Merger Mogul, Cross-Border M&A News, Private Equity Real Estate Alert and Post-Merger Integration News, our free email news alerts
SEC Levies Charges Against PE Real Estate Firm
Top executives at Wextrust Capital have been charged with running a $255m Ponzi scheme.
August 12, 2008
Top executives at Wextrust Capital, real estate-focused private equity and specialty finance company, were indicted on charges levied by the Securities and Exchange Commission claiming that the firm’s principals and four affiliated funds ran a massive Ponzi scheme. The SEC and Federal Bureau of Investigation issued separate statements, claiming that Steven Byers and Joseph Shereshevsky, Wextrust’s CEO and former CFO, respectively, diverted funds that had been raised through private placement offerings.
According to the SEC’s complaint, Wextrust was formed in 2003 to pursue investment opportunities in undervalued real estate. An affiliate, Wextrust Securities, was created two years later to act as the selling agent for the private placement offerings. The Chicago firm also runs various commodities funds and controls interests in certain African diamond mines. Byers, the complaint says, was involved with the real estate investments, while Shereshevsky’s role “was to take the lead in soliciting investors.”
The SEC points out that Shereshevsky, who also goes by the name Joseph Heller, is a convicted felon and had not registered with the SEC to serve as a broker-dealer.
According to the complaint, the defendants “have conducted at least 60 securities offerings and raised at least $255 million from at least 1,196 investors.” The bulk of this activity occurred during the past three years, although “at least four offerings occurred as early as 2002,” the complaint alleges.
The typical offering, according to the complaint, promised investors fixed interest payments, “such as 8.5% over the course of the investment,” with additional profits split 30/70 between the defendants and the investors.
According to the complaint, however, the proceeds from the offerings were used to pay investors from previous offerings and also to fund the operating expenses of various Wextrust affiliates. Byers and Shereshevsky oversaw more than $100 million fraudulently transferred between entities.
Regulators cite as an example a 2005 private placement in which the issuer corralled $9 million from investors. The capital, based on the private placement memorandum of a Wextrust affiliate, was to be used to acquire and operate seven commercial properties. As it turned out, no deal materialized, and $6.5 million was diverted to a separate entity.
A similar move was executed in 2007, when Wextrust formed an affiliate to acquire a Crowne Plaza-branded hotel based in Phoenix. “Almost immediately after” raising $9.3 million from investors, “Shereshevsky instructed various Wextrust employees that all funds for the Crowne-Phoenix offering be deposited into Wextrust’s house account.”
This kind of commingling of funds, forbidden in the PPM documents, occurred frequently, according to the allegations, which state that the defendants “staked their ability to extricate themselves from these frauds on the success of their diamond mining investments in Africa.”
Byers and Shereshevsky, who were both apprehended earlier this week, are charged with one count of conspiracy to commit securities fraud. If convicted, the pair face a maximum of five years in prison and a fines doubling their gains.
For more information on related topics, visit the following:
