Norfolk man faces charges in alleged $100M pyramid scheme

NORFOLK

A Norfolk man and his Chicago business partner were arrested Monday and charged by the Securities and Exchange Commission with defrauding investors by diverting at least $100 million of their funds through a Ponzi scheme.

Chicago-based investment firm WexTrust Capital and its major owners - Joseph Shereshevsky of Norfolk and Steven Byers of Oak Brook, Ill. - targeted members of the Orthodox Jewish community for their investment schemes, the SEC said in its civil complaint, raising $255 million from almost 1,200 investors in the United States and overseas.

The men were arrested Monday on securities-fraud charges filed in federal court in Manhattan in a separate criminal case.

In its complaint, the SEC cited fraudulent practices, including one scheme by which the defendants allegedly raised $9 million to buy real estate for lease to federal agencies. The defendants, however, knew they were never going to buy the

seven buildings described in the documents they distributed to investors, a violation of securities laws, the SEC said.

One WexTrust unit, WexTrust Securities, is a Virginia-chartered company based in Norfolk, the SEC said. The company has an office in the Dominion Tower building on Waterside Drive.

WexTrust and its owners conducted their Ponzi scheme by promoting at least 60 securities offerings that promised to buy specific assets, the SEC said. But instead of making the purchases described in the documents distributed to investors, WexTrust, Shereshevsky and Byers diverted funds to pay those investors who had put money into previous offerings or to pay their own expenses, the SEC alleged.

According to WexTrust's balance sheet for year end 2007, the company "borrowed" more than $1 million from one securities offering that was supposed to buy an office building in Peoria, Ill., the SEC said.

Andrew Sacks, a Norfolk attorney who is representing Shereshevsky in the criminal case, said that, based on their initial discussions, "this is something that dropped out of the sky."

"From what we can see, this is not based on any hard evidence," Sacks said.

Shereshevsky, 52, appeared briefly Monday in U.S. District Court in Norfolk, where the court set a detention hearing for Wednesday afternoon.

Shereshevsky, who owns a 20 percent stake in WexTrust, served until recently as its chief operating officer, according to the SEC.

David Gutierrez, a WexTrust spokesman in Chicago, said attorneys for Byers and the company were still studying the SEC complaint and had not yet prepared a response. Byers, 46, is WexTrust's chairman and holds a 60 percent stake in the company.

The SEC sought court approval Monday to freeze the defendants' assets and put a receiver in control of WexTrust and its entities as a way to safeguard the assets. The SEC also asked the federal court in Manhattan for a temporary restraining order to block new securities offerings that it said WexTrust is still conducting.

WexTrust, the SEC said, created 150 limited liability companies or similar entities to issue its securities offerings. Most of its offerings were conducted during the past 3-1/2 years.

WexTrust, Shereshevsky and Byers also violated securities regulations by failing to disclose to investors that Shereshevsky was a convicted felon who pleaded guilty to bank fraud in New York in 2003, the SEC said. In addition, Shereshevsky acted as a securities broker but failed to register with the commission or to be properly licensed for the jobs he performed for WexTrust, the SEC said.

By 2007, Shereshevsky and Byers sought to extricate WexTrust from financial difficulties by investing in diamond-mining operations in southern Africa, according to the complaint.

In a March 18, 2008, e-mail, Shereshevsky told Byers, "We have faked it until we made it for long enough and now we must clean up," according to the SEC complaint.

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