Investment News
Feds Seize Control of Private Equity Real Estate Firm
1,200 Investors Entrusted Nearly $255 Million to WexTrust Capital Now Under Federal Court Control
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WexTrust Capital, a Chicago-based private equity firm with interests in up to 2.5 million square feet of U.S. office and industrial properties, hundreds of apartment units and hotel rooms, millions of dollars in mortgage debt, not to mention South African diamond mines, was taken over by the federal government.
After filing a formal complaint in U.S. District Court, the U.S. Securities & Exchange Commission was granted emergency relief to freeze WexTrust’s assets and place the Wextrust entities under the control of a receiver to safeguard hundreds of million of dollars in assets. The freeze also affects WexTrust’s ongoing offerings to raise money to acquire additional properties.
In addition to the emergency relief, the SEC is seeking “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.” If granted, such a move could affect firms that may have acquired assets WexTrust has recently sold.
The court appointed Timothy J. Coleman, a partner the Washington, DC, law firm of Dewey & LeBeouf as receiver over a wide ranging list of assets, that also includes personal residences, aircraft and bank accounts. (A listing of some of the commercial real estate assets accompanies this story.)
The SEC hit Wextrust Capital LLC, its principals Steven Byers and Joseph Shereshevsky, and its affiliated entities Wextrust Equity Partners LLC (WEP), Wextrust Development Group LLC, Wextrust Securities LLC and Axela Hospitality LLC with civil court complaints in connection with an alleged massive Ponzi-type scheme.
Concurrently, the U.S. Attorney for the Southern District of New York has filed criminal charges against the principals of the company alleging securities fraud.
The case has been assigned to the Honorable Denny Chin, U.S. District Court, Southern District of New York. There is a preliminary hearing scheduled before Judge Chin on Sept. 4.
According to the SEC complaint, from at least 2005, the defendants raised approximately $255 million from about 1,200 investors, targeting members of the Orthodox Jewish community of which Shereshevsky is a member, 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 SEC alleged that the defendants diverted funds to pay returns to investors in prior offerings and for personal expenses.
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 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.
It’s unclear at this point whether any of WexTrust Capital assets are retrievable. Coleman is telling investors that there is not enough information at this time to determine whether any assets will be liquidated.
The complaint names the following defendants.
Byers, age 46, is a resident of Oakbrook, IL, and owns 60% of Wextrust. He is the chairman of Wextrust and president and COO 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 20% of Wextrust through a partnership interest held in the name of his wife. Shereshevsk, until recently, Wextrust’s COO, 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. The company’s web site has been taken down by the receiver and replaced with links to information concerning the case.
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.
The Frozen Assets
Following is a partial list of the commercial real estate associated with assets frozen by the U.S. District Court and identified as assets in which WexTrust Capital has control or purported to have a direct or indirect interest.
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CoStar Group Inc. shows WexTrust entities also own the following property: Oak Lawn Train Station Retail, at 5102-5116 W. Museum Drive in Oak Lawn, IL, with 11,111-square feet of retail space.
