed by Ogier Nominees (Cayman) Limited. Three of the other four directors were employees of Ogier Fiduciary Services (Cayman) Limited, including Vijayabalan Murugesu, David Sargison, and Andrew Eastabrook. 7. The HVP Partners principals Illarramendi, Lopez and Luth directed the

process of setting up the funds and appointing directors. Emails show that Ogier & Boxalls, and the U.S. law firm Seward & Kissel LLP, took direction from Luth when executing registration and other formation decisions. 8. The investment management agreement between HVP Offshore and HVP

Partners (the Offshore IMA) was signed by Lopez on behalf of HVP Offshore, and Illarramendi on behalf of HVP Partners. The Offshore IMA gives HVP Partners the right and duty to make all investment decisions for [HVP Offshore]. This includes the authority to purchase, hold, sell, sell short, cover and otherwise deal in securities and financial instruments of any sort and rights therein, including restricted and privately issued securities, on margin or 3

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otherwise. It also includes the right of HVP Partners to enter into, make, and perform any other contracts, agreements or other undertakings on behalf of HVP Offshore, effectively granting HVP Partners unfettered power to bind HVP Offshore in agreements with third parties (i.e., to make business decisions). The Offshore IMA explicitly included the right of HVP Partners to enter into contracts, agreements, or other undertakings with persons, firms or corporations affiliated with [HVP Partners]. There is also a section of the Offshore IMA that permits the entire agreement granting powers to HVP Partners relating to the operations of HVP Offshore to be assigned at HVP Partners will, without the prior written consent of [HVP Offshore], to any other entity controlled by Illarramendi, Lopez and Luth. Notably, the

Offshore IMA specifically states that HVP Offshore does not have any right of assignment without prior written consent of HVP Partners. A true and correct copy of the Offshore IMA is attached hereto as Exhibit D. 9. In addition to Lopez and the employees of Ogier Fiduciary Services (Cayman)

Limited, another director of HVP Offshore at the time of its commencement was Luis Bethart, an investment advisor of Quadrant, a company associated with Oswaldo Cisneros (Cisneros). Although Quadrant was originally named co-investment manager along with HVP Partners, HVP Partners had exclusive authority to execute trades and open accounts on behalf of HVP Offshore. An email shows that Quadrant was listed as a co-manager primarily for tax reasons. By the end of 2005, Quadrant had resigned the title of investment manager, leaving HVP Partners as the sole investment manager for HVP Offshore. 10. By April 2006, the business changed its structure to a master-feeder structure,

by creating the Highview Point Master Fund, Ltd. (the Master Fund), turning HVP Offshore into an offshore feeder, and creating Highview Point, L.P. as a domestic feeder (collectively with 4

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the Master Fund and HVP Offshore, the HVP Funds). 11. The Master Fund was incorporated in the Cayman Islands in January 2006. Its

directors were Lopez and three employees of Ogier Fiduciary Services (Cayman) Limited, including at various times Vijayabalan Murugesu, David Sargison, Scott Dakers, Evan Burtton and Thomas Parsons. On April 1, 2006, the effective date of the new master-feeder structure, the Master Fund entered into an investment management agreement with HVP Partners (Master Fund IMA). The Master Fund IMA grants HVP Partners the same investment and contracting powers over the Master Fund as the Offshore IMA granted over HVP Offshore. It also includes the same assignments clause, permitting assignment to another entity controlled by Illarramendi, Lopez and Luth. As in the Offshore IMA, the Master Fund does not have such assignment rights. Also like the Offshore IMA, the Master Fund IMA is signed by Illarramendi and Lopez, with Lopez signing for the Master Fund. A true and correct copy of the Master Fund IMA is attached hereto as Exhibit E. 12. Ogier, a law firm representing HVP Offshore and the Master Fund, addressed

correspondence to the HVP Funds at the Stamford, Connecticut office of HVP Partners. The Credit Lyonnais Bond Deal 13. Based upon my review of documents and the testimony and admissions of

Illarramendi, it is apparent that Illarramendi began the Fraudulent Scheme at least as early as October 2005 when he caused losses from the purchase and sale of a Credit Lyonnais bond with a nominal value of $50 million (the Calyon Bond) to be concealed on the books of HVP Offshore. (See Exhibit A at 359.) 14. Prior to executing the transaction, Illarramendi obtained funds from a group of

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investors, including HVP Offshore, to complete the purchase of the Calyon Bond. In executing the transaction, HVP Offshore transferred approximately $18.8 million to an investment account in the name of CNI Securities. Lopez, and his sister Carolina Lopez, transferred approximately $2.5 million to the same account. Other investors, including Pamac Securities, Goldenbird, Nazri Corp., and BCT Bank International (BCT Bank), committed additional monies equaling approximately $28.9 million, for a total of approximately $50.2 million. BCT Bank committed the funds based upon a loan to HVP Partners. 15. On or about October 12, 2005, Illarramendi caused approximately $49.3 million

to be transferred from the bank account of CNI Securities to Banco Federal de Venezuela. In exchange, the Calyon Bond was transferred to CNI Securities. On or about October 14, 2005, the Calyon Bond was delivered from CNI Securities to an HVP Offshore account at the Royal Bank of Canada. 16. Of the remaining approximately $900,000 of funds sent to CNI Securities,

approximately $35,000 was taken by CNI as its fee, approximately $19,000 was used for accrued interest, approximately $170,000 was transferred to a bank account in the name of Northwestern International Ltd., an entity believed to be controlled by Moris Beracha (Beracha), and approximately $675,000 was sent to a bank account in the name of HVP Partners. 17. Illarramendi sold the Calyon Bond on or about October 14, 2005 to Royal Bank

of Canada for approximately $46.5 million, which was transferred to an HVP Partners account in the form of cash and Venezuelan bonds. 18. Despite the fact that the Calyon Bond transaction resulted in a loss, HVP Partners

transferred cash to each investor, other than HVP Offshore, in amounts greater than each investors initial investment. For example, Lopez, and his sister Carolina Lopez, received 6

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approximately $2.55 million for their $2.5 million investment. Because Illarramendi distributed positive returns to the other investors, HVP Offshore only received approximately $14.1 million in cash and bonds for its original investment of approximately $18.8 million. Although only $14.1 million in value was received by HVP Offshore, its books and records were falsified to reflect the receipt of approximately $19.3 million of value from the investment. The difference between the $19.3 million falsely recorded and the $14.1 million in value actually received constituted a cash shortfall of approximately $5.2 million absorbed by HVP Offshore, which Illarramendi described to the Court as the beginning of the hole that his Fraudulent Scheme concealed. The Cover-Up at HVP Offshore With the Creation of a Fictitious Investment In Ontime1 19. The documents that I reviewed reflect that Illarramendi initially covered the

approximately $5.2 million shortfall by causing a fictitious investment in Ontime to be falsely entered on the books and records of HVP Offshore and described in the HVP Offshore trade blotter as ONTIME_OVERS2.2 However, no proceeds from the Calyon Bond transaction were transferred to Ontime. As described below, later, false entries were utilized to make it appear that this fictitious investment in Ontime had been redeemed with a profit even though no such legitimate redemption occurred. 20. On or about December 19, 2005, Ontime transferred approximately $7.4 million

to HVP Offshore. Notwithstanding that this transfer did not come from the liquidation of any

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Ontime is an entity linked to Illarramendis brother-in-law, Rufino Gonzalez-Miranda.

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The $5.2 million hole that was concealed by Illarramendi was bundled with other purported investments in Ontime, for a total purported investment of $7.0 million recorded on the trade blotter of HVP Offshore.

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investment by Ontime, the transfer was falsely recorded in the books and records of HVP Offshore as a redemption of the corresponding fictitious investment described above. Ontime also transferred $30,000 to an account in the name of Illarramendi and Maria Josephina Gonzalez-Miranda (Illarramendis wife) on or about November 21, 2005. 21. Ontimes payment to HVP Offshore, which was falsely recorded by HVP

Offshore as a redemption of a fictitious investment, was funded, in part, by approximately $5.5 million that had been transferred to Ontime from a bank account in the name of HVP Partners during the time period November 3, 2005 through December 1, 2005. 22. HVP Partners transfers to Ontime were funded, in part, by a $5 million loan from

BCT Bank on or about November 16, 2005. Lopez was a director of the holding company that owns BCT Bank. 23. This $5 million loan from BCT Bank was repaid, in part, with roughly $5 million

advanced by an entity known as Goldenbird, which characterized its advance in a spreadsheet as one of many payments listed as the Highview Point Special Situation. Notably, the Highview Point Special Situation transactions were reflected in the spreadsheet as being paid back with interest. None of these Highview Point Special Situation transactions were recorded in the HVP Funds books and records. I understand from my review of documents, that Goldenbird was an entity associated with Cisneros. Use of Off-Book Options Trading 24. On at least five occasions between November 2005 and August 2006,

Illarramendi caused the diversion of assets of the HVP Funds to entities he effectively controlled for purposes of directing further transactions with the proceeds of these diversions. Thereafter,

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Illarramendi utilized the proceeds of these transfers to engage in a speculative, off-the-books trading strategy which focused primarily on options trading (Off-book Trading Strategy). The Off-book Trading Strategy sought to capitalize on the volatility in the markets for stocks like Google, Yahoo and others. The execution of these trades, however, resulted in further net losses of approximately $28 million. Notably, by transferring money from the HVP Funds to these entities to execute the Off-book Trading Strategy, the existence of the speculative options trades and the significant losses sustained as a result were not reflected in the books and records of the HVP Funds. Because these losses continued to be concealed from investors, they caused the hole to grow dramatically. By the end of August 2006, the hole stood at over $33 million, more than one third of the $95 million net asset value of the HVP Funds. 25. Entities used by Illarramendi to effectuate the Off-book Trading Strategy included

HVP Partners, Naproad Finance S.A. (Naproad), and HPA, Inc. (HPA). 26. HVP Partners Wachovia Securities account statement indicates that by December

31, 2005, it had gained approximately $1 million as a result of the Off-book Trading Strategy. 27. HPA Inc.s Wachovia Securities Account statement indicates that, between

December 2005 and February 2006, it had lost approximately $6.1 million as a result of the Offbook Trading Strategy. 28. Naproads Wachovia Securities Account statement indicates that between January

and August 2006, it had lost approximately $14.3 million as a result of the Off-book Trading Strategy. 29. In August 2006, Illarramendi received an e-mail informing him that another

account where he effectuated his Off-book Trading Strategy had lost approximately $8.6 million

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as a result of the Off-book Trading Strategy. First Naproad Transaction 30. The following is a summary of facts related to the falsification of the books and

records of HVP Offshore relating to a fictitious investment in Naproad, which was described in the HVP Offshore trade blotter as NAPROAD, and utilized to further the Fraudulent Scheme. 31. On or about January 5, 2006, HVP Offshore transferred approximately $5.5

million to a bank account in the name of Naproad and falsely recorded that transfer in its books and records as a purchase of a fictitious investment in Naproad. 32. Naproad did not utilize the money received from HVP Offshore for any

investment. Rather, on or about January 6, 2006, Naproad transferred approximately $5.2 million to Goldenbird, apparently to repay, with interest, an earlier advance from Goldenbird to HVP Partners that was characterized as a Highview Point Special Situation transaction and which is described in 23 above. 33. Also, on or about January 13, 2006, Naproad also made the following transfers:

$50,000 to a bank account in the name of Illarramendi, $5,000 to a bank account in the name of Adela Illarramendi, and $100,000 to a bank account in the name of Luth. 34. Several months later, on or about April 5, 2006, Naproad transferred

approximately $5.7 million to HVP Offshore. Notwithstanding that these funds did not come from the liquidation of any investment, HVP Offshore falsely recorded in its books and records the receipt of the approximate $5.7 million as the redemption of the fictitious investment in Naproad. Notably, on the same day of the $5.7 million transfer, Naproad also transferred $100,000 to a bank account in the name of Illarramendi.

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35.

Naproads transfers to HVP Offshore and Illarramendi were funded, in whole or

in part, by transfers to Naproad totaling approximately $15.8 million, from March 31 through April 4, 2006, from various entities, of which at least $11.8 million were secured by promissory notes with HVP Partners. These funds, which constituted other peoples money loaned to HVP Partners and transferred to HVP Offshore, were commingled with other investor funds in HVP Offshores account. 36. From my review of financial records and other documents, it is apparent that in

many cases the execution of transfers of money obtained from other entities to any of the HVP Funds bank accounts to assist in concealing the hole, had the effect of enlarging the hole because entities or persons who provided funds ultimately used in these transfers for the most part expected to receive their money back with additional profits. Lopez Learns of the Fraudulent Scheme 37. In his testimony from the May 25, 2011 hearing before this Court, Illarramendi

admitted that he informed Lopez about the Fraudulent Scheme during 2006. (See Exhibit A at 360-365.) According to that testimony, rather than exposing the Fraudulent Scheme, Lopez instructs Illarramendi to fix the problem. (id.). The Fraudulent Scheme continued and grew for several more years after that. Commingled Funds Tainted All Subsequent Investments 38. The Investigation conducted by the Receiver and FTI has confirmed multiple

instances where money received from others, which the HVP Funds falsely recorded as redemptions of fictitious investments, was used to invest in what otherwise might have appeared to be legitimate investments. The use of commingled funds to make these investments tainted

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those investments and the corresponding profits received. The following are two examples of this occurring. 39. As described in 20, HVP Offshore, on December 19, 2005, received $7.4

million from Ontime, which was falsely characterized as the redemption of the fictitious investment in Ontime. Based on my review of the HVP Offshore account statements, it is evident that prior to, and following this date, the HVP Offshore account entered into certain purchase and sale transactions which left HVP Offshore with balances less than $7.4 million in the account. As such, cash received from Ontime was used to fund, in part, the trading activity conducted by HVP Offshore to purchase this bond. 40. On April 29, 2010, Illarramendi caused the Michael Kenwood Venezuela Fund

(MKV) to transfer approximately $34 million to the Master Fund, which the Master Fund falsely recorded as the redemption of a prior fictitiously recorded investment in MKV that never actually occurred. The $34 million transfer to the Master Fund is part of the $180 million in transfers this Court found that the Commission has preliminarily shown that the Highview Funds likely do not have a legitimate claim to (Doc #276 at 9-10.) Shortly after the Master Fund received the $34 million transfer from MKV some of those funds were utilized to invest in four securities. These securities transactions utilizing funds commingled from MKV ultimately yielded profits to the Master Fund. Concealment of the Hole Through The Falsification of Additional Fictitious Investments In the Books and Records of the HVP Funds 41. During 2006, Illarramendi continued to cover up the hole and execute the

Fraudulent Scheme by falsely creating fictitious investments on the HVP Funds books and records, and thereafter making false entries in its books and records reflecting the purported

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redemption of the fictitious investments.

Many times these falsely recorded redemptions

occurred contemporaneously with the receipt of money from another entity that was commingled with that of the HVP Funds. Examples relating to the falsification of investments in Pamac Securities (Pamac), Ontime and Naproad and the commingling of funds are briefly summarized below. Pamac 42. On or about June 2 and June 14, 2006, false entries were entered in the Master

Funds books and records purporting to record $10 million and $4 million investments in Pamac which were described in the Master Funds trade blotter as PAMAC2. An examination of the financial records of the Master Fund reflects that no such investment was made in Pamac. 43. In reality, the $10 million entry related directly to a transfer to a proprietary

account of BCT Bank, to pay back loans made to HVP Partners to further the Fraudulent Scheme. The $4 million entry related directly to a transfer to Pamac, used in part to pay back obligations to third parties. 44. On or about August 28, 2006, a false entry was entered in the Master Funds

books and records inaccurately reflecting the redemption of the fictitious investment in Pamac for approximately $14.7 million. However, no monies were actually received by the Master Fund at this time. Instead, as will be described in more detail below, at the same time as this fictitious redemption was recorded, a new fictitious investment in Naproad Finance, S.A. was simultaneously falsely recorded in the books of the Master Fund, which included the amount of this falsely recorded redemption. Ontime

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45.

On or about June 6, 2006, a false entry was entered in the Master Funds books

and records purporting to record a $4 million investment in Ontime which was described in the Master Funds trade blotter as ONTIME3. 46. In reality, this entry related directly to a transfer of approximately $4 million to

Ponter Investments, S.A., to pay back a loan made to HVP Partners to further the Fraudulent Scheme. 47. On or about August 28, 2006, a false entry was entered in the Master Funds

books and records inaccurately reflecting the redemption of the fictitious investment in Ontime for approximately $4.2 million. However, no monies were actually received by the Master Fund from Ontime at this time. Instead, as will be described in more detail below, at the same time as this fictitious redemption was recorded, a new fictitious investment in Naproad Finance, S.A. was simultaneously falsely recorded in the books of the Master Fund, which included the amount of this falsely recorded redemption. Naproad Finance, S.A. 48. As referenced above, both of the falsely recorded redemptions of the fictitious

Pamac and Ontime investments, were covered with the false creation of a new fictitious investment in the books and records of the Master Fund purportedly in Naproad Finance, S.A. The Master Funds trade blotter described this fictitious investment as NAPROADFI. 49. On or about August 28, 2006, a false entry was entered in the Master Funds

books and records to inaccurately reflect that a purported investment of $20 million had been made in Naproad. On or about the same date, the Master Fund transferred only approximately $1.1 million in cash to Naproad. The rest of the fictitious investment consisted of the false book

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entries, described in 44 and 47 above, that in effect rolled over the fictitious investments in Pamac and Ontime into the purported investment in Naproad Finance S.A. For example, on or about August 28, 2006, Illarramendi sent an e-mail to the HVP Funds administrator GlobeOp indicating that the $14.7 redemption from Pamac and the $4.2 redemption from Ontime, neither of which actually occurred, should be transferred via book entry to reflect an investment in Naproad. Tens of Millions of Dollars from the HVP Funds Are Utilized to Engage In Venezuelan Currency Arbitrage Trades 50. During 2007 and 2008, money transferred from the HVP Funds was, at times,

utilized to engage in high risk Venezuelan currency arbitrage transactions from which the HVP Funds received little, if any, profits. My review of documents indicates that certain funds related to PDVSA3 (the PDVSA Funds4) and Beracha received millions of dollars of profits from these transactions and that proceeds from the transactions may have been utilized to pay bribes to a former official of PDVSA. I briefly summarize only some of the details relating to one such transaction in October 2007. 51. During the period of October 2, 2007 to October 9, 2007, the Master Fund,

directly and through transfers to Ontime, sent approximately $26 million to BM Financial. In connection with these transfers, false entries were made in the books and records of the Master Fund inaccurately recording a purported investment in Ontime of $26 million which wasThe Venezuelan state-owned oil company, Petroleos de Venezuela S.A., and related entities collectively referred to herein as PDVSA.4 3

The PDVSA Funds include APJ International Limited; Asociacion Civil Administradora de los Fondos de Pensiones de los Jubilados de Petroleos de Venezuela, S.A. y sus Filiales; Fondo Prevision Trabajadores de Petroleos de Venezuela S.A. y sus Filliales; and PDVSA Institucion Fondo de Ahorros are collectively referred to herein as the PDVSA Funds.

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described in the Master Funds trade blotter as ONTIMEUSD. In addition to the $26 million received from the Master Fund, BM Financial also received approximately $10 million from BCT Bank, which were the proceeds of a loan provided to HVP Partners, and approximately $2 million from Lopezs sister, Carolina Lopez, through transfers to Ontime, for a total of approximately $38 million. 52. Documents reviewed reflect that BM Financial converted the dollars to

Venezuelan Bolivars (VEF) at a favorable permuta exchange rate, turning approximately $36.5 million of the invested monies into VEF worth approximately $89.5 million (USD) at the official government exchange rate. According to documents reviewed, BM Financial purchased VEFdenominated bonds with the Venezuelan Bolivars obtained. 53. BM Financial sent the VEF-denominated bonds to the PDVSA Funds, which in

turn sent U.S. dollar-denominated bonds worth approximately $47.6 million to HPA, an entity controlled by Illarramendi, providing a net benefit to the PDVSA Funds of approximately $41.9 million, calculated based upon the official government exchange rate. HPA then sold the bonds for market value, making a profit of approximately $11.1 million for the investor group.5 54. The Master Fund thereafter received a $26.75 million cash transfer as a result of

this Venezuelan currency arbitrage transaction. A false entry was recorded in the books and records of the Master Fund inaccurately reflecting that this transfer was a redemption of the falsely recorded Ontime investment. 55. Emails between Illarramendi and Beracha reveal that they kept track of the profits

Before the profit was distributed, the proceeds were immediately used to fund another Venezuelan currency arbitrage transaction again executed through BM Financial and the PDVSA Funds.

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and distributions thereof for each Venezuelan currency arbitrage transaction separately. 56. Of the approximately $11.1 million of profit from the permuta transaction

described above, more than $10.5 million was transferred to or retained by Beracha or entities which emails suggest Beracha controlled. 57. One such entity is Hermitage. An email between Illarramendi and Beracha notes

that approximately $7.3 million was to be paid to Hermitage as earmarked for black. Additional emails and information evidence that black is actually Juan Montes, an official at PDVSA. In addition, emails between Illarramendi and Beracha indicate that approximately $1.5 million sent to BM Financial, but not used to fund the Venezuelan currency arbitrage transaction, was to be sent to black (Juan Montes) directly by Beracha. Attached as Exhibit F are true and correct copies of these emails. Hotelera Playa Minas Early Redemption 58. Attached as Exhibit G is a true and correct copy of the Confidential Explanatory

Memorandum of HVP Offshore. This document evidences the 90-day redemption policy of HVP Offshore. (See Exhibit G at p 22.) Documents I reviewed, some of which are described below, reveal that in October 2008, Illarramendi and others apparently circumvented the 90-day redemption policy of HVP Offshore and arranged to favorably redeem an investor, Hotelera Playa Minas, off-the-books, prior to the expiration of 90 days. 59. In or about September 2008, Alvaro Martin (Martin), on behalf of Hotelera

Playa Minas, sought an immediate redemption of his investments in HVP Offshore, which would not have been permissible under the 90-day redemption policy. 60. An email I reviewed indicates that Lopez made an agreement with Martin,

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whereby Martin would cancel his September 30, 2008 redemption request and instead reapply for a December 31, 2008 withdrawal. 61. On or about October 20, 2008, Ontime transferred approximately $2.8 million to a

bank account held by Hotelera Playa Minas which appears to be the functional equivalent of an early redemption of Hotelera Playa Minas investment in HVP Offshore. Ontimes funding of this transfer followed the receipt of approximately $3.6 million from Elmont Properties, an entity connected to Cisneros, on or about October 17, 2008. 62. On or about December 22, 2008, Lopez sent an email to Martin instructing Martin

to transfer the money that he would receive from the conforming 90-day HVP Offshore redemption in January 2009 to an account at BCT Bank in the name of Flight Services, Inc., apparently to avoid Hotelera Playa Minas from being compensated twice for its investment in HVP Offshore. 63. On or about January 15, 2009, HVP Offshore transferred approximately $2.3

million to a bank account held by Hotelera Playa Minas. On or about January 16, 2009, Martin confirmed that he would transfer those funds to Flight Services, Inc., as instructed. 64. On or about January 22, 2009, Flight Services, Inc. transferred approximately

$2.3 million to Ontime. More Than a Quarter of a Billion Dollars of Capital From the MK Funds6 and Certain of the MK Entities7 Were Transferred To or For the HVP Funds Without6

The MK Funds refers to the following funds: MK Special Opportunity Fund; MKV; and Short Term Liquidity Fund, I, Ltd. (the MK Funds).

The MK Entities refers to the following entities: The Michael Kenwood Group, LLC; Michael Kenwood Capital Management, LLC; Michael Kenwood Asset Management, LLC; MK Energy and Infrastructure, LLC; MKEI Solar, LP; MK Automotive, LLC; MK Technology, LLC; Michael Kenwood Consulting, LLC; MK International Advisorycontinued on next page

7

18

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The Receipt of Any Benefit in Return 65. The Investigation has revealed that well in excess of a quarter of a billion dollars

of capital from the MK Funds and certain MK Entities was transferred to or for the HVP Funds without the receipt of any benefit in return from the HVP Funds. This net amount in excess of $250 million greatly exceeds the $164 million in net principal that investors claim to have invested in the HVP Funds. Notably, millions of dollars of principal contributed by investors in the HVP Funds was lost in Illarramendis various attempts to cover up the hole. MKV Monies Used by Fidevalores to Pay HVP Partners Principals and Others 66. Illarramendi caused MKV to transfer money to Fidevalores Sociedad de Corretaje

de Titulos Valores, S.A. (Fidevalores) which was used to make significant payments to Luth, Illarramendi, Illarramendis wife, and an entity controlled by Odo Habeck, who was one of the principals of the Michael Kenwood Group (MK Group). Fidevalores is an entity I understand is controlled by Illarramendis brother-in-law, Rufino Gonzalez-Miranda. A true and correct copy of an email describing this transaction is attached hereto as Exhibit H. 67. On or about June 16, 2009, MKV transferred approximately $4 million to a bank

account in the name of Fidevalores. 68. On or about June 16, 2009, Illarramendi sent a letter to Fidevalores requesting

that Illarramendi and his wife be paid $500,000. Attached hereto as Exhibit I is a true and correct copy of that letter.

continued from previous page

Services, LLC; MKG-Atlantic Investment, LLC; Michael Kenwood Nuclear Energy, LLC; MyTcart, LLC; TUOL, LLC; MKCM Merger Sub, LLC (the MK Entities).

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69.

On or about June 18, 2009, Fidevalores transferred $1.1 million to a bank account

in the name of Luth, purportedly for MK Group Consulting Fees. 70. On or about June 18, 2009, Fidevalores transferred $500,000 to a bank account in OGH

the name of OGH Advisors, LLC, purportedly for MK Group Consulting Fees. Advisors, LLC is an entity controlled by Odo Habeck. 71.

Prior to these transactions, in May 2009, Illarramendi caused MKV to transfer

money to Fidevalores which was used to make significant payments: $500,000 to Illarramendi and his wife, $500,000 to entity controlled by Odo Habeck and $935,000 to an entity hired to build Illarramendis residence in Connecticut. MKV Funds Used by Underhill to Pay Individuals Associated with HVP Partners and MK Group 72. Illarramendi caused MKV to transfer approximately $4 million to Underhill

Investments, S.A. (Underhill), an entity believed to be related the Lopez family, for the purpose of making payments to Luth, Lopez, Illarramendi and an employee of HVP Partners. 73. On or about March 24, 2010, Illarramendi sent an email to Lopez. In the email,

Illarramendi instructed Lopez to tell Carolina to send $1,267,000 to, as translated, us 3, which appears to be a reference to Luth, Lopez and Illarramendi; $105,000 to BP; and $50,000 to LB. Attached hereto as Exhibit J is a true and correct copy of the email. 74. On or about March 25, 2010, MKV transferred approximately $4 million to a

bank account in the name of Underhill. 75. On or about March 29, 2010, Illarramendi sent an email to Lopez modifying the

instructions in the March 24 email, indicating that BP should instead be paid $155,000. On or about April 6, 2010, $155,000 was wired from Underhill into an account in the name of an 20

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employee of HVP Partners with the initials BP. 76. On or about April 6, 2010, bank records I have reviewed confirm that $1,267,000

was wire transferred from Underhill to an account in the name of Luth. 77. On or about April 6, 2010, bank records I have reviewed confirm that $1,267,000

was wire transferred from Underhill to an account in the name of Illarramendi. HVP Funds Monies Used by Ontime to Pay HVP Partners Principals and Others 78. In January 2009, the Master Fund transferred funds to Ontime which then paid

$480,000 each to Luth and Illarramendi, $50,000 to Victor Chong, HVP Partners Chief Financial Officer and Chief Compliance Officer (Chong), and $400,000 to Illarramendis contractor. 79. Again, in February 2009, the Master Fund transferred funds to Ontime which then

paid $75,000 to Luth, $100,000 to Illarramendi and another $400,000 to Illarramendis contractor. HVP Funds Monies Used by Naproad to Pay HVP Partners Principals and Others 80. In January 2008, the Master Fund transferred funds to Naproad which then paid

$60,000 to Chong. 81. In January 2008, Naproad made transfers of $133,000 to each of Illarramendi,

Luth, Argenta Management Inc., and an entity associated with Lopez. These transfers were primarily funded with loans that were subsequently repaid using funds derived from Venezuelan currency arbitrage transactions that utilized money from the Master Fund. Extensive Commingling of Funds To and From HVP Funds and Various Entities 82. By August 2006, money received from the following entities had been 21

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EXHIBIT A

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1 2 3 4 5 6 7 8 9 10 11 BEFORE: 12 13 14 15 16 17 18 19 20 21 22 23 24 25

UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT * * * * * * * * * * * * * * * Case No. 11cv78(JBA) * * * * * * MAY 25, 2011 * * * *

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, vs. FRANCISCO ILLARRAMENDI, ET AL Defendant. * * * * * * * * * * * * * *

TRANSCRIPT OF EVIDENTIARY HEARING VOLUME II THE HONORABLE JANET BOND ARTERTON, U.S.D.J. RUA KELLY, ESQ KATHELEEN SHIELDS, ESQ CARLOS COSTA-RODRIGUES, ESQ LEEANN GAUNT, ESQ. United States Security and Exchange Commission 33 Arch Street Boston, MA 02110 JOHN GLEASON, ESQ. Gleason & Koatz 122 East 42nd Street New York, NY 10168 CARL LOEWENSON, ESQ RONALD WHITE, ESQ. Morrison & Foerster 1290 Avenue of the Americas New York, NY 10104 MICHAEL SWARTZ, ESQ Highview Point Schulte Roth & Zabel 919 Third Avenue New York, NY 10022

Appearances: FOR THE PLAINTIFF:

FOR THE DEFENDANT FRANCISCO ILLARAMENDI:

FOR THE DEFENDANT HIGHVIEW POINT PARTNERS:

FOR THE DEFENDANT HIGHVIEW POINT MASTER FUND, HIGHVIEW POINT OFFSHORE, LTD:

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that -- this was from information in those transaction reports, and this is what we accumulated. Q. So, we've seen here two instances of

investors essentially getting more out of the Master Fund than they put in. Did you do any additional

analysis to determine whether any investors received more back from the Master Fund than they had contributed? A. I did not. I limited it to the procedures

performed to compile this list. Q. So, what we don't know from Exhibit G is

how many investors redeemed and essentially made a profit on their investment? A. Q. I have not calculated that. I'm sorry, I meant to go through one other

set of -- I'm going to take you back to an exhibit of yours we already looked at. Let me just figure I think we can

out which of those exhibits it is. do it with Exhibit B. A. Q. Yes.

And I'd like to direct you to the third

line of data on Exhibit B, which is your sort of summary of the MKV X 2010 transactions. A. Yes.

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Q.

And what you've indicated were the total

proceeds from that set of transactions of 94 plus million dollars. A. Q. Yes, that's correct. I'd like to have you look at Mr.

Greenblatt's presentation concerning that transaction, and that is Plaintiff Exhibit 9, and the piece of it I want to ask you first about is, it's your understanding, sir, isn't it, that the $94 million proceeds were received back into the Master Fund in two chunks, essentially a $34 million chunk on April 29th and a $60 million chunk on May 10th; is that correct? A. Q. That's my recollection. Okay. And it's that $34 million piece that Were some of the documents

I want to start with.

that you reviewed in connection with your analysis records from the Highview Master Fund Deutsche Bank account? A. I did have those. I did have bank

statements from that bank, yes. MS. SHIELDS: approach, your Honor? THE COURT: Q. Yes. May I have permission to

I have for you what we've marked for

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identification as Plaintiff's Exhibit 13.

Have you

seen the Deutsche Bank records that are the first -let's see, three pages of Plaintiff's Exhibit 13? A. I don't recall. I went through many bank

statements. Q.

I don't personally recall this one.

Would you agree with me, sir, that the

$34 million payment that was made into the Highview Point Master Fund on April 29th is shown on the first page of Plaintiff's Exhibit 13, about three quarters of the way down? A. Q. I do see the amount of $34,145,000, yes. And perhaps it might be easier if you look

at Plaintiff's Exhibit 9, which is the presentation. I can direct you to the wire transfer order that matches up there and perhaps give you some additional comfort. Exhibit 9. A. Q. Yes, I found page 28. And you see that is the wire transfer It's page 28 of Plaintiff's

payment order reflecting the payment of that $34 million plus amount from the Michael Kenwood Venezuela Fund into the Highview Master Fund Deutsche Bank account? A. Q. Yes, I agree this is the wire transfer. And what we have is the Deutsche Bank

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account statement sort of showing those funds arrived; is that right? A. That's correct, that's on Plaintiff's

Exhibit 13. Q. And you'll observe on the first page of

Plaintiff's Exhibit 13 that prior to the Deutsche Bank's account -- prior to the Deutsche Bank account's receipt of those funds, there was approximately $8.7 million in that account? A. Yes, 8.7 million appears to be the balance

immediately preceding this deposit. Q. And then if you look at pages 2 and 3 of

Plaintiff's Exhibit 13, you'll observe, and we've highlighted them so you can see them more easily, you'll see that there are four transactions, four essential purchases that are reflected in the Deutsche Bank account in the amounts of $9.8 million, $9.8 million, $5.6 million, and $3.9 million. A. Do you see those purchases?

I do see those disbursements from the bank

accounts, yes. Q. And those four purchase, those are all

purchases that you -THE COURT: Is there an difference --

you use the word "purchases," he uses the word

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"disbursements."

Is this of any significance? I can use the word

MS. SHIELDS: "disbursements." Q.

Essentially funds going out of the Deutsche

Bank account. A. Q. A. Q. Yes. For some purpose. Yes. And those four disbursements are Yes?

disbursements that you have analyzed as four, I think what you've called them, securities trades; is that right? A. check. I would have to go through -- I'd have to I don't recall of all of the securities

trades these four numbers. Q. Okay. Well, perhaps we can do it this way.

If you look at pages 4 and 5 and 6 and 7 of Plaintiff's Exhibit 13, those are the wire transfer payment orders that correspond to those disbursements. them. A. Thank you. I've reviewed the four wire I'll give you a moment to look at

transfers. Q. And do you agree that those are the wire

transfer orders that correspond to those four

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disbursements? A. They match in dollar amount to the four

disbursements. Q. And those are all from the Highview Point

Master Fund Deutsche Bank account? A. Q. Yes, they appear to be, yes. Then if you look at the last two pages of

Plaintiff's Exhibit 13, is it fair to say what is reflected -- that those are pages from the Highview Point Master Fund's trade blotter? A. They do appear to be the pages from the

trade blotter, yes. Q. And if you look at the highlighted entries

on both of those pages, that shows how these, the four disbursements, were characterized on the Master Fund's trade blotter; is that right? A. Q. A. Q. If I may just have a moment. Certainly. I've reviewed the four pages. And do those pages show how these

disbursements were characterized on the trade blotter of the Master Fund? A. I have matched the dates to the same period

and I've matched the dollars for three of them directly to the book net amount and one of them to

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the book net amount plus accrued interest. would -- they do represent the same dollars. Q. A. Q. And -Dollar amounts, if I may.

So, it

And these entries on the trade blotter,

fair to say that these are entries that you would have put into the securities trades bucket when you sort of grouped investments from the trade blotter together? A. From my recollection, they would be in the

securities bucket. Q. So, you would agree with me, sir, wouldn't

you, that without this $34 million that came into the Master Fund from the Michael Kenwood Venezuela Fund, the Master Fund would not have had enough money to engage in these securities trades? fair? A. If I -- they would only have -- just Is that

mathematically, the fund would only have had $8.7 million, and I think the aggregate of what was purchased after the receipt of substantially these funds totals about 28 to 30 million dollars of securities. As to the availability of funds, this So, I would

was limited to this one bank account. just qualify my answer that way.

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Q.

So, they could have gotten funds from

somewhere else, but if this is the bank account they had to use, they couldn't have made these securities trades without the $34 million? A. They could not have made all four. They

may have been able to make individual ones. Q. Fair enough. MS. SHIELDS: So I think -- if I may,

your Honor, have just a moment to consult with my colleagues. Q. I have just sort of two summary questions And that is to again sort of make

for you, sir.

sure that we're all clear about the scope of your testimony. It's not your testimony, is it, sir,

that there was no commingling of funds between the Master Fund and any of the Michael Kenwood funds, is it? A. I haven't done any procedures that would

address anything related to commingling. Q. And similarly, it's not your testimony that

there was no fraud in connection with the Master Fund? A. It's not my testimony that there was no

fraud, that is correct. MS. SHIELDS: Thank you. I have no

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it's about 70 years if it got to be -- you know, there is a column and a line and I'm not -Q. So the right side of the line? MR. WITNESS: THE COURT: THE WITNESS: Q. I'm sorry? The grid. Exactly, the grid.

So, on the far end of the grid is 70 years;

to the best of your knowledge? A. Q. Correct, correct. As a result of the fraud you've pled guilty

to, the liabilities for the funds that you managed exceeded the assets to pay those liabilities by hundreds of millions of dollars, right? A. That's being calculated, as I understand

it, but my understanding is that yes, that would be about adequate. Q. You've referred to this as the hole in your

plea allocution? A. Q. Yes, I believe so. And the hole could, in your estimation, be

in excess of $300 million? A. Q. I believe so, yes. During the time you committed this fraud,

from say 2005 through 2010, you were managing principal at Highview Point Partners, right?

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Q.

Can you talk a little bit about how the

circumstances in which the fraud began, when what you referred to as the hole started to develop? A. In approximately mid-October 2005, I was in

Venezuela to enter into supposedly a transaction to purchase a credit linked note from a Venezuelan financial institution through the arbitrage that I have described in my testimony in answering to Mr. Loewenson's questions. And as a result of that,

because of a number of issues, the bank that was purchasing the note from us backed out of the transaction, and because of market events that resulted in us, or me, having to sell the security at a much lower price than I had intended initially, and a loss being effectively incurred, in part by Highview Point Master Fund, or at the time it wasn't Master Fund, it was just Highview Point Offshore, and in part by others, that contributed to the transaction. that. And it's a lot more elaborate than

In the interest of time, I could go into a

lot more detail, but I don't want to either -- I don't know if it's relevant to do that. tell me. THE COURT: That's how it started. You can

We'll go on from October '05.

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Q.

The only question I have about the hole is

how much it was at that time? A. When all was said and done in that first

part of it, I believe the hole was approximately $5 million, but it wasn't from -- the hole from the transaction. Q. At some point did you disclose the

existence of the hole to any of your partners who were principals? A. At a later date, after I had tried to

recover the money and had failed to do so, thereby larging -- or increasing -- I don't think larging is a word, I'm sorry -- increasing the amount of the mismanagement between assets and liabilities to approximately $30 million, I described -- I disclosed the situation to Mr. Lopez. I don't know,

that may have been, you know, at the end of the summer of 2006 perhaps. Q. Can you talk a little bit more about that

conversation. A. It was -- after reaching that point I

decided to approach first my father and then Mr. Lopez, and eventually both of them together, to discuss the matter and to get advice on what would be the best course of action.

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Q. A.

What did you say to Mr. Lopez exactly? That through -- because of that transaction

initially, and my subsequent actions to try and recover the money, I had reached a point where, due to market transactions and other things that had -it's a long story, so I can discuss it whenever you guys want, but I want to be as efficient as possible -- there had been a significant hole, let's call it, creator, differential creator, loss created by me, and the circumstances that totaled approximately $30 million, part of which was money that essentially was Highview Point's money and part of which was money from other investors that participated in transactions with us. Q. And how did you -- how did you describe

this to Mr. Lopez? A. Well, it was a few years ago, but I believe I, you know,

I just told him, look, I messed up.

lost this money in this transaction where Calyon backed out of the trade, and then I tried to make it up through doing options trading and other transactions, and they didn't go well and, unfortunately, you know, the loss is growing. Q. A. How did Mr. Lopez react? He was very taken aback. He was not happy.

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And we discussed at that time whether or not we should approach first the lead investor, or the investors, and my father recommended that we approach the lead investor to disclose to him what had happened, and then Frank asked me that him and I should go to the office and leave my father. We

were meeting, at a hotel at a restaurant in a hotel in Manhattan near where I lived, and we went to the office and we discussed it, and he felt it would be a very bad thing for his reputation, for a number of things, and myself as well, and, you know, so he asked that we try to figure out a different way of fixing the problem and that I work to fix the problem. Q. And by the way, you mentioned before that What was his title at

Mr. Lopez had been your boss. Credit Suisse; if you know? A.

Over the years when I first arrived at

Credit Suisse Frank, was a director of Latin America Group. So without necessarily having a reporting

line direct to him, he was a superior member of the team. Subsequent to that, over the years he became

head of Latin America, Latin American Investment Banking, or the Emerging Markets Group. We were

never really clear on what the exact titles were at

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Credit Suisse, but he was head of the team I worked in. Q. A. Pretty high up at Credit Suisse? Well, as high as you can get without going

into I think management of the firm in terms of -you know. Q. So, you indicated that he was of the view

that the Master Fund couldn't disclose the loss to investors. Is that what you testified to just now? MR. LOEWENSON: Your Honor, consistent

with your prior ruling, I'll object to the leading. THE COURT: Q. Sustained.

What happened -- how did you react to Mr.

Lopez's directive that the investor should not be told about the loss the fund had sustained? respond? A. I agreed that I would do everything, my Did you

best efforts and everything in my power to resolve the situation. I -- how I reacted? Are you asking

me to qualify my reaction? good one. Q.

Because it wasn't a very

Did he ask you to do anything specifically Did he ask

other than to just keep on keeping on? you to do anything? A.

I don't recall the exact details of the

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conversation, but, you know, we'll have to figure out how we, you know, fix it. it, basically. And, you know -- fix

And then he -- obviously we agreed

that I would never tell anybody about it, and then -- I'm sorry, I didn't know these were going to be the circumstances under which this was going to be discussed, but I think under the circumstances I can't honor that commitment. the extent of it. But I think that was

And then essentially I went to

work on trying to solve the problem, which obviously didn't work out very well. Q. How did you and Mr. Lopez go about trying

to keep this loss concealed? A. Well, it's not that we went about together Once he was

trying to keep the loss concealed.

informed and once I agreed that I would, you know, try to work through it, we didn't talk much about it except on occasion, you know. And the idea was I

would try to raise as much money as possible to be able to make it so that the gains from those -- from that additional money would eventually cover the loss, and that I would use everything in my power, you know, all the people I knew in government in Venezuela or other investors to see if I could raise enough money.

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But I think that at some point in time -- because this resulted in what I call kind of the third bucket of investors, or the investors who were not Michael Kenwood investors or Highview Point Master Fund, being essentially created, you know, that existed or growing, at some points some investors participated in that that he brought in and that were in and out of the transactions, or the pot, as I would call it. Q. You just used the term "third bucket." Can

you -- and I believe you said that it was investors who were neither Highview nor Michael Kenwood; is that right? A. It was either investors that were neither

Highview nor Michael Kenwood, or additional money from investors that were in Highview or that were in Michael Kenwood that that money was not subscribed to either Highview or Michael Kenwood. if that clarifies. Q. What was the -- what was the reason for I don't know

getting those investors from what you called the third bucket? A. Why did you need the money from them?

The way that I tried to solve the problem

was to run what I called a unified, let's say, treasury function where the money, no matter where

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EXHIBIT B

Case 3:11-cv-00078-JBA Document 446-3 Filed 05/05/11 Page 1 2 of 23 Case 3:11-cr-00041-SRU Document 10 Filed 02/02/12 Page of 14U.S. Department of Justice

United Slales Allorney DislriclofConnecticut

Briell McMaholl Federal Bllildillg9/5 Lafi,ye"e Bou/evard. Room J09 Bridgeporr, COllnecticut 06604

(203) 696-3000 Fnt (203) 579-5550

March 7, 20 II John P. Gleason, Esquire Gleason & Koatz, LLP 122 E. 42" d Street New York, NY 10168

Re:

United States v. Francisco IIIarramendi Criminal No.

Dear Mr. Gleason: This letter confirms the plea agreement between your client, Francisco Illarramendi (the "defendant"), and the United States Attorney's Office for the District of Connecticut (the "Government" or "this Office") concerning the referenced criminal matter.

THE PLEA AND OFFENSEThe defendant agrees to waive his right to be indicted and to plead guilty to a five-count information charging him in Counts One and Two with wire fraud, in violation of 18 U.s.C. 1343, and in Count Three with securities fraud, in violation of 15 U.S.c. 78j(b) & 78ff, 17 C.F.R. 240.1 Ob-5, and in Count Four with investment adviser fraud, in violation of 15 U.S.c. 80b-6 & 80b-17, and in Count Five with conspiracy to obstruct justice, obstruct an official proceeding and to defraud the U.S. Securities and Exchange Commission, in violation of 18 U.S.c. 371.

Counts One and Two: Wire FraudThe defendant understands that, to be guilty of the offenses charged in Counts One and Two (wire fraud), the following essential elements of the offense must be satisfied: I. That there was a scheme or artifice to defraud or to obtain money and property by means of materially false and fraudulent pretenses, representations or promises; That the defendant knowingly and wilfully participated in the scheme or artifice to defraud, with knowledge of its ft'audulent nature and with intent to deft'aLld; and

2.

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John P. Gleason, Esquire March 7, 2011 Page 2 3. That in execution of or in furtherance of that scheme, the defendant used, or caused the use of, wires in interstate or foreign commerce.

Count Three: Securities Fraud

The defendant understands that, to be guilty of the offense charged in Count Three (securities fraud), the following essential elements of the offense must be satisfied: I. That in connection with the purchase or sale of securities, the defendant (a) employed a device, scheme or artifice to defraud, or (b) made an untrue statement of a material fact or omitted to state a material fact which made what was said, under the circumstances, misleading, or (c) engaged in an act, practice or course of business that operated, or would operate, as a fraud or deceit upon a purchaser or seller; That the defendant acted willfully, knowingly and with the intent to defraud; and That the defendant knowingly used, or caused to be used, any means or instruments of transportation or communication in interstate commerce or the use of the mails in furtherance of the fraudulent conduct.

2. 3.

Count Four: Investment Adviser Fraud

The defendant understands that, to be guilty of the offense charged in Count Four (investment adviser fraud), the following essential elements of the offense must be satisfied: I. That the defendant was acting as an investment adviser with respect to clients or potential clients; That the defendant (a) employed a device, scheme, or artifice to defraud clients or prospective cl ients, or (b) engaged in a transaction, practice, or course of business which operated as a fraud or deceit upon a client or prospective client, or (c) engaged in an act, practice, or course of business which was fraudulent, deceptive or manipulative; That the defendant acted willfully and knowingly and with intent to defraud; and That the defendant used the mails or another instrumentality of interstate commerce.

2.

3. 4.

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John P. Gleason, Esquire March 7,2011 Page 3Count Five: Conspiracy

The defendant understands that, to be guilty of the offense charged in Count Five (conspiracy to obstruct justice, obstruct an official proceeding and to defraud the U.S. Securities and Exchange Commission), the following essential elements of the offense must be satisfied: 1. That two or more persons entered into an agreement to commit an offense against the United States; That the defendant knowingly participated in the conspiracy with the specific intent to commit at least one of the offenses that were the objects of the conspiracy; and That during the course of the conspiracy, one of the members of the conspiracy committed an overt act in furtherance of the objectives of the conspiracy.

2.

3.

THE PENALTIES

With respect to the charges of wire fraud in Counts One and Two of the information, each of those offenses carries a maximum penalty of20 years of imprisonment and a $250,000 fine. In addition, under 18 U.S.c. 3583, the Court may impose a term of supervised release of not more than three years to begin at the expiration of any term of imprisonment. The defendant understands that, should he violate any condition of the supervised release, he may be required to serve a fwther term of imprisonment of up to two years with no credit for time already spent on supervised release. With respect to the charge of securities fraud in Count Three of the information, the offense carries a maximum penalty of 20 years of imprisonment and a $5,000,000 fine. In addition, under 18 U.s.C. 3583, the Court may impose a term of supervised release of not more than three years to begin at the expiration of any term of imprisonment. The defendant understands that, should he violate any condition of the supervised release, he may be required to serve a further term of imprisonment of up to two years with no cred it for time already spent on supervised release. With respect to the charge of investment adviser fraud in Count Four of the information, the offense carries a maximum penalty of five years of imprisonment and a $10,000 fine. In addition, under 18 U.S.C. 3583, the Court may impose a term of supervised release of not more than three years to begin at the expiration of any term of imprisonment. The defendant understands that, should he violate any condition of the supervised release, he may be required to serve a fllrther term of imprisonment of up to two years with no credit for time already spent on supervised release.

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John P. Gleason, Esquire March 7, 20 II Page 4 With respect to the charge of conspiracy in Count Five of the information, the offense carries a maximum penalty of five years of imprisonment and a $250,000 fine. In addition, under 18 U.S.c. 3583, the Court may impose a term of supervised release of not more than three years to begin at the expiration of any term of imprisonment. The defendant understands that, should he violate any condition of the supervised release, he may be required to serve a further term of imprisonment of up to two years with no credit for time already spent on supervised release. With respect to the five charges in the Information, defendant understands that the total maximum sentence he could receive if the sentences were imposed consecutively is 70 years of imprisonment. The defendant also is subject to the alternative fine provision of 18 U.S.c. 3571. Under this section, the maximum fine that may be imposed on the defendant for each count of conviction is the greatest of the following amounts: (I) twice the gross gain to the defendant resulting from the offense; (2) twice the gross loss resulting from the offense; or (3) (a) $5,000,000 (with respect to Count Three); or (b) $250,000 (with respect to Counts One, Two and Five); or (c) $10,000 (with respect to Count Four). In addition, the defendant is obligated by 18 U.S.c. 3013 to pay a special assessment of $100 on each count of conviction for a total special assessment of $500. The defendant agrees to pay the special assessment to the Clerk of the Court on the day the guilty plea is accepted. The defendant is also subject to restitution, as discussed below. Unless otherwise ordered, should the Court impose a fine or restitution of more than $2,500 as part of the sentence, interest will be charged on the unpaid balance of the fine or restitution not paid within 15 days after the judgment date. 18 U.S.c. 3612(f). Other penalties and fines may be assessed on the unpaid balance of a fine or restitution pursuant to 18 U.S.c. 3572 (h), (i) and 3612(g). Restitution In addition to the other penalties provided by law, the Court must also order that the defendant make restitution under 18 U.S.c. 3663A, and the Government reserves its right to seek restitution on behalf of victims consistent with the provisions of 3663A. The scope and effect of the order of restitution are set forth in the attached Rider Concerning Restitution. Restitution is payable immediately unless otherwise ordered by the Court. The defendant agrees to work with the receiver appointed in SEC v. Illarramendi, ef aI., 3:11-cv-00078 (lBA) (hereafter, the "SEC Action"), and with the SEC in an effort to make restitution. The defendant's refusal to cooperate with the receiver and the SEC renders this agreement voidable by the Government.

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John P. Gleason, Esquire March 7, 2011 Page 5 Forfeiture The defendant understands that, as pal1 of the SEC Action, there is a freeze on his assets. Notwithstanding this, the defendant understands that, as a result of his entry ofa guilty plea to the count(s) of wire fraud in the Information, he may be subject to forfeiture to the United States of America, pursuant to 18 V.S.c. 981 (a)( 1)(C) and 28 U.s.C. 2461 (c). Such forfeiture may include, but not be limited to, all right, title, and interest he maintains in any and all property, real or personal, which constitutes or is derived from proceeds traceable to violations of 18 V.S.C. 1343, and/or a sum of money equal to the total amount of proceeds obtained as a result of the offenses. Moreover, he further understands that, ifany of the above-described forfeitable property, as a result of any act or omission of the defendant, cannot be located upon the exercise of due diligence, has been transferred, sold to, or deposited with a third party, has been placed beyond the jurisdiction of the court, has been substantially diminished in value, or has been commingled with other property which cannot be divided without difficulty, it is the intent of the United States, pursuant to 21 U .S.c. 853(p), as incorporated by 28 V.S.C. 2461 (c), to seek forfeiture of any other property of said defendant. The defendant understands and agrees that by virtue of his plea of guilty he waives any rights or cause of action to claim that he is a "substantially prevailing party" for the purpose of recovery of attorney fees and other Iitigation costs in any related forfeiture proceeding pursuant to 28 V.S.c. 2465(b)(I).

THE SENTENCING GUIDELINESApplicability The defendant understands that the Court is required to consider any appl icable Sentencing Guidelines as well as other factors enumerated in 18 U.S.c. 3553(a) to tailor an appropriate sentence in this case and is not bound by this plea agreement. The defendant agrees that the Sentencing Guideline determinations will be made by the Court, by a preponderance of the evidence, based upon input from the defendant, the Government, and the United States Probation Office. The defendant further understands that he has no right to withdraw his guilty plea ifhis sentence or the Guideline application is other than he anticipated, including if the sentence is outside any of the ranges set forth in this agreement. Acceptance of Responsibility At this time, the Government agrees to recommend that the Court reduce by two levels the defendant's adjusted offense level under 3E 1.1 (a) of the Sentencing Guidelines, based on the defendant's prompt recognition and affirmative acceptance of personal responsibility for the offense. Moreover, because the Government anticipates that the offense level determined by the advisory Guidelines prior to the adjustment for acceptance of responsibility will be greater than

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John P. Gleason, Esquire March 7,2011 Page 6 level 16, the Government intends to file a motion with the Court pursuant to 3E 1.1 (b) recommending that the COLll1 reduce defendant's adjusted offense level by one additional level based on the defendant's prompt notification of his intention to enter a plea of guilty. The above-listed recommendations are conditioned upon the defendant's full, complete, and truthful disclosure to the Probation Office of information requested, of the circumstances surrounding his commission of the offense, of his criminal history, and of his financial condition through the submission of a complete and truthful financial statement. The defendant understands that the Court is not obi igated to accept the Government's recommendations on the reductions. The Government will not make the recommendations if the defendant engages in any acts which, in the Government's view, (1) indicate that the defendant has not terminated or withdrawn from criminal conduct or associations (Sentencing Guideline 3E 1.1); (2) could provide a basis for an adjustment for obstructing or impeding the administration ofjustice (Sentencing Guideline 3C 1.1); or (3) constitute a violation of any condition of release. Moreover, the Government wi II not make the recommendations if the defendant seeks to withdraw his plea of guilty or takes a position at sentencing, or otherwise, which, in the Government's assessment, is inconsistent with affirmative acceptance of personal responsibility. The defendant understands that he may not withdraw his plea of guilty if, for the reasons explained above, the Government does not make one or both of the recommendations. Stipulation Pursuant to 6B 1.4 of the Sentencing Guidelines, the defendant and the Government have entered into a stipulation, which is attached to and made a part of this plea agreement. The defendant understands that this stipulation does not set forth all of the relevant conduct and characteristics that may be considered by the Court for purposes of sentencing. The defendant understands that this stipulation is not binding on the Court. The defendant also understands that the Government and the United States Probation Office are obligated to advise the Court of any additional relevant facts that subsequently come to their attention. Defendant understands and agrees that his admissions in the Stipulation of Offense Conduct section are material cond itions of th is plea agreement. If the defendant seeks to withdraw from any of the admissions set forth in the Stipulation of Offense Conduct, the Government will deem defendant's effort to withdraw fi'om the admissions as a material breach ofthis plea agreement and the Government may void all or part of this agreement, including, but not limited to, the non prosecution provisions of this agreement.

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John P. Gleason, Esquire March 7, 20 I I Page 7 Guidelines Stipulation The Government and the defendant have no agreement and, thus, do not stipulate as the defendant's applicable Guidelines range or fine range. The Government and the defendant do stipulate that the defendant is a Criminal History Category I. Because the Government and the defendant do not stipulate as to the applicable Guidelines range, there is no stipulation or agreement as to the final Guidelines offense level applicable to the defendant. The defendant expressly understands that his final Guideline offense level, fine range and criminal history category will be determined by the Court. He also understands that the parties' calculations regarding his criminal history category are subject to final determination by the Court. The defendant further expressly understands that he will not be permitted to withdraw the plea of guilty if the Court imposes a sentence outside the Guidelines range or fine range determined by the Court or if the Court determines that his criminal history is different than that stipulated by the parties. In the event the Probation Office or the Court contemplates any sentencing calculations different from those stipulated by the parties, the parties reserve the right to respond to any inquiries and make appropriate legal arguments regarding the proposed alternate calculations. The defendant reserves the right to request a downward departure from the applicable Guideline Sentencing range on any basis including, but not limited to, the arguments that defendant is entitled to a downward depaIture pursuant to Guideline 5K2.16 (Voluntary Disclosure of Offense), reserves the right to seek a non-Guidelines sentence and reserves the right to challenge and oppose any sentencing motion filed by the Government. The Government expressly reserves the right to respond to, challenge and oppose any sentencing motion filed by the defendant. Moreover, the Government expressly reserves the right to defend any sentencing determination, even if it differs from that stipulated by the parties, in any post-sentencing proceeding. Appeal Rights Regarding Sentencing The parties reserve their respective rights to appeal and to oppose each other's appeal of the sentence imposed as permitted by 18 U.S.c. 3742. Information to the Court The Government reserves its right to address the Court with respect to an appropriate sentence to be imposed in this case. Moreover, the Government will discuss the facts of this case, including information regarding the defendant's background and character, 18 U.S.c. 3661, with the United States Probation Office and will provide the Probation Officer with access to material in its file, with the exception of grand jury material.

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John P. Gleason, Esquire March 7, 201 I Page 8WAIVER OF RIGHTS

Waiver of Right to Indictment The defendant understands that he has the right to have the facts of this case presented to a federal grand jury, consisting of between sixteen and twenty-three citizens, twelve of whom would have to find probable cause to believe that he committed the offense set forth in the information before an indictment could be returned. The defendant acknowledges that he is knowingly and intelligently waiving his right to be indicted. Waiver of Trial Rights and Consequences of Guilty Plea The defendant understands that he has the right to be represented by an attorney at every stage of the proceeding and, if necessary, one will be appointed to represent him. The defendant understands that he has the right to plead not guilty or to persist in that plea if it has already been made, the right to a public trial, the right to be tried by ajury with the assistance of counsel, the right to confront and cross-examine the witnesses against him, the right not to be compelled to incriminate himself, and the right to compulsory process for the attendance of witnesses to testify in his defense. The defendant understands that by pleading guilty he waives and gives up those rights and that, if the plea of guilty is accepted by the COLll1, there will not be a further trial of any kind. The defendant understands that, ifhe pleads guilty, the Court may ask him questions about each offense to which he pleads guilty, and if he answers those questions falsely under oath, on the record, and in the presence of counsel his answers may later be used against him in a prosecution for peljury or making false statements. Waiver of Statute of Limitations The defendant agrees that, should the conviction following defendant's plea of guilty pursuant to this plea agreement be vacated for any reason, then any prosecution that is not timebarred by the appl icable statute of Iimitations on the date of the signing of th is plea agreement (including any indictment or counts the Government has agreed to dismiss at sentencing pursuant to this plea agreement) may be commenced or reinstated against defendant, notwithstanding the expiration of the statute of limitations between the signing of this plea agreement and the commencement or reinstatement of such prosecution. The defendant agrees to waive all defenses based on the statute of limitations with respect to any prosecution that is not time-barred on the date the plea agreement is signed.

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John P. Gleason, Esquire March 7, 2011 Page 9ACKNOWLEDGMENT OF GUILT AND VOLUNTARINESS OF PLEA

The defendant acknowledges that he is entering into this agreement and is pleading guilty freely and voluntarily because he is guilty. The defendant further acknowledges that he is entering into this agreement without reliance upon any discussions between the Government and him (other than those described in the plea agreement letter), without promise of benefit of any kind (other than the concessions contained in the plea agreement letter), and without threats, force, intimidation, or coercion of any kind. The defendant further acknowledges his understanding of the nature of the offense to which he is pleading guilty, including the penalties provided by law. The defendant also acknowledges his complete satisfaction with the representation and advice received from his undersigned attorney. The defendant and his undersigned counsel are unaware of any conflict of interest concerning counsel's representation of the defendant in the case. . The defendant acknowledges that he is not a "prevailing party" within the meaning of Public Law 105-119, section 617 ("the Hyde Amendment") with respect to the count of conviction or any other count or charge that may be dismissed pursuant to this agreement. The defendant voluntarily, knowingly, and intelligently waives any rights he may have to seek attorney's fees and other litigation expenses under the Hyde Amendment.SCOPE OF THE AGREEMENT

The defendant acknowledges that this agreement is limited to the undersigned parties and cannot bind any other federal authority, or any state or local authority. The defendant acknowledges that no representations have been made to him with respect to any civil or administrative consequences that may result from this plea of guilty because such matters are solely within the province and discretion of the specific administrative or governmental entity involved. Finally, the defendant acknowledges that this agreement has been reached without regard to any civil tax matters that may be pending or which may arise involving him.COLLATERAL CONSEQUENCES

The defendant further understands that he will be adjudicated guilty of each offense to which he has pleaded guilty and will be deprived of certain rights, such as the right to vote, to hold public office, to serve on ajury, or to possess firearms. The defendant understands that pursuant to section 203(b) of the Justice For All Act, the Bureau of Prisons or the Probation Office will collect a DNA sample from the defendant for analysis and indexing. Finally, the defendant understands that the Government reserves the right to notify any state or federal agency by which he is licensed, or with which he does business, as well as any current or future employer of the fact of his conviction.

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John P. Gleason, Esquire March 7, 2011 Page 10SATISFACTION OF FEDERAL CRIMINAL LIABILITY; BREACH

The defendant's guilty plea, ifaccepted by the Court, will satisfy the federal criminal liability of the defendant in the District of Connecticut as a result of his participation in his wire fi'aud and securities fraud scheme to defraud clients of his investment advisory business between in or about 2008 and 20 II and his efforts to obstruct a lawful investigation by the U.S. Securities and Exchange Commission and the related civil case filed in this district, which conduct forms the basis of the information in this case. The defendant understands that this paragraph satisfying his criminal liability in the District of Connecticut is limited to criminal conduct which he or his counsel has disclosed to the Government as of the date this plea agreement is executed. The defendant understands that if, before sentencing, he violates any term or condition of this agreement, engages in any criminal activity, or fails to appear for sentencing, the Government may void all or part of this agreement. If the agreement is voided in whole or in part, defendant will not be permitted to withdraw his plea of guilty.NO OTHER PROMISES

Apart from any other written agreement signed by the parties to this agreement, the defendant acknowledges that no other promises, agreements, or conditions have been entered into other than those set forth in this plea agreement, and none will be entered into unless set forth in writing, signed by all the parties. This letter shall be presented to the COUI1, in open court, and filed in this case. Very truly yours, DAVID B. FEIN UNITED STATES ATTORNEY

~~ 7~RICHARD 1. EO-ITER SENIOR IGATION COUNSEL PAUL A. MU I-IY ASSISTANT UNITED STATES ATTORNEY

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John P. Gleason, Esquire March 7,2011 Page II The defendant certifies that he has read this plea agreement letter and its attachment(s) or has had it read or translated to him, that he has had ample time to discuss this agreement and its attachment(s) with counsel and that he fully understands and accepts its terms.

~~-

FRANCISCO ILLARRAMENDI The Defendant

2-MDate Date

r

!

1 have thoroughly read, reviewed and explained this plea agreement and its attachment(s) to my client who advises me that he understands and accepts its terms.

J HN P. GLEASON, ESQ. Attorney for the Defendant

Case 3:11-cv-00078-JBA Document 446-3

Filed 02/02/12 Page 13 of 23

Page Intentionally Blank

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,

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF CONNECTICUT

- - - xUNITED STATES OF AMERICA No. 3:11CR-41(SRU) 915 Lafayette Boulevard Bridgeport, Connecticut March 7, 2011 FRANCISCO ILLARRAMENDI- - - - - - - - - - - - - - - - x

vs.

WAIVER AND PLEA

B E FOR E: THE HONORABLE STEFAN R. UNDERHILL, U. S. D. J.

A P PEA RAN C E S:

FOR THE GOVERNMENT: OFFICE OF THE UNITED STATES ATTORNEY . 915 Lafayette Boulevard, Room 309 Bridgeport, Connecticut 06604 BY: PAUL A. MURPHY, AUSA FOR THE DEFENDANT: GLEASON & KOATZ, LLP 122 East 42nd Street New York, New York 10168 BY: JOHN P. GLEASON, ESQ.

Susan E. Catucci, RMR Official Court Reporter 915 Lafayette Boulevard Bridgeport, Connecticut 06604 Tel: (917)703-0761

Case 3:11-cv-00078-JBA Document 190-2 446-3

Filed 05/10/11 Page 41 of 59 02/02/12 15 2340

need you to tell me that, so please listen carefully to his summary of the government's proof. 3 4 5 6 7 8 9 10 11 12 MR. MURPHY: Your Honor, if the defendant were

to proceed to trial, the government would prove that from in or about 2006 until about February 8, 2007, he engaged in a scheme to defraud the investors and creditors of hedge funds and entities he advised and he also engaged in a scheme to defraud the SEC. One of the objects of the scheme was to obtain money and property from investors and creditors without disclosing the truth about the performance of the funds and the assets under management of the funds. Another

1314 15 16

object of the scheme was to conceal from the investors and creditors the hole that existed between the fund assets and liabilities, which has been estimated at exposing investors to potential losses in the hundreds of millions of dollars. Throughout the scheme to defraud, the defendant, among other things, used money provided by new investors to the Funds to payo