A former Massachusetts Institute of Technology professor and his son agreed to plead guilty to running a $500 million hedge-fund scam that was uncovered by investigators probing Bernard Madoff’s Ponzi scheme.
Gabriel Bitran, who was a professor and associate dean at MIT’s Sloan School of Management, and his son, Marco, wooed investors to GMB Capital Management LLC with fake claims of success in managing family and friends’ accounts using a trading model based on the father’s research, according to a copy of a charging document provided by federal prosecutors in Boston.
The men, who raised more than $500 million from 2005 to 2011, meanwhile put money into “funds of funds,” which rely on investments by other hedge funds, and fed money to Madoff’s firm and Madoff feeder funds, according to prosecutors.
The Bitrans’ funds suffered losses of more than $140 million. The men paid themselves as much as $16 million in management fees over the life of the businesses and recovered $12 million of their own investments when the funds were doing poorly, the U.S. said, adding that the two discussed their scheme in e-mail exchanges.
“A person with experience and knowledge of the financial sector and a veteran professor of MIT should not have engaged in this type of behavior,” Gabriel Bitran said in an e-mail to his son in July 2009 that was cited by prosecutors. “I feel very embarrassed because we told them a story that was not true!”
Marco Bitran said in a September 2009 e-mail to his father that “we are certainly sharing equally in this” and that “lots of problems were caused by my good intentions but very poor actions when it came to true honesty,” according to prosecutors.
While investigating potential victims of Madoff’s fraud in 2009, U.S. regulators began probing the Bitrans’ claims to have made average annual returns of 16 percent to 23 percent.
After the SEC began its probe, the Bitrans took steps to shield their assets by transferring them out of GMB to other entities using the name of a family member who wasn’t aware of what they were doing, prosecutors said.
In 2012, the Bitrans agreed to pay $4.8 million to settle U.S. Securities and Exchange Commission claims that they lied to investors about their track record.
Each will plead guilty to one count of conspiracy to commit securities fraud, wire fraud and falsify documents and face a maximum sentence of five years in prison, according to agreements with prosecutors.
“Professor Bitran accepts responsibility and is pleased there will be a resolution of this matter,” his lawyer, Nicholas Theodorou, said yesterday in a phone interview.
Marco Bitran also “looks forward to resolving this matter and putting it behind him,” said his lawyer, Mark Pearlstein.
Gabriel Bitran, 69, was a professor at MIT from 1978 to 2013, where he focused on research and consulting in the field of “optimal pricing,” according to prosecutors. Marco Bitran, 39, holds a bachelor’s degree from MIT and a master’s degree in business administration from Harvard Business School, prosecutors said.
“MIT does not comment on pending criminal proceedings involving members of the MIT community,” Paul Denning, a spokesman for Cambridge-based Sloan, said in an e-mail.
The charging documents and plea agreements filed by prosecutors couldn’t immediately be verified in court records.
The case is U.S. v. Bitran, U.S. District Court, District of Massachusetts (Boston).