Norfolk, VA – Rabbi Chaim Silver of the B’nai Israel Congregation in Norfolk, Va., says members have called him often with a question about a congregant: “Can I trust Joseph Shereshevsky? I am planning to invest a lot of money with him.”
The rabbi assured them: “He is the kindest, most generous, trustworthy man.”
Rabbi Silver and a number of Orthodox Jews were shocked by Monday’s arrest of Mr. Shereshevsky and a business partner at WexTrust Capital, a Chicago-based private-equity firm. Federal prosecutors in New York charged them with raising more than $250 million through a Ponzi scheme — mainly from Orthodox Jews. A spokesman for the firm declined to comment.
The Securities and Exchange Commission, in a civil lawsuit filed along with the criminal case, says that WexTrust diverted $100 million to run the company, cover personal expenses and pay off previous investors.
Andrew Sacks, an attorney for Mr. Shereshevsky, says the 52-year-old former chief operating officer at WexTrust had a “knack for raising money.” But he didn’t keep the company’s books and “had no knowledge of any fraudulent activities.”
Martin J. Siegel, a lawyer representing Mr. Shereshevsky in the fraud case, said: “When the evidence comes out it is going to be clear that Mr. Shereshevsky did not intentionally commit a crime.”
Mr. Shereshevsky is being held without bail in Norfolk, where he lives. His business partner, Steven Byers, 46, of Oak Brook, Ill., was released on bail. Mr. Byers, who couldn’t be reached to comment, was WexTrust’s chief executive. Both men will be formally charged at a yet-to-be-scheduled hearing in New York.
Federal officials say WexTrust is one of the biggest “affinity” investment cases they have ever prosecuted. In these cases, firms raise money from people with similar backgrounds. Nearly 1,200 investors flocked to WexTrust, as word spread from Virginia to Chicago to the diamond dealers of Manhattan to Israel and South Africa. Much of the money came through Mr. Shereshevsky’s deep ties to the Orthodox Jewish community, prosecutors allege.
Mr. Shereshevsky is the son of a prominent rabbi named Chaim Shereshevsky, who is now deceased. Investors say they were disarmed by Mr. Shereshevsky’s faith, his endorsement by Rabbi Silver, and his reputation as a philanthropist. Mr. Shereshevsky supported medical research, schools, and made headlines by sending a private jet to Jamaica to rescue an Orthodox teen who said he was being abused at a reform school.
Using a network of mortgage brokers and salespeople, the firm also raised money from non-Jews. Tim Moore, a 39-year-old biomedical engineer in Virginia, borrowed against his home to invest $140,000 in WexTrust.
“I don’t make much money, so I worked nights for six years to raise extra money,” says Mr. Moore, who has a 3-year-old child. “Now I have to sell my dream house, or lose it, because I can’t afford the payments.”
WexTrust cobbled together about 60 “private placements” — securities that aren’t sold through public offerings, according to the SEC lawsuit filed against WexTrust on Monday, along with the criminal case by the U.S. attorney’s office. Through these investments, the firm said it was buying real estate, diamond mines and other properties.
Mr. Moore’s lawyer, John Russell Jr., says his client’s money went into a WexTrust investment that purportedly functioned like a mutual fund, channeling money into dozens of projects.
Another investor said he was drawn by Mr. Shereshevsky’s faith. This investor, a 75-year-old retired electronics entrepreneur in Ohio who invested hundreds of thousands of dollars, said he came across WexTrust shortly after the firm was formed in 2003. He heard from an acquaintance that the fund’s returns were higher than the stock market.
In marketing material, WexTrust claimed it had underwritten more than $1 billion worth of deals since 1995.
One investor in Israel said he found out about WexTrust through an “eye-catching” ad in the Jewish Press, a weekly newspaper that caters to the Orthodox community. The ad, published in the Israeli edition, depicted a person sleeping soundly, with a message conveying that investors in WexTrust could rest assured their money was safe.
Mr. Shereshevsky got attention for philanthropy. In Westchester County, N.Y., he sponsored a golf tournament last summer to raise money for cancer patients.
Last October, the principal of Norfolk’s Maury High School canceled the band’s appearance at a football game because he wanted to sell the 300 seats they would occupy. Mr. Shereshevsky bought the band’s seats for the season.
In Norfolk, Mr. Shereshevsky and his wife bought a house near the B’nai Israel synagogue. According to Rabbi Silver, nearly half the congregation’s 150 families live in that neighborhood. He had seven children and four grandchildren, and was known as kind and soft-spoken.
If someone from out of town was passing through and contacted the synagogue for a place to stay, the Shereshevskys opened their doors, Rabbi Silver says.
“He pays people’s mortgages, pays to keep loved ones in a nursing home,” Rabbi Silver says. “People trust him — and you do business with people you trust.”
Stanley and Nancy Peck, who also live in Norfolk, invested about $200,000 in a project Mr. Shereshevsky was managing. They had gotten to know him socially “when he began to mingle with the Jewish community of Norfolk,” according to a federal lawsuit they filed last November.
Mr. Shereshevsky married their niece Elka and began calling them Uncle Stanley and Aunt Nancy. But when the couple decided to invest about $200,000 in a project he was managing, it turned out to be a “disastrous failure,” the suit claims. He wasn’t named as a defendant in the case.
The SEC alleges that WexTrust funneled money from investors into its operations, personal expenses of Messrs. Shereshevsky and Byers and to pay off previous investors. In 2005, the company raised more than $9 million to buy seven properties that were leased by federal government agencies. But the properties were never purchased, the SEC claims.
Similar patterns emerged in deals raised for diamond mines, hotels and other properties, the SEC says. As of December 2007, WexTrust had borrowed at least $74 million from its private placements. “We are in debt and I am working diligently to get us out of it,” Mr. Shereshevsky wrote to a partner.
He added that every month, the company was spending $1 million more than it earned.
“We are on the verge of becoming a very strong company,” he wrote. “We have to maneuver and do things that maybe we would not do if we were cash rich.”