A development that should raise concerns for all investors – Gabriel Bitran, a former professor at the Massachusetts Institute of Technology (MIT) and an associate dean of its business school, pleaded guilty last Tuesday to lying to investors about the performance of his hedge fund, GMB Capital Management LLC, according to the U.S. Attorney’s Office in Boston.
Since 2005, when he founded GMB, Bitran had solicited investors for more than half a billion dollars based on his impressive credentials, “proprietary quantitative models derived through extensive research” on optimal pricing. Bitran described his hedge fund methodology as a non-traditional approach to investing across global markets. The GMB models were said to be “not dependent on fundamental data used in traditional methods” to value equity, fixed income and other asset classes. GMB’s investment field was supposedly comprised of US listed Exchange Traded Funds (ETF) and index funds representing global capital markets including equities, commodities, interest rates, fixed income and currencies. Bitran told investors that GMB had never suffered a down year and always delivered double-digit returns ranging between 16% and 23%.
Now we know that in reality GMB was a fund of funds, meaning it took capital from investors and simply channeled the money to a mix of other funds. When the financial crisis put the robustness of the fund’s managers to the test, several of Bitran’s hedge funds had “disastrous losses,” with about 50% to 75% of their capital gone. One of those fund’s managers was the now infamous scammer Bernard Madoff, who was convicted of defrauding investors of hundreds of billions of dollars and sentenced to 150 years of jail time.
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“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,” Bitran wrote in an e-mail to his son that was recovered by the investigators. “I feel very embarrassed because we told them a story that was not true!”
Bitran’s fraud was exposed by investigators who were on the Madoff case, one can assume by backtracking his investors, but GMB was an SEC registered investment advisor, which raises the questions of why they did not investigate GMB’s claims sooner and if the SEC can be trusted to expose such scams before they implode?
Gabriel Bitran and his son Marco, who was also a manger at GMB, will be sentenced to serve at least two years but no more than five years in prison if the court accepts their guilty pleas, the U.S. Attorney said in its statement. They took in approximately $16 million in management fees since 2005 and withdrew $12 million of their own investments when the funds were losing.