The founder of a Valencia-based investment firm has agreed to plead guilty to criminal conspiracy charges in connection with a securities fraud that may have cost investors as much as $14 million.
Keith G. Gilabert, 35, whose Capital Management Group operated a hedge fund called GLT Venture, has agreed to cooperate with the Justice Department and securities regulators under terms of a plea agreement filed Friday in U.S. District Court in Los Angeles.
The Securities and Exchange Commission also filed a civil complaint against Capital Management Group and Gilabert on Friday, charging them with misappropriating funds and misleading investors.
Gilabert, who was touting 27% returns at GLT in late 2004, acknowledged in the plea agreement with the Justice Department that he had lied to lure investors into his fund. Far from earning such returns, the fund lost more than $7 million and distributed to investors some $4.6 million in money falsely labeled as profits, securities officials charged.
Although Gilabert started out investing money in stocks and options, as he had said he would, Capital Management Group turned into a classic Ponzi scheme -- paying old investors with money coming from new investors -- as the investments plunged in value, regulators said in legal filings.
The Justice Department said Gilabert stole at least $2.5 million of investor money for his own use. And he continued marketing his fund throughout 2004, officials said, even though Capital Management's investment advisor registration had been revoked by the California Department of Corporations in 2003.
Gilabert declined to comment.
More than 40 investors poured money into Capital Management from September 2000 to January 2005, when the company was abruptly closed, Gilbert admitted in the plea agreement. According to documents filed by regulators, Gilabert worked with a co-conspirator at a major brokerage house to lull investors into a false sense of security.
Neither the SEC nor the Department of Justice would reveal the name of the brokerage house or the co-conspirator. But in a civil lawsuit filed in August 2005, an investor said he had been persuaded to invest $4 million in Capital Management by a broker at UBS Financial Services Inc.
The investor, Rabbi Sam Bronstein of Los Angeles, said in his complaint that the broker came to his home with Gilabert to tout a "special investment program" that they said was backed by UBS. The two also sent Bronstein fictitious account statements, purporting to show how his money was allocated and performing, the suit alleges.
Gilabert admitted in his plea deal that he had paid the broker in exchange for his assistance. UBS spokesman Paul Del Colle said the firm was cooperating with authorities and had reimbursed its clients for their losses.
The SEC and the Justice Department said they were continuing to investigate Gilabert and those who worked with him.
"The government has an ongoing investigation and will pursue the conspirators who participated in the scheme with Mr. Gilabert," said David Willingham, deputy chief of the major frauds section in the U.S. attorney's office in Los Angeles.
Upon entering his plea, Gilabert would face a maximum sentence of five years in federal prison. He was ordered to appear in District Court on May 22.
Briane Nelson Mitchell, associate regional director of the SEC's Los Angeles office, said the government's action against Gilabert should serve as a warning to investors considering hedge funds, which are sophisticated investments sold to wealthy individuals and are largely unregulated.
"This is an emerging area," Mitchell said. "People really need to take a look at hedge funds and who is operating them."