MIT Sloan School of Management Professor Gabriel Bitran PhD ’75 and his son Marco Bitran ’97 have agreed to pay $4.8 million to settle hedge fund fraud charges brought against them by the Securities and Exchange Commission (SEC), the SEC said on Friday.
The report stated that the Bitrans, on multiple counts, misrepresented their firms’ historic performance, strategy, and investments to investors and media.
In 2005, Gabriel founded GMB Capital Management (GMB Management), stating that the firm would manage hedge funds using the quantitative models he had developed, according to the SEC’s order. The three main selling points the Bitrans used to market GMB Management were based on their supposed track record of successful actual trades with real money since 1998, their use of Gabriel’s optimal pricing model in these trades, and Gabriel’s “pedigree and involvement as founder and portfolio manager of hedge funds.”
However, the SEC said that the supposed track record was not based in reality, but rather on “back-tested hypothetical simulations,” particularly “hypothetical historical allocations to six hedge fund managers.” Additionally, despite the promise to use Gabriel’s model to trade liquid securities, most of the fund was actually invested in “illiquid investments in other hedge funds” — including funds managed by Bernard L. Madoff — and did not make use of the optimal pricing model.
On the third point, in June 2006, Marco joined his father as a managing member of GMB Management, and two years later in May 2008, GMB divided into GMB Management and GMB Capital Partners (GMB Partners), the latter of which was advised by Marco with no involvement, advisory or otherwise, from Gabriel. GMB Partners was still marketed to investors based on the same three false points. In this particular aspect, GMB Partners falsely advertised based on Gabriel’s “pedigree.”
In response to an unannounced examination by the SEC’s Boston Regional Office, GMB Management provided false documents. The examiners were given a fabricated record of Gabriel’s trades from 1998 to 2005. The document claimed that the trades were recorded “in real-time,” but in fact were neither “true nor accurate,” according to the SEC order. Additionally, when SEC examiners requested correspondence between GMB Management and its clients, including emails during a specified time period, they were told that email was not Gabriel’s “primary method of communication,” and an email sent from Gabriel’s account stated that no such emails were found. However, when faced with subpoenas from the examiners, GMB management provided relevant email correspondence between Gabriel and GMB Management clients.
The SEC’s investigation also showed that, in several incidences, GMB failed to disclose aspects of losses to investors. When possible financial fraud at Petters Group Worldwide was reported in September 2008, GMB investments were in a “fund that was entirely invested in the Petters Group became illiquid.” GMB did not inform investors that the fraud had affected them.
Most notably, GMB had “suffered significant losses in hedge funds that had invested with Bernard L. Madoff Investment Securities,” an issue which had brought GMB significant media attention in December 2008 when Madoff admitted to the Ponzi scheme.
Nicholas C. Theodorou, Gabriel Bitran’s lawyer, said to the Boston Globe that his client was “pleased to have a settlement with the SEC and put the matter behind him.” Mark Pearlstein, Marco Bitran’s lawyer, said the same for his client.
In January 2011, GMB Management changed its name to ClearStream Investments, which Scott Sunshine, a spokesman for the hedge fund, confirmed was shutting down to the Boston Globe.
The Bitrans agreed to be “barred from the securities industry, and the GMB entities will be censured,” starting June 19, in addition to the $4.8 million settlement.
After this story was published, the Bitrans’ spokesperson contacted The Tech and released a statement on their behalf indicating that the Bitrans neither confirm nor deny the claims made in the SEC report.