The U.S. Attorney’s Office for the District of Massachusetts announced today that it was charging two Boston-area hedge fund managers with conspiracy to commit securities fraud, wire fraud and obstruction of justice.

Madoff Hedge Fund Scam

Gabriel Bitran, a former professor and associate dean of the Massachusetts Institute of Technology, and his son Marco Bitran, a Harvard Business School graduate and financial professional, were charged with conspiracy to commit securities fraud, wire fraud and obstruction of justice related to their hedge fund businesses, GMB Capital Management and GMB Capital Partners. Both men have stated they plan to plead guilty to the charges.

Details on the hedge fund scam

The DOJ claims that Gabriel and Marco Bitran solicited investors for their hedge fund and investment advisory businesses from 2005 through 2011 with false claims that they had managed friends and family money for a number of years, delivering annual returns between 16 and 23% every year.

The men also 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, which was not true. The Bitrans also hid the fact that certain of their hedge funds were just “funds of funds,” i.e., funds in which values of investments are set by the value of investments in other independently managed hedge funds.

Based on their falsehoods, the Bitrans managed to convince investors to put over $500 million in their hedge fund scam. Moreover, the two men paid themselves millions of dollars in for managing the fraudulent funds.

When the financial crisis hit back in late 2008, several of their hedge funds suffered huge losses, resulting in investors losing more than half of their principal in many instances. Despite these huge losses, Gabriel and Marco Bitran redeemed approximately $12 million of their own money from these hedge funds in late 2008, while delaying other requests for redemption.

Hedge fund scam connection to Madoff

The United States Securities and Exchange Commission (“SEC”) examiners learned of the Bitrans’ performance claims and asked for supporting documentation while investigating potential victims of the Madoff fraud in 2009. The men allegedly made false statements to the SEC examiners and even provided fabricated records supporting their claimed trading performance.

The DOJ statement also points out that during this time Gabriel and Marco Bitran exchanged emails acknowledging to each other that they had made false statements to investors and owed them restitution.