Former MIT Sloan Associate Dean Pleading Guilty in Hedge Fund Scam

A former associate dean at MIT Sloan School of Management and his son, a Harvard MBA graduate, have agreed to plead guilty to running a hedge fund scam that cost investors more than US$140 million and earned the two men “millions of dollars” in management fees, according to the US Attorney in Boston.

Gabriel Bitran, 69, and his son, Marco Bitran, 39, were charged with conspiracy to commit securities fraud, wire fraud, and obstruction of justice in connection with their hedge fund businesses, GMB Capital Management and GMB Capital Partners. As part of a plea agreement with prosecutors, the Bitrans each face a maximum sentence of five years in prison.

US Attorney finds investors lost more than US$140 million in hedge fund scam

The scam was discovered by the US Securities and Exchange Commission (SEC) in 2009 while investigating potential victims of Bernie Madoff, the former financier sentenced to 150 years in prison in connection with a massive Ponzi scheme that defrauded investors out of billions of dollars. In 2012, the Bitrans agreed to pay US$4.8 million to settle SEC claims that they lied to investors.

The Bitrans solicited more than US$500 million from investors with two big claims: that for at least eight years they managed friends and family funds, delivering average annual returns of between 16 and 23 percent with no down years, and that GMB funds would be invested using a complex mathematical trading model developed by Gabriel Bitran and based on his MIT Sloan research on optimal pricing theory.

According to prosecutors, neither was true. Certain GMB hedge funds were actually “funds of funds,” investing in other independently managed funds, a fact the Bitrans concealed from investors. In the fall of 2008, several of the Bitrans’ hedge funds had disastrous losses, resulting in many investors losing as much as 75 percent of their principal. At the same time, the Bitrans pulled US$12 million of their own money out of the funds, leaving investors to suffer more losses.

Bitrans attempted to dodge the SEC

With the SEC closing in on the Bitrans in 2009, the Bitrans attempted to shield their assets by transferring them out of GMB businesses to other entities, using the name of a family member without that person’s knowledge and obtaining falsely-notarized signatures in that person’s name, according to prosecutors.  They also allegedly made false statements to SEC examiners and provided fabricated records to support their claimed trading performance.

That same year, Gabriel Bitran emailed his son, admitting that they had misled investors:

“We have mislead [sic] a lot of people with a range of statements that were incorrect simply to increase our income,” read one email released by prosecutors. “A person with the experience and knowledge of the financial sector and a veteran professor of MIT should not have engaged in this type of behavior….They are not idiots, they know that they were mislead [sic]. The penalty for this type of action is Full [sic] restitution, which obviously we cannot afford.”

Marco Bitran, in an email to his father, acknowledged that he had not acted honestly. “We are certainly sharing equally in this dad….Lots of our problems were caused by my good intentions but very poor actions when it came to true honesty.”

Gabriel Bitran’s attorney, Nicholas Theodorou, and Marco Bitran’s attorney, Mark Pearlstein, did not immediately respond to requests for comment today. Theodorou told Bloomberg News that his client “accepts responsibility and is pleased there will be a resolution to this matter.”  Pearlstein told the news service his client “looks forward to resolving this matter and putting it behind him.”

Not the first time the former MIT Sloan dean faced investigation

Gabriel Bitran became a professor at MIT Sloan in 1984, and retired as recently as January 2013—eight months after he agreed to the SEC penalty and some four years after some of the hedge fund misdeeds first came to light.  Sloan has been criticized for keeping Bitran on the payroll following those revelations. Paul Denning, a spokesman for MIT Sloan, said MIT does not comment on personnel matters.

This is not the first time Bitran has found himself in the spotlight at MIT Sloan. In 1992, he was sued unsuccessfully for sexual harassment by an employee who accused him of kissing her repeatedly on the lips. The case sparked a protest on campus and a push to change how MIT treated victims of sexual harassment.