WexTrust owners indicted on fraud charges in N.Y.

Two co-owners of investment firm WexTrust Capital were indicted Monday in federal court in Manhattan on fraud charges related to the way they raised more than $9 million from an offering of real-estate investments.

Joseph Shereshevsky, a Norfolk resident and former chief operating officer of WexTrust, and Steven Byers, the company's founder and chief executive officer, were each charged with one count of securities fraud and one count of conspiracy to commit securities and mail fraud.

The defendants raised $9.2 million by telling investors that these funds, along with a $21 million mortgage, would be used to buy seven specific buildings, according to the indictment. Investors were led to believe that WexTrust would lease the buildings - in Wisconsin, Illinois, Indiana and Florida - to the federal government's General Services Administration.

However, WexTrust acquired none of the buildings, and the $9.2 million that Shereshevsky and Byers collected in 2005 was diverted to other uses, the government said. The operating agreement for WexTrust's private placement offering specifically barred commingling funds with any other investment or entity and prohibited lending the money, the government said.

Shereshevsky and Byers fabricated explanations as to what happened to investors' funds, and WexTrust mailed tax documents and quarterly financial statements to investors that falsely reported such details as earned income, revenue and expenses, according to the indictment.

In addition, the documents that Shereshevsky and Byers distributed for the GSA offering failed to disclose that Shereshevsky had a criminal background, including a guilty plea for conspiracy to commit bank fraud, the government said.

If convicted, each defendant faces a maximum of 25 years in prison and a fine that's greater than either $250,000 or twice the gross gain or loss caused by their alleged crimes, the government said. The indictment also seeks forfeiture of at least $9.2 million from the defendants.

Shereshevsky and Byers, of Oak Brook, Ill., were arrested on fraud charges in August. Byers was freed after posting a $4 million bond.

"Mr. Byers vigorously denies the charges set forth in the indictment and looks for ward to his day in court when he'll be vindicated," Pery Krinsky, Byers' attorney, told Dow Jones Newswires.

Shereshevsky has remained in federal custody since his arrest and is being held in Brooklyn. "We're confident the defendant will ultimately be vindicated," Martin Siegel, Shereshevsky's attorney, told Bloomberg News after the indictments.

Shereshevsky and Byers are scheduled to be arraigned on Friday by U.S. District Judge Denny Chin in federal court in Manhattan.

Meanwhile, Shereshevsky, Byers and Chicago-based WexTrust face allegations of securities fraud in a separate civil complaint brought by the Securities and Exchange Commission. The SEC contends that Shereshevsky, Byers and their company bilked investors by diverting more than $100 million of investor funds to unauthorized uses. Some of the funds that WexTrust collected from more recent investors were used to its pay earlier investors in a Ponzi-type scheme, the SEC contends.

In a report filed on Friday, a court-appointed receiver in the SEC case said WexTrust ended up collecting $9.39 million from 103 investors in its GSA offering. In total, the company raised about $313 million from 1,400 investors, the receiver, Timothy Coleman, said in his interim report. More than 60 percent of its investors lived in four areas: Norfolk, New York, Chicago and Israel, the report said.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com