BOSTON A father and son hedge fund team that wooed clients with its ties to the Massachusetts Institute of Technology but then put some money into Bernard Madoff's Ponzi scheme will pay $4.8 million to settle charges they lied about their records and how they would make money, securities regulators said on Friday.
Gabriel Bitran, a professor of operations management at MIT, founded GMB Capital Management in 2005 and with his son, Marco, raised more than $500 million from wealthy investors who wanted a piece of the MIT's professor's exclusive computer models which the pair said had delivered years of lucrative returns.
The trouble was that neither claim was accurate, the Securities and Exchange Commission said, noting that instead of investing the money themselves, they gave a chunk to other firms which turned out to be frauds.
"The Bitrans lied to investors about what they had done, and they lied to investors about what they would do. Then, when the SEC began an exam, they lied to the exam staff as well," said David Bergers, Director of the SEC's Boston regional office.
To settle the civil case, where the pair neither admitted nor denied the SEC's findings, father and son will disgorge $4.3 million, pay a $250,000 fine each and be barred from the securities industry, the SEC said.
The charges were settled at a time many wealthy investors are eager to boost personal investment returns by putting money into hedge funds. At the same time regulators are now keeping a much closer eye on the $2 trillion hedge fund industry having just required all but the very smallest funds to register with the agency and disclose how they make money and for whom.
Last month the SEC's Boston office won another victory when hedge fund swindler Andrey Hicks, a college dropout who convinced investors he had earned a PhD from Harvard, was ordered to pay back more than $7.5 million.
The Bitrans, like Hicks, told impressive tales of how the MIT professor would spend 80 percent of his time managing the funds and review trades on a daily basis, when in fact, he played no part in managing any hedge fund, the SEC said.
The Bitrans boasted strong resumes with degrees from MIT and Harvard and work experience at Wellington Management. GMB Capital's tony address in one of Boston's most vaunted downtown office buildings added to the image that the father and son had all the tools to make their investors' fortunes grow.
The pair fabricated track records showing annualized returns of 16.2 percent and 11.7 percent for the two funds with no down years.
Even though the Bitrans' firm was small, it garnered attention because many investors are always looking for the next industry stars and because the large successful hedge funds are often closed to new investors.
Most shocking to some investors who had allocated money to GMB Capital was that the men did not make their own trades but rather gave the money to other funds which then put it into fraudulent firms.
"These investments in funds that ultimately invested with the Petters Group and Madoff were made contrary to what GMB investors were told," the SEC said.
In June 2009, Bernard Madoff was sentenced to 150 years in prison for turning his wealth management business into a giant Ponzi scheme. Thomas Petters was sentenced to 50 years in prison in April 2010 on similar charges.
(Reporting By Svea Herbst-Bayliss; Editing by Leslie Gevirtz)