260 F. Supp. 3d 166
D. Conn.2017Background
- SEC sued Francisco Illarramendi for violations of Section 206(1), (2), (4) of the Investment Advisers Act and Rule 206(4)-8, seeking injunction, disgorgement, and civil penalties; motion for summary judgment directed only at Illarramendi on Claims Two–Four.
- Illarramendi pleaded guilty in a related criminal case to adviser fraud, securities and wire fraud, conspiracy, and stipulated that the offense conduct descriptions were true and accurate; he received lengthy prison sentence and a restitution order.
- At a preliminary injunction/asset-freeze hearing in this civil case, Illarramendi testified under oath that he managed pooled funds, engaged in foreign-exchange arbitrage, suffered an initial $5M loss that grew, concealed losses from investors, commingled funds, used new investor money to pay earlier investors, and inflated NAVs/fees.
- Illarramendi opposed summary judgment alleging duress/necessity (extortion threats by PDVSA), contesting valuation of certain claims, and asserting his guilty plea was not intended as admission or is vitiated by Sixth Amendment counsel issues; he produced no admissible evidence supporting duress or extortion.
- The court independently reviewed the record, found Illarramendi’s courtroom admissions and his guilty plea dispositive, and concluded no genuine issue of material fact remained.
- Remedy: court granted SEC summary judgment, permanently enjoined Illarramendi from violating Sections 206(1),(2),(4), ordered disgorgement of $25,844,834 (the court’s approximation of unjust enrichment) and imposed a $1,000,000 third‑tier civil penalty.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Illarramendi violated §206(1),(2),(4) and Rule 206(4)-8 | Admissions and guilty plea establish scheme to defraud, misrepresentations, commingling, and use of new investor funds to pay old investors | Denies liability, claims actions were under duress/necessity and disputes some valuation numbers | Court held admissions and plea establish violations; summary judgment for SEC |
| Whether criminal guilty plea has preclusive effect in civil case | Guilty plea and allocution collaterally estop defendant on material facts underlying the fraud | Argues plea not intended as admission, is vitiated by Sixth Amendment counsel denial and habeas pending | Court applied collateral estoppel: plea and allocution preclude relitigation; pending appeals/habeas do not negate preclusive effect |
| Whether defendant raised genuine disputes of material fact to avoid summary judgment | SEC: defendant’s pro se 56(a)2 denials lack specific record citations and are conclusory/self‑serving | Illarramendi: points to duress, extortion, misvaluation of claims, and procedural infirmities | Court found defendant failed to cite admissible evidence; denials insufficient to create triable issues |
| Appropriate remedies (injunction, disgorgement, civil penalty) | Seek permanent injunction, disgorgement equal to restitution ($370M claimed) and maximum third‑tier penalty | Argues criminal matter not final and inability to pay; contests disgorgement amount | Court entered permanent injunction; disgorgement set at $25,844,834 (unjust enrichment estimate); imposed $1,000,000 third‑tier civil penalty |
Key Cases Cited
- Anderson v. Liberty Lobby, 477 U.S. 242 (summary judgment requires concrete evidence to create genuine issue)
- Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986) (nonmovant must show more than metaphysical doubt to avoid summary judgment)
- Transamerica Mortg. Advisors, Inc. v. Lewis, 444 U.S. 11 (investment advisers owe fiduciary duty to disclose material facts)
- Aaron v. SEC, 446 U.S. 680 (Advisers Act antifraud provisions applicable as discussed)
- Schiro v. Farley, 510 U.S. 222 (1994) (issue preclusion principles)
- Parklane Hosiery Co. v. Shore, 439 U.S. 322 (preclusion doctrine and offensive use)
- United States v. U.S. Currency (More or Less), 304 F.3d 165 (criminal conviction may have collateral estoppel effect in later civil proceedings)
- Gelb v. Royal Globe Ins. Co., 798 F.2d 38 (estoppel principles and government’s ability to rely on criminal convictions in civil suits)
- SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082 (disgorgement as remedy to deprive wrongdoer of unjust enrichment)