Federal prosecutors in Manhattan said the founders behind StraightPath Venture Partners LLC received lengthy prison terms after a jury found they ran a pre-IPO investment scam that siphoned millions from clients.

U.S. District Judge Jesse M. Furman sentenced Michael Castillero, also known as Michael Alejandro, to 11 years in prison and Brian Martinsen to 10 years for obstruction of justive, and gave Francine Lanaia an eight-year term. 

Prosecutors said the defendants raised close to $400 million from investors between 2017 and April 2022 through nine affiliated private funds called the StraightPath Funds. They used "boiler room" style call centers to pitch access to shares of private companies ahead of expected public listings, marketing the deals as attractively priced opportunities.

Prosecutors said investors were told there would be no upfront charges, but the defendants bought pre-IPO stock and resold it to investors at "arbitrarily inflated markups" without disclosure. Prosecutors also said the group mischaracterized key aspects of the investments and concealed that Castillero and Lanaia had previously been barred from the securities business by the Financial Industry Regulatory Authority (FINRA).

Authorities said the scheme generated about $75 million for the three defendants, or roughly $25 million each, while additional investor money was routed to associates. In total, prosecutors said about $130 million was misappropriated and spent on high-end purchases including homes, vehicles, watches, a boat, and other luxury items.

"Our private markets are the lifeblood of small and medium-sized businesses as well as tomorrow's global giants," said U.S. Attorney Jay Clayton. "Small and medium-sized business drive domestic employment.  Our global giants in tech, energy, finance, life sciences, and other industries contribute greatly to the welfare of every American and provide strength on the world stage. Those companies, their investors, their employees, and all Americans benefit from our private markets.”

Clayton reiterated a commitment to “rooting out bad actors.”

“The federal prison sentences imposed today send a message that private market frauds will be met with vigorous criminal prosecution,” he said.

In addition to prison, each defendant received three years of supervised release and was ordered to pay $115 million in restitution, prosecutors said. The court also ordered forfeiture of specified property and set forfeiture amounts of $24,259,128.80 for Lanaia, $25,355,714.43 for Martinsen, and $24,279,516.80 for Castillero.

Prosecutors said the StraightPath entities and funds are no longer operating and are now overseen by a court-appointed receiver working to pursue a plan aimed at returning value to investors. 

Last month, the Department of Justice announced the creation of the National Fraud Enforcement Division, which is "laser-focused on investigating and prosecuting those who commit fraud against the American people," the release noted. 

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