Sartor AGF’s Lead Partner Admits Failure to Restructure Funds Amid Illiquid Asset Exposure

The Sartor Case: Defense Admits Structural Weakness but Denies Crime

During a five-day formalization hearing in Santiago, the defense of Pedro Pablo Larraín, main partner of the collapsed Chilean asset manager Sartor AGF, delivered a nuanced message. While rejecting any admission of criminal conduct, Larraín’s lawyer acknowledged that the firm should have restructured its mutual funds as its portfolio became increasingly concentrated in illiquid assets. The statement came as prosecutors allege that a series of related-party deals and risky investments caused losses of approximately US$190 million for fund investors.

Jaime Winter, the criminal lawyer representing Larraín, told Diario Financiero that his client “always acted with the best interest of contributors in mind.” However, Winter conceded that “progressively they started having many illiquid assets and the funds were redeemable. When you have many illiquid assets with redeemable funds, many times you have to sell those assets to pay, and that ends up not extracting the maximum return.” He added that a restructuring offer had been made to Chile’s Financial Market Commission (CMF) before the regulator intervened.

The defense argues that the prosecution’s narrative of misconduct conflates market exposure with actual financial harm. Winter insisted that without demonstrable loss there can be no conviction for mismanagement, a core element of the charges under Chilean law. The hearing continues with debates over pre-trial detention for five of the eleven defendants, including the Larraín brothers and other senior executives.

What the Defense Admission Means for the Case and for Fund Governance

The Strategic Calculus Behind the Partial Admission

By conceding that Sartor should have restructured its funds, the defense may be attempting to isolate the regulatory failure from the criminal allegations. The admission of a structural shortcoming—failing to match fund redemption terms to asset liquidity—is a governance critique that is familiar to the asset management industry, especially after several high-profile fund freezes globally. It allows the defense to argue that losses stem from a market-liquidity mismatch exacerbated by the CMF’s intervention, rather than from intentional wrongdoing.

Winter pointed specifically to the case of ECapital, a factoring firm in which Sartor funds invested heavily. He claimed the business was viable until the CMF intervened and halted new financing, which then triggered defaults because counterparties “knew the company had problems.” This line of reasoning seeks to shift blame toward the regulator and to paint the liquidation of assets as a value-destroying choice. However, prosecutors have documented that many related-party loans were already in default before the intervention, and that interest-only payments masked deeper solvency issues.

Conflict-of-Interest Allegations Remain the Core Risk

The defense must still contend with conflict-of-interest claims, particularly around Autofidem and ECapital. These entities were not directly owned by the funds but by the Sartor holding company in partnership with businessman Nicolás Matthei. Winter argued that the structure was necessary to secure management expertise and was designed so that the funds, not the holding company, captured the economic benefit. Yet the prosecution has framed the arrangement as a potential self-dealing mechanism, and the distinction between market loss and criminal breach of duty will likely hinge on internal documentation and the true flow of benefits.

CMF’s Intervention Under Scrutiny

The defense’s criticism of the CMF’s decision to liquidate the funds—calling it a “bad decision” that forced fire sales of the best assets first—introduces a broader policy debate. If illiquid fund structures were indeed offered for redemption without adequate liquidity buffers, the CMF’s action may have been appropriate to protect remaining investors. But if the underlying assets were fundamentally sound, as the defense contends, the regulator could face questions about whether its intervention aggravated the losses. This tension will be tested as the case proceeds and as the CMF itself faces potential administrative scrutiny.

Implications for Asset Managers, Investors and Regulators in the Sartor Aftermath

For asset managers

• The Sartor case underscores the need to rigorously align fund liquidity terms with the actual liquidity profile of portfolio assets. Regular stress-testing of redemption scenarios for funds holding significant illiquid positions is now a must.
• Related-party transactions and co-investment structures must be documented with extreme transparency, and independent governance approvals should be demonstrable, especially when investments in entities managed by business partners are involved.

For fund investors and advisors

• Investors in Chilean mutual funds, particularly those that held Sartor products, should review the composition of their remaining holdings and assess the liquidity mismatch risk in other asset managers where funds may promise daily liquidity while investing in private credit or real estate.
• The case highlights that redemption suspensions and fire-sale losses can be exacerbated by regulatory intervention; understanding a fund’s gating provisions and the regulator’s powers is now part of due diligence.

For regulators

• The CMF’s decision to intervene and liquidate will be judged against whether early restructuring proposals—like the one the defense says it offered—could have preserved more value. A review of the intervention protocol for illiquid retail funds may be warranted to establish clearer guidelines on when to restructure versus liquidate.