Illarramendi in his own words: He was a pawn

Francisco Illarramendi, who is currently appealing his 13-year sentence for securities fraud related to the pension fund of Venezuelan state oil company Petroleos de Venezuela SA, filed this interesting document into the federal court docket back in January. I missed it, but if you were interested in his case, it’s worth reading. It’s basically his version of events, laid out in very long form. Among other details, he basically claims to have invented Venezuela’s permuta Bs./$ bond sales system:

Prior to the instant offense, Mr. Illarramendi worked in the securities industry with Credit Suisse from 1994 to 2004, conducting extensive work in Latin American countries, including Venezuela (“BROV”). PSR, at 23. While at Credit Suisse, Mr. Illarramendi was the leader of a team that developed a bolivar to U.S. dollar (“BVD/USD”) arbitrage mechanism that spawned the BROV’s ability to fund itself at significantly discounted interest rates. In 2004, he took a sabbatical from Credit Suisse, and began a special assignment as an advisor to Venezuela’s national oil company “Petroleos de Venezuela, S.A.” (PDVSA). PSR, at 22-23. During this assignment Mr. Illarramendi generated approximately $1.6 billion in savings, when based on his advice, PDVSA was able to repurchase $2.0 billion in outstanding bonds, utilizing Mr. Illarraendi’s arbitrage innovation. Thereafter, the BROV began issuing profitable bonds. PSR, at 22. Specifically, Mr. Illarramendi advised the Venezuelan government to issue bonds denominated in U.S. dollars, which were purchased using bolivars (“BVD”) at the official exchange rate. This allowed the financing of currency exchanges, and lower yields than would otherwise be available in the international markets. PSR, at 5. Ultimately, Mr. Illarramendi’s instruction and advice paid dividends well into the future, to the tune of billions of dollars for the BROV and PDVSA.

He then describes what his fund, Highview Point, did to make money. If you are keen on finance, go read it. He then describes how he ended up stuck in a bad deal:

In or about October, 2005, Mr. Illarramendi and his family travelled to Venezuela for a wedding; while there, he was asked to intermediate the purchase and sale of a $50 million Credit Linked Note issued by Credit Lyonnais, which was sold by the BROV in the secondary market to Banco Federal. He undertook to have Highview Point (“HVP”)4 purchase the note from Banco Federal, and sell it to Calyon Securities. Calyon Securities, however, failed to complete the transaction as contemplated. Consequently, Mr. Illarramendi endured coercive pressure to complete the transaction; the failure in this transaction, however, ultimately produced the $5 million loss referred to by the Government as the initial “hole.” While still in Venezuela, Mr. Illarramendi attempted to “back out” of the transaction, however, due to pressure from Banco Federal, and BROV Government officials, he quickly realized that doing so may result in harmful consequences to both himself and/or his family. It is at this juncture that Mr. Illarramendi began to realize the darker side of the financial success he precipitated in the BROV.

Spooky.

Mr. Illarramendi detailed and explained to the FBI, and USAO, that he attempted to disguise a loss in managed funds, and had outstanding liabilities that exceeded the true value of the funds’ assets … from early 2006 until February of 2011. … Mr. Illarramendi also disclosed that he had to pay bribes and kickbacks to government officials at PDVSA, who were wholly responsible for the investment decisions of the pension funds they controlled. The purpose of paying these kickbacks was to assure continued liquidity of the MK funds, and to “close the hole” which necessitated his “scheme” in the first place. As part of complying with PDVSA officials’ demands, Mr. Illarramendi caused his hedge funds to purchase an asset held by PDVSA (the “Harewood asset”7) for $35 million, in return for a $100 million investment by PDVSA.

He makes the case that this wasn’t a Ponzi scheme. So I guess I shouldn’t have called it the PDVSA Pension Ponzi many times back around 2011.

His main point through it all is that PDVSA may have lost money, but most of that money was lost through kickbacks and graft in the company. Using exchange rate goofiness as a premise, he says his fund owed only $42 million, not $482 million, to PDVSA, and the receiver if anything gave too much to the oil company. He says he was a pawn, and that oil company officials were the real beneficiaries of the whole scam.

Officials use their unbridled power to obtain huge personal gains by deploying well known intermediaries, a phenomenon facilitated readily by the “license to steal” aspect of government operations in the BROV. Once again, it is also difficult to imagine how the Receiver and/or the Government could deny the effect of this phenomenon, and fail to recognize the multitude of specific transactions involving such well known intermediaries. Records of these transactions confirm exactly what Mr. Illarramendi has maintained in proffer sessions; namely, that his attempts to cure the shortfalls were further stifled by the siphoning of otherwise anticipated profits by Government officials, via extortionate means. Mr. Illarramendi’s obvious expertise in the VEB/USD arbitrage made him an attractive target for this type of corruption; he understood the transactional nuances and was forced to operate as a pawn for the benefit of Government officials since 2005.

Looking big picture, Illarramendi calculates that the permuta exchange system has provided US$60 billion in financial benefits for public and private entities.

The statement goes on for many pages, giving a master class in Venezuelan exchange finance, and if you’re into that stuff, go read it. All I can say is that it’s clear at this point that this was a mess.

The filing obviously didn’t work. It was an attempt to get a more lenient sentence, and instead he got a pretty severe sentence. I hear all the anti-Wall Street sentiment is having this effect — since the government doesn’t have the time or guts to go after big banks, instead it is really throwing the book at less important but more convictable financial criminals. So it goes.

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7 thoughts on “Illarramendi in his own words: He was a pawn

  1. notiven

    I started reading the big document, but stopped due to the time. In the mentirme, your words that … “, Illarramendi calculates that the permuta exchange system has provided US$60 billion in financial benefits for public and private entities.” This is wow

    Nice reporting, specially knowing that getting these documents is not free By experience ,they only cost some cents per page, but cents start piling up and become Dollars

    1. Steven/Setty Post author

      Thanks Notiven, yes, I have blown hundreds of my own dollars on PACER but I think it’s worth it. In part I do it because I know how hard it is for people in Venezuela to get access to foreign credit cards to download these documents. Happy to help out.

  2. Miguel Octavio

    I think you are confusing permuta by Bs./$ bond sales. They are different. Permutas were born in February 2003 when brokers began exchanging bonds in Bs, for bonds in dollars and viceversa. What he claims to have invented is the sale of bonds denominated in dollars to the public in Bs. These sales began in August 2003 and the original idea was to drain monetary liquidity and relieve pressure from the permuta system.

  3. jennymanche

    First time ever I read the other side of this sad story. Thank you for doing proper investigative journalism!

    Another dimension maybe worth looking into, that goes beyond this particular case: how can defendants defend themselves against well funded criminal and punitive civil lawsuits in an effective way, if absolutely all their personal assets are frozen from the outset by the very people who are suing them?

    In other words, had Mr Illarramendi’s family been independently wealthy, or had he used his undeniable dealing skills to stash funds away for a rainy day – as any “schemer” or “fraudster” would do – he would have been able to fund defense lawyers with the proper level of expertise. And most probably would not be in the terrible position he is in today.

    The legal fees spent by the Receivership to destroy that man’s life must add up into the millions of dollars (are these not in public domain through court filings by the way?). Most of that money might have been better used to further refund the honest investors, who have all recouped more than 90% of their claims by the way. This case is not about a “Ponzi” scheme at all.

    At the very least, the defendant’s version of the story should have been argued more broadly and taken into proper consideration.

    Might the minutes of the sentencing hearing also be informative in that respect ?

  4. John Howes

    I read the sentencing transcript. It’s one of the most horrifying things I’very ever encountered. The fact that the US government rendered him penniless and unable to adequately defend himself is in itself an indictment of our criminal justice system. I think Mr. Illarramendi’s lawyer did the best he could under the circumstances, but everything was stacked against him. Hopefully Mr. Illarramendi will have a better opportunity to defend himself on appeal.

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