LOS ANGELES (HedgeWorld.com)--Keith G. Gilabert, who federal authorities and securities regulators say ran a Ponzi scheme disguised as a hedge fund, has agreed to plead guilty to federal charges of conspiracy to commit mail fraud, wire fraud and securities fraud, according to a news release from the U.S. Attorney's Office.
Mr. Gilabert, 35, of Valencia, Calif., also is facing Securities and Exchange Commission civil charges in connection with his hedge fund firm, Capital Management Group. Mr. Gilabert raised $14.1 million from at least 38 investors, SEC officials alleged in a complaint filed in April. Mr. Gilabert told people he was running a hedge fund, the GLT Venture Fund, that would use both short- and long-duration trades in stocks and options to generate double-digit returns while mitigating risk through hedging. Mr. Gilabert even devised a marketing program whereby he recruited and trained so-called sales agents to round up investors, and created printed marketing materials and a web site.
In those materials, Mr. Gilabert touted prior annual returns of between 19% and 36% dating back to 1997, even though the fund wasn't formed until March of 2000, according to the SEC complaint.
In actuality, though, Mr. Gilabert lost more than half the money he collected from investors--$7.8 million--through bad trades, spent another $4.6 million paying phony "returns" to early investors (the Ponzi scheme) and used another $1.7 million for personal expenses, including paying off credit cards and taking flying lessons.
SEC officials also alleged that Mr. Gilabert received $700,000 in trading commission rebates from one of the GLT Fund's executing brokers, rebates that were never disclosed to investors.
The SEC complaint, filed May 1, references Mr. Gilabert's plea agreement with federal prosecutors. As part of that agreement, Mr. Gilabert admitted he ran a fraudulent hedge fund and lied to investors. He also admitted to most of what the SEC has alleged, specifically that he made up returns and misappropriated investor funds.
But the federal plea agreement contains another nugget: In it, Mr. Gilabert also admitted that he conspired with an account manager at an unnamed "major brokerage firm" to mislead investors about the performance of the GLT Fund, investment risks and oversight by the brokerage firm. He also admitted that he paid off the account manager in exchange for helping to defraud investors.
According to the U.S. Attorney's Office, Mr. Gilabert will cooperate with investigators in what federal prosecutors termed an "ongoing criminal probe."
Although the brokerage firm is unnamed, according to an article in the Los Angeles Times, a civil lawsuit filed in August by a GLT investor claimed that the investor had been visited at home by Mr. Gilabert and a broker from UBS Financial Services Inc. Together, Mr. Gilabert and the broker convinced the man, Rabbi Sam Bronstein of Los Angeles, to invest $4 million. They told the rabbi the GLT fund was backed by UBS. Later they sent the rabbi false account statements showing positive performance, according to the Times' description of the lawsuit.
Paul Del Colle, a spokesman for UBS, said, "UBS is cooperating with the relevant authorities in this matter. Clients who invested in GLT through UBS have been made whole."
Mr. Gilabert is next scheduled to appear in court on May 22. Once he enters his guilty plea, he could be sentenced to a maximum of five years in federal prison.
In the SEC's separate civil case, the commission is seeking to make Mr. Gilabert repay investors with interest and pay a civil penalty.
Contact Bob Keane with questions or comments at firstname.lastname@example.org.