Washington, D.C., Aug. 11, 2008 (LAWFUEL) – The United States Securities and Exchange Commission today filed charges against Wextrust Capital, LLC (Wextrust), its principals, and four affiliated Wextrust entities, alleging that defendants conducted a massive Ponzi-type scheme from 2005 or earlier that raised approximately $255 million from approximately 1,200 investors. The targets of the fraudulent offerings are primarily members of the Orthodox Jewish community. Simultaneous with the filing of the action, the Commission is seeking emergency relief from the Court to freeze the defendants’ assets and place the Wextrust entities under the control of a receiver to safeguard assets. The Commission is also seeking a temporary restraining order to stop the ongoing offerings and other immediate relief.
Scott Friestad, Deputy Director of Enforcement, said, “This case demonstrates that the Commission will aggressively seek out and pursue affinity frauds. It is also a signal to investors to be wary of friends touting great investment ‘opportunities.’ In this case, Wextrust purported to be ‘a globally diversified private equity and specialty finance company, specializing in investment opportunities ranging from real estate to specialty finance and investment banking.’ The reality, as alleged in our complaint, was very different.”
Andrew M. Calamari, Associate Director of Enforcement, added, “Our complaint alleges an affinity fraud of very large scale. In this case, one of the defendants used his extensive connections in the orthodox Jewish community to solicit more than $250 million from unsuspecting investors. Affinity frauds are especially pernicious because the victims tend to let their guards down in circumstances where they might otherwise proceed with much more caution.”
The Commission’s complaint, filed in federal court in Manhattan, charges that Wextrust, its principals Steven Byers and Joseph Shereshevsky, and its affiliated entities Wextrust Equity Partners, LLC (WEP), Wextrust Development Group, LLC (WDG), Wextrust Securities, LLC (Wextrust Securities) and Axela Hospitality, LLC (Axela) conducted at least 60 securities offerings through private placements and created approximately 150 entities in the form of limited liability companies or similar vehicles to act as issuers or facilitators of the offerings, purportedly to fund the acquisition of specified assets, the majority of which were commercial real estate ventures. Contrary to representations in the offering memoranda that proceeds would be used for specific projects, the defendants allegedly diverted funds to pay returns to investors in prior offerings, or to fund expenses of the defendants.
In one offering, conducted in 2005, the SEC complaint alleges that defendants falsely represented to investors that the more than $9 million raised would be used to purchase seven specifically identified real estate properties that were leased by federal government agencies, such as the General Services Administration. In fact, according to the complaint, the defendants never purchased the seven properties. Moreover, at the time the offering occurred, they knew or were reckless in not knowing that the seven properties would not be acquired. Significantly, while the offering was ongoing, the Wextrust entities “borrowed” more than $6 million from the funds raised in the GSA offering and used these funds for purposes unrelated to the GSA offering.
Overall, the complaint alleges, defendants diverted at least $100 million dollars to unauthorized purposes. The complaint alleges that the defendants are conducting at least four ongoing offering frauds intended to raise money to pay back investors from prior offerings.
In addition to the emergency relief sought today, the Commission’s complaint seeks disgorgement of the defendants’ ill-gotten gains, civil penalties, and permanent injunctions barring future violations of the antifraud and other provisions of the federal securities laws.
The complaint names the following defendants.
Byers, age 46, is a resident of Oakbrook, Ill., and owns sixty percent of Wextrust. He is the Chairman of Wextrust and President and Chief Operating Officer of WEP, the arm of Wextrust focusing on income-producing properties, and is also an owner or controlling person of Wextrust Securities. Together with Shereshevsky and others not named in the complaint, Byers controls the Wextrust affiliated entities.
Shereshevsky, age 51, is a resident of Norfolk, Va., and owns twenty percent of Wextrust through a partnership interest held in the name of his wife. Shereshevsky was, until recently, Wextrust’s Chief Operating Officer, was instrumental in founding Wextrust Securities, and was responsible for Wextrust’s expansion into purported diamond mining investments in Africa. Shershevsky pled guilty to one felony count of bank fraud in June 2003, U.S. v. Shereshevsky, 94 Cr. 248 (CSH).
WexTrust, an Illinois limited liability company, was formed by Byers in 2003. According to the company’s website, Wextrust is a globally diversified private equity and specialty finance company, specializing in investment opportunities ranging from real estate to specialty finance and investment banking. Wextrust is headquartered in Chicago and maintains offices in New York, N,Y., Norfolk, V., Atlanta, Ga., Boca Raton, Fla., Nashville, Tenn., Tel Aviv, Israel; and Johannesburg, South Africa.
WEP is an Illinois limited liability company headquartered in Chicago, engaged in the business of buying real estate assets, generally though its partially-owned subsidiaries. According to WEP documents, WEP is the beneficial owner of approximately 120 entities formed for the purpose of owning equity interests in commercial and multi-family real estate assets.
WDG is an Illinois limited liability company headquartered in Chicago, in the business of developing real estate assets.
Wextrust Securities is a broker-dealer registered with the Commission and a Virginia limited liability company headquartered in Norfolk, Va. It employs thirty-six registered representatives and maintains branch offices in New York, N.Y., Norfolk, Chicago, Southfield, Mich., and Ramat Gan, Israel. It was formed in March 2005, registered with the Commission in March 2006, and has been a licensed broker dealer since that time.
Axela is an affiliate of WexTrust Capital. Axela, through its LLC subsidiaries, owns and operates Wextrust’s hotel properties, including the Axela Baltimore Hotel and the Park View Hotel in Chicago, and provides asset management services to other Wextrust affiliated LLCs, such as Crowne-Phoenix Investors LLC.
The complaint alleges that defendants violated and are violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Wextrust Securities violated Sections 15(b)(1), 15(b)(7) and 15(c)(1) of the Exchange Act and Rules 10b-3, 15b1-1, 15b3-1 and 15b7-1 promulgated thereunder. Shereshevsky violated Section 15(a) or alternatively, aided and abetted, Wextrust Securities’ violations of Sections 15(b)(1), 15(b)(7) and 15(c)(1) of the Exchange Act and Rules 10b-3, 15b1-1, 15b3-1 and 15b7-1 promulgated thereunder. Byers aided and abetted Wextrust Securities’ violations of Sections 15(b)(1), 15(b)(7) and 15(c)(1) of the Exchange Act and Rules 10b-3, 15b1-1, 15b3-1 and 15b7-1.
The Commission acknowledges the assistance of the United States Attorney for the Southern District of New York and the Federal Bureau of Investigation in connection with this matter.List your legal jobs on the LawFuel Network