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Saturday, July 13, 2024 | Back issues
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Investor Sues Former MIT Prof for $800K

     BOSTON (CN) - An investor claims in court that a former vice dean at MIT's Sloan School of Management cost him $800,000 by touting, and misrepresenting, his proprietary trading algorithm.

Lead plaintiff Ilex Investments sued lead defendant Gabriel Bitran, a former professor and vice dean at MIT, in Suffolk County Court.

George Crawford and the Crawford Living Trust are co-plaintiffs.

Defendants include Bitran's son, Marco Bitran, and three entities founded by Gabriel Bitran: GMB Global Multi-Strategy, GMB Global Multi-Strategy Offshore, and GMB Global Master Fund.

Ilex and Crawford claim Bitran cost them $800,000 in hedge fund losses - some of them related to Bernard Madoff's scheme - after touting an investment model he claimed to have developed and used successfully for years.

Gabriel Bitran, a professor and former vice-dean at MIT's Sloan School of Management, founded GMB Management in 2006. It attracted investors by claiming to base investments on a complex algorithm developed by Bitran after years of academic research. The GMB Global funds operated under the umbrella of GMB Management, according to the complaint.

Bitran's son, Marco Bitran, co-owned and managed the GMB entities. In 2008, he founded GMB Partners, a separate company, according to the complaint.

Neither GMB Management nor GMB Partners are named as defendants.

"The GMB funds were marketed as complex investment opportunities, targeting high net worth investors," the complaint states. "The Bitrans made three material misrepresentations to induce plaintiffs to invest approximately $1.5 million in their funds: first, they represented that the GMB funds would invest by following a complicated proprietary algorithm developed by Gabriel Bitran, who at the time was a professor at the Massachusetts Institute of Technology ('MIT') and the former vice-dean of that institution, and any investments not made pursuant to the algorithm would be made in seven specifically identified hedge funds; second, it was represented that Gabriel Bitran had successfully invested for his own personal account by using his proprietary algorithm from 1998 through 2006; and third, it was represented that Gabriel Bitran would be actively involved in the management and investing of the GMB funds. The Bitrans made these misrepresentations directly through oral communications to plaintiff George Crawford and in the written offering materials sent to him.

"Contrary to their representations, however, investors' funds were not invested as claimed. First, although Gabriel Bitran claims to have developed a proprietary trading algorithm, he never actually invested any funds pursuant to his algorithm. Second, the GMB funds were not invested as represented - with 60 percent being invested pursuant to the Gabriel Bitran algorithm and 40 percent in specifically designated hedge funds - instead 100 percent of the funds were invested in other investment funds. Third, Gabriel Bitran was not involved in the management or investing of the funds. Plaintiffs have suffered significant losses and the GMB funds are now in liquidation."

In April 2012, the SEC found that Bitran and his son had raised more than $500 million by making similar misrepresentations to other investors, and had invested most of the money in illiquid investments which did not use the purported Bitran algorithm, according to the complaint. The SEC ordered the Bitrans and GMB Capital Management to pay $4.8 million in penalties, barred them from the securities industry, and initiated liquidation of the GMB funds, according to the complaint.

Crawford, of New York, says he met Gabriel and Marco Bitran in April 2008, and decided to invest $1.5 million in the GMB funds based on their misrepresentations. According to the complaint, the Bitrans claimed that the Bitran algorithm had generated average annual returns of at least 16 percent, that Gabriel Bitran had successfully used the model for eight years, and that he would manage the funds himself.

The Bitrans claimed that "based on historical returns," their algorithm was likely to perform well in different market conditions, and that it used "a quantitative process believed to be of statistically higher accuracy for predicting and capturing pricing inefficiencies," according to the complaint.

What's more, Crawford says, "GMB Global and the Bitrans represented that between 50 and 60 percent of the assets of GMB Global were invested in ETFs [exchange-traded funds] and in another Bitran controlled entity, [nonparty] GMB Global Alpha, LP ('GMB Alpha'). GMB Alpha was a fund also investing using the proprietary models developed by Gabriel Bitran. Contrary to this stated allocation representation, however, GMB Global held a meager of 1.6 percent of its assets in GMB Alpha and at times its ownership interest in GMB Alpha dwindled to zero."

Crawford claims the Bitrans never told investors their money would be put into any hedge funds other than the GMB entities and the seven hedge funds mentioned in the offering materials.

GMB Global's assets, however, were invested in 29 external hedge funds, including funds invested solely in other hedge funds, some of which were part of Bernard Madoff's Ponzi scheme, according to the complaint.

"Plaintiffs collectively [invested] $1,500,000 in the GMB funds," the complaint states. "As of Nov. 30, 2012, the value of plaintiffs' investment in the GMB funds was reported as $149,107 and plaintiffs have received $549,962 in distributions from the funds, making their total loss $800,931.

"In June 2009, facing devastating losses and unprecedented withdrawals as a result of these poor investments, defendant GMB Global chose to dissolve the limited partnership and informed investors of this intent via letter sent June 1, 2009. The effect of this dissolution was to freeze redemption requests made by the limited partners and to proceed with the liquidation of the limited partnership with disbursals to be made at a rate of fifteen and twenty percent of the assets distributed quarterly. Nearly three years later, the dissolution still has not been completed and negative returns on investment continue to diminish the value of the GMB funds and thus, have caused and continue to effect real and tangible harm to plaintiffs.

"In addition to the myriad material misrepresentations in the composition of GMB Global and the underlying model powering the GMB funds, potential investors were provided with a fictitious historical track record that purportedly detailed the success of Gabriel Bitran's investment model. Defendants claimed that their actual trading results, based on investments made by the Bitrans' personal portfolios from 1998 through 2006, demonstrated a 16.2 percent average annualized return. Marco Bitran, in a March 2008 interview disseminated by HedgeFund.net and subsequently provided to potential investors by defendants, stated that the Bitrans were able to achieve compounded returns of approximately 20 percent per year since 1998, without any years of negative returns."

The Bitrans also fabricated documents during the SEC investigation to support Gabriel Bitran's purported track record, according to the complaint.

Crawford claims the Bitrans lied about Gabriel Bitran being involved in the day to day operations of the GMB funds, when in fact he had nothing to do with their management.

He seeks rescission of his investments, recovery of assets, and punitive damages for fraudulent misrepresentation and concealment, negligent misrepresentation, and fraud in the inducement.

Crawford is represented by Jeffrey Block with Block & Leviton.

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