McClatchy-Tribune Information Services
The owners of a Chicago-based real estate investment firm were arrested Monday on federal fraud charges, and U.S. regulators accused them of conducting a quarter-billion-dollar Ponzi scheme going back as far as 2005.
Steven Byers, 46, chief executive of WexTrust Capital LLC and an Oak Brook resident, and Joseph Shereshevsky, 51, a principal of WexTrust, were taken into custody and charged with conspiracy to commit securities fraud, the Justice Department said.
Simultaneously, the Securities and Exchange Commission alleged in a lawsuit that the two men had raised $255 million from about 1,200 people, many of them Orthodox Jews, and misappropriated the money.
The SEC also won an order Monday freezing the company’s assets.
Byers, Shereshevsky and their lawyers could not be reached for comment. WexTrust is headquartered at 333 W. Wacker Drive.
“Our complaint alleges an affinity fraud of very large scale,” said Andrew Calamari, associate director of enforcement for the SEC. “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.”
In affinity fraud, scammers target individuals with a common interest or belief, which may include a religious affiliation, to exploit their trust to obtain money.
That person in this case, according to court documents, was Shereshevsky, a resident of Norfolk, Va. Shereshevsky pleaded guilty to conspiracy to commit bank fraud in 1994, a fact not disclosed to investors he solicited, according to court papers.
Shereshevsky allegedly used the names Joseph Heller, Josie and Yossi.
WexTrust owns at least 120 entities formed to acquire real-estate interests, and it has conducted at least 60 private placements since 2005, according to the SEC. Byers owns 60 percent of WexTrust, and Shereshevsky owns 20 percent, the SEC said.
Prosecutors with the Southern District of New York, where many of the victims reside, allege the suspects raised money in private placements for real estate investments. In one deal they solicited investors to buy seven commercial buildings leased to the U.S. General Services Administration.
An FBI agent said in court filings that he interviewed the owners of the buildings. None of them had ever heard of WexTrust, Byers or Shereshevsky, according to the FBI.
A confidential informant within WexTrust told federal investigators that when the investors became suspicious, Byers told him to “blame it on the lawyer, blame it on something.”
On another occasion, the informant said, he was instructed by Byers on how to deal with inquisitive investors: “When people call you … all you have got to say is … ‘look, I wasn’t there, I wasn’t part of it, I don’t know for sure.’ ”
According to court filings, the two suspects were raising money from new investors to pay a return to earlier investors. This is known as a Ponzi scheme, which typically collapses when not enough money can be found to satisfy obligations to investors.
In one instance, federal prosecutors said, Byers and Shereshevsky raised millions of dollars to buy a hotel in Phoenix, diverting much of the money to fund WexTrust.
WexTrust also was involved with diamond mines in South Africa and Namibia, according to SEC documents.
Shereshevsky and Byers were allegedly counting on the mines to yield money to satisfy investors, although how is not explained by the SEC.
On June 24 Byers sent the confidential informant an e-mail saying “under the worst [expletive] case scenario, I got to get enough money out of the diamond mine to pay” investors, according to documents.
If convicted, Byers and Shereshevsky face a maximum of five years in prison.
Copyright (C) 2008 Chicago Tribune