International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Friday, August 22, 2014

Former Associate Dean of MIT Sloan School and His Harvard MBA Son Agree to Plead Guilty in Hedge Fund Scam of over $140 of million

SECTwo Boston-area hedge fund managers were charged [August 12] with conspiracy to commit securities fraud, wire fraud and obstruction of justice. In total, the Bitrans lost more than $140 million of GMB investors’ principal.  If the plea agreements are accepted by the Court, the Bitrans will be sentenced to no more than five years in jail but no less than two years, as well as a period of up to three years of supervised release and more than $10 million in forfeiture.

Gabriel Bitran, 69, of Newton, a former professor and associate dean of the Massachusetts Institute of Technology ("MIT") Sloan School of Business, and his son Marco Bitran, 39, of Brookline, a Harvard Business School graduate and money manager, were charged with conspiracy to commit securities fraud, wire fraud and obstruction of justice in connection with their hedge fund businesses, GMB Capital Management and GMB Capital Partners. Both Gabriel and Marco Bitran have agreed to plead guilty to the charge.

It is alleged that from 2005 through 2011, Gabriel and Marco Bitran solicited and maintained investors in their hedge fund and investment advisory businesses with false claims that, for eight or more years, they had managed friends and family funds, delivering average annual returns between 16 and 23%, with no down years. The Bitrans falsely told investors that the money in GMB hedge funds would be invested according to a complex mathematical trading model developed by Gabriel Bitran and based upon his MIT research on optimal pricing theory. The Bitrans also routinely concealed from investors that certain of their hedge funds were simply “funds of funds,” that is, hedge funds in which values of investments are determined by the value of investments in other independently managed hedge funds, some of which were themselves broad-based funds of funds.

By means of their fraudulent representations, the Bitrans induced investors to entrust over $500 million to their businesses. From this money, the Bitrans paid themselves millions of dollars in management fees for managing the funds in which they had fraudulently induced people to invest.

In the fall of 2008, several of the Bitrans’ hedge funds had disastrous losses, resulting in investors losing 50–75% of their principal in many instances. Nonetheless, in the fall of 2008, as their funds were experiencing these losses, Gabriel and Marco Bitran redeemed approximately $12 million of their own money from these hedge funds, while deferring other investors’ requests for redemption. The Bitrans thereby extracted much of the value of their own investments while leaving other investors to suffer more losses as the funds’ values declined precipitously.

In January 2009, while investigating potential victims of the Madoff fraud, the United States Securities and Exchange Commission (“SEC”) examiners learned of the Bitrans’ performance claims and asked for supporting documentation. In response, the Bitrans allegedly made false statements to the SEC examiners and provided fabricated records purporting to support their claimed actual trading performance.

As they did so, Gabriel and Marco Bitran acknowledged to each other that they had made false statements to investors and owed them restitution. In July 2009, Gabriel Bitran emailed Marco Bitran and discussed the fact that they had misled investors:

“We have mislead [sic] a lot of people with a range of statements that were incorrect simply to increase our income. . . . A person with the experience and knowledge of the financial sector and a veteran professor of MIT should not have engaged in this type of behavior. . . . I certainly do not blame you for everything that happened; we both share responsibility. . . . With [several named individuals] and probably a few others . . . we told them a story that was not true! . . . In my view you are discarding their anger as bad losers. This is not the whole story. They are not idiots, they know that they were mislead [sic]. The penalty for this type of action is Full [sic] restitution, which obviously we cannot afford.”

Similarly, in a September 1, 2009 email, Marco Bitran acknowledged to his father that he had not acted honestly. He stated:

“We are certainly sharing equally in this dad. . . . Lots of our problems were caused by my good intentions but very poor actions when it came to true honesty.”

Still, from early 2009 through 2010, the Bitrans took steps to shield their assets by transferring them out of GMB businesses and into entities with less obvious affiliations to Gabriel and Marco Bitran. To effect some of these transfers, they used the identity of a family member without that person’s knowledge, obtaining falsely notarized signatures in that person’s name, to shield millions of dollars that they had preferentially transferred out of the GMB hedge funds.

see SEC Charges Father-and-Son Hedge Fund Managers Who Agree to Pay $4.8 Million to Settle Fraud Case

The SEC’s investigation found that Gabriel and Marco Bitran raised millions of dollars for their hedge funds through GMB Capital Management LLC and GMB Capital Partners LLC by falsely telling investors they had a lengthy track record of success based on actual trades using real money. In truth, the Bitrans knew the track record was based on back-tested hypothetical simulations. The Bitrans also misled investors in certain hedge funds to believe they used quantitative optimal pricing models devised by Gabriel Bitran to invest in exchange-traded funds (ETFs) and other liquid securities. Instead, they merely invested the money almost entirely in other hedge funds. GMB Capital Management later provided false documents to SEC staff examining the firm’s claims in marketing materials of a successful track record.

According to the SEC’s order instituting settled administrative proceedings, Gabriel Bitran founded GMB Capital Management in 2005 for the stated purpose of managing hedge funds using quantitative models he developed based on his academic optimal pricing research to trade primarily ETFs. He and his son Marco Bitran solicited potential investors with three primary selling points:

  • Very successful performance track records based on actual trades using real money from 1998 to the inception of the hedge funds.
  • The firm’s use of Gabriel Bitran’s proprietary optimal pricing model to trade ETFs.
  • Gabriel Bitran’s involvement as founder and portfolio manager of the funds.

The SEC’s order states that over a period of three years, the Bitrans raised more than $500 million for eight hedge funds and various managed accounts while making these misrepresentations to investors. In order to market the hedge funds, GMB Management and the Bitrans created performance track records beginning in January 1998 showing double-digit annualized return without any down years. They distributed these track records to potential investors in marketing materials, and told investors that they were based on actual trading with real money using Gabriel Bitran’s optimal pricing models. In reality, the Bitrans knew their representations were false and the track records were based on hypothetical historical investments. For two of their hedge funds, they created track records showing annualized returns of 16.2 percent and 11.7 percent with no down years, and told investors the returns were based on actual trading when in fact they were based on hypothetical historical allocations to hedge fund managers.

According to the SEC’s order, investors were misled to believe their money was being invested according to Gabriel Bitran’s unique quant strategy when in reality certain GMB hedge funds were merely investing predominantly in other hedge funds without his involvement. For example, investors in two GMB hedge funds were told that Gabriel Bitran spent 80 percent of his time managing the funds and was involved in reviewing trades in the funds on a daily basis. However, he actually had no role in the management of either fund.

Both funds experienced a series of losses at the end of 2008, and GMB eventually dissolved them. When a possible financial fraud of $3.7 billion at the Petters Group Worldwide was reported in late September 2008, the two hedge funds’ investments in a fund that was entirely invested in the Petters Group became illiquid. However, GMB did not disclose to investors that it had been impacted by the Petters fraud, instead sending investors a letter stating that “a swap instrument that the Fund entered into seeking to realize a higher return on a portion of its uninvested cash” had become illiquid because “one of the parties underlying the swap instrument is currently experiencing a credit and liquidity crisis, in conjunction with other alleged factors.” Furthermore, the two GMB funds suffered significant losses in hedge funds that had invested with Bernard Madoff. These investments in funds that ultimately invested with the Petters Group and Madoff were made contrary to what GMB investors were told.

According to the SEC’s order, during an SEC examination of GMB Capital Management, the firm produced a document that the Bitrans claimed was a real-time record of Gabriel Bitran’s trades since 1998. In fact, the document was false and created solely for the purpose of responding to the SEC staff’s request for the books and records that supported GMB’s performance claims.

https://lawprofessors.typepad.com/intfinlaw/2014/08/former-associate-dean-of-mit-sloan-school-and-his-harvard-mba-son-agree-to-plead-guilty-in-hedge-fun.html

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