SEC’s Complaint Against Joseph Shereshevsky, Steven Byers, Wextrust And Axela

1:08-cv-07104-DC Securities and Exchange Commission v. Byers et al
Denny Chin, presiding
Date filed: 08/11/2008
Date of last filing: 08/25/2008

Cause: 15:78m(a) Securities Exchange Act

Plaintiff: Securities and Exchange Commission

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Defendant: Steven Byers
Defendant: Joseph Shereshevsky
Defendant: Wextrust Capital, LLC
Defendant: Wextrust Equity Partners, LLC
Defendant: Wextrust Development Group, LLC
Defendant: Wextrust Securities, LLC
Defendant: Axela Hospitality, LLC

Excerpted From Original Complaint Filed By The SEC:

SUMMARY

1.The Commission brings this emergency action,to halt ongoing fraudulent offerings of securities by a convicted felon, Defendant Shereshevsky, and his partner Defendant Byers (collectively, the “Individual Defendants”);: The Individual Defendants, acting through Wextrust and its affiliated entities, Defendants Wextrust Securities, WEP, WDG and Axela (collectively, the “Wextrust Entities or Wextrust Entity Defendants”), have raised at least $255 million from at least 1,196 investors throughout the United States and abroad.

2.Altogether the Defendants have conducted at least 60 private placement offerings and created approximately 150 entities in the form oflimited liability companies or similar vehicles to act as issuers or facilitators ofthe offerings (collectively the “LLC Entities”). The vast majority ofthese offerings occurred between 2005 and 2008. However, at least four offerings occurred as early as 2002. Through these private placement offerings, the Defendants have sold securities to investors in the form of investment contracts, notes or other evidence of indebtedness.

3.Defendants have been fraudulently raising money in the various offerings, each of which purportedly is for a particular investment, without disclosing that funds raised were actually being used to pay prior investors in unrelated offerings and to make unauthorized payments to fund the operations of the Wextrust Entities, which were operating at a deficit. An internal Wextrust combined ”balance sheet” shows that as ofDecember 31,2007, Wextrust Entities “borrowed” at least $74 million from the LLC Entities and also “lent” at least $54 million to various LLC Entities. The Defendants are raising money and commingling funds in contravention ofspecific representations in private placement memoranda that investor funds will be used for specific investments in real estate or other assets identified in offering memoranda.

4.For example, the Defendants falsely represented to investors that more than $9 million raised in a 2005 offering would ,be used to purchase’seven specifically identified real estate properties that were leased by federal government agencies, such as the General Services Administration (the “GSA offering”). In fact, the Defendants never purchased the seven properties identified in the GSA offering documents. Moreover, at the time the offering occurred, Defendants 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.

5.In the private placement memoranda distributed to investors, and Wextrust’s website, the Defendants have also failed to disclose to investors that Defendant Shereshevsky is a convicted felon who pleaded guilty to bank fraud. Defendants Wextrust Securities, Byers and Shereshevsky are also violating the Commission’s broker-dealer registration requirements because the Form BD filings fail to identify Defendant Shereshevsky as a controlling person of Wextrust Securities, and fail to disclose Shereshevsky’s felony conviction. Also, Defendant Shereshevsky, while acting as a broker, has failed to register with the Commission or be properly licensed as associated with Wextrust Securities. In addition, while Defendants Byers and Shereshevsky are openly managing Wextrust Securities and soliciting investors for the securities offerings, they have failed to pass ‘proper licensing examinations, such as the Series 7 and 24.

6.Expedited relief is needed because the Defendants are in the midst of raising funds from new private placement offerings and plan to divert funds raised from new investors to repay moneys owed to investors in prior offerings and to meet other expenses of the Wextrust Entities. To halt the ongoing fraud, maintain the status quo and preserve any assets for injured investors, the Commission seeks emergency relief, including temporary restraining orders and preliminary injunctions, and an order: (i) imposing asset freezes against the Defendants; (ii) appointing a receiver over the Wextrust Entity Defendants; (iii) allowing expedited discovery and preventing the destruction of documents; and (iv) requiring the Defendants to provide verified accountings. The Commission also seeks permanent injunctions, disgorgement of ill gotten gains, plus prejudgment interest and civil monetary penalties against all of the Defendants.

THE DEFENDANTS

1.Steven Byers, age 46, is a resident ofOakbrook, Illinois 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. Offering materials explain that in 1994 Byers founded ASG Financial Services, Wextrust’s predecessor, which underwrote debt and equity investments.  In 1996Wexford Bancgroup was formed to focus on the commercial mortgage-backed securities and specialty finance businesses. In 2003, Byers formed the current Wextrust. Offering materials state that Byers has twenty years experience in the lending and investment business and was a former bank examiner and valuation specialist with a supervisory entity. Byers’ sixty percent ownership of Wextrust is comprised of twenty percent outright ownership and forty percent owned through interests in the Brandon Family Limited Partnership and Lindsay Investment Limited Partnership. Together with Defendant Shereshevsky and Partner A, Byers controls the Wextrust Entities. Although records from the broker-dealer, Wextrust Securities, evidence that Byers is managing the broker-dealer and has solicited investors in different offerings and effected securities transactions while associated with that broker-dealer, records from the Financial Industry Regulatory Authority (”FlNRA”) show that.Byers has not passed any licensing exams.

2.Josepb Shereshevsky, a/k/a Joseph Heller or “Yossi”, age 52, is a resident of Norfolk, Virginia 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, and, according to offering materials, has been a key person in building Wextrust’s private equity group, has greatly increased Wextrust’s access to capital, was instsrumental in founding Wextrust Securities, and was responsible for Wextrust’s expansion into diamond mining investments in Africa. He has a background in the diamond commodity business and is well known in the Orthodox Jewish community. In March 1993, Shereshevsky was arrested for bank fraud, among other things. In June 2003, Shereshevsky pleaded guilty in the Southern District of New York to one felony count of bank fraud. He was sentenced to time served, 24 months supervised release and ordered to pay restitution in the amount of$38,797.90, which judgment was satisfied on February 15, 2005. Although records from the broker-dealer, Wextrust Securities, evidence that Shereshevsky is managing the broker-dealer and has solicited investors in different offerings and securities transactions while associated with that broker-dealer, there are no records from FINRA showing that Shereshevsky has passed any licensing exams. Shereshevsky was not registered as a broker or dealer, nor was his association with Wextrust Securities disclosed.

3.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 fmance and investment banking. Wextrust is headquartered in Chicago, Illinois and maintains offices in New York, New York, Norfolk, Virginia, Atlanta, Georgia, Boca Raton, Florida, Nashville, Tennessee, Tel Aviv, Israel and Johannesburg, South Africa. Wextrust purports to have five main areas of business: (1) Wextrust Securities, a registered broker dealer that acts as selling agent for Wextrust’s offerings ofunits in various limited liability companies; (2) WEP, which purportedly manages $500 million of real estate owned by various limited liability companies whose units were sold to investors in offering; (3) Wextrust Commodities Managers, LLC, which manages various managed futures funds with assets of approximately $15 million; (4) certain high yield debt funds, which manage assets of approximately $35 million; and (5) certain interests in diamond mines and operations in Africa held through Pure Africa Mining Ltd. and other affiliates, in which Wextrust has a substantial interest.

4.WEP is an Illinois limited liability company headquartered in Chicago, Illinois, 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.. Wextrust owns at least 80% ofWEP and is its manager and majority member.  Between September 2006 and December 2007, WEP sold to investors approximately $8.6 million in promissory notes in WEP with varying maturities and terms, ofwhich approximately $6.2 million in principal remain outstanding. In December 2007, WEP commenced a new offering ofsecurities in the form ofGuaranteed Subordinated Promissory Notes (”GSPNs”) in five varying maturities and terms with corresponding interest rates, each guaranteed byWextrust. To date, WEP has raised approximately $4.6 million from investors purchasing GSPNs.

5.WDG is an Illinois limited liability company headquartered in Chicago, Illinois, in the business ofdeveloping real estate assets. Wextrust owns 80% ofWDG.

6.Wextrust Securities is a broker-dealer registered with the Commission and a Virginia limited liability company headquartered in Norfolk, Virginia. It employs thirty-six registered representatives and maintains branch offices in New York, New York, Norfolk, Virginia, Chicago, Illinois, Southfield, Michigan, 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. Defendant Wextrust owns 21% ofWextrust Securities. Byers, through the Byers Family Partnership, owns another 5% ofWextrust Securities. Shereshevsky, though the Shereshevsky Family Partnership, owns another 7% ofWextrust Securities.

7.Axela is an affiliate ofWexTrust 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, Illinois, and provides asset management services to other Wextrust affiliated LLCs, such as Crowne-Phoenix fuvestors LLC.

More tomorrow…