(CN) – A federal judge in Manhattan has approved a plan to distribute money to 1,200 investors and creditors who say they were swindled in a $255 million Ponzi scheme. The co-founders of WexTrust Capital used their “extensive connections” in the Orthodox Jewish community to bilk investors, according to the SEC.
Joseph Shereshesky failed to disclose that he was a convicted felon who pleaded guilty to bank fraud in 2003. And both Shereshesky and his partner, Steven Byers, failed to pass proper licensing exams, such as the Series 7 and 24, according to their indictment.
In April 2008, the SEC and FBI froze the assets of the Chicago-based private equity firm and jailed Shereshevsky, of Norfolk, Va., and Byers, of Oakbrook, Ill., for allegedly looting the company.
The SEC appointed a receiver to monitor and take stock of the firm’s finances and assets. The receiver decided that liquidation was the best route, preferable to bankruptcy.
More than 100 complaints have been lodged about the distribution plan U.S. District Judge Denny Chin calls “controversial,” in part because it draws no distinction among investors.
Judge Chin said the 2nd Circuit and other appeals courts have deemed the pro rata method the most equitable. It divides the money proportionately among the creditors and investors, according to the amount of the individual debts, as opposed to the actual investment.
The judge said it’s the best method for reimbursing fraud victims of a Ponzi scheme.
The defendants allegedly set up 60 private placements and created 150 entities, mostly limited liability companies, for the sole purpose of acting as issuers or facilitators of the offerings, according to the SEC.
In one example, the company purportedly raised millions from investors, telling them the money would be used to buy and operate seven properties that would be leased to the U.S. General Service Administration. Instead, the investments were used to repay earlier investors and fund the firm’s operations, the SEC claimed.
To prevent the missing money from being discovered, Shereshevsky, 51, and Byers, 46, allegedly raised $54 million for purported diamond mine operations in South Africa and Namibia. Forty million of it was transferred to Pure African Minerals, a South African company, and the money hasn’t been seen since, the SEC said.
Shereshevsky told a confidential informant that he needed to raise enough money in the diamond mine venture to pay off the GSA, according to the criminal indictment.
The receiver sued in South Africa to gain access to books and records of the company. The case is still pending.
The receiver said investors should expect between five and 50 cents on the dollar.
The plan excludes WexTrust employees who “participated in the development, implementation, or marketing of the fraudulent scheme,” Judge Chin ruled.
He decided against ordering investors to repay all cash distributions they received from WexTrust entities.
“Many of the investors may not have the money, and litigation to collect it would be expensive, time-consuming, and, in some instances, cruel,” the judge wrote.
WexTrust specialized in real estate and investment banking, with offices in Manhattan, Atlanta, Tel Aviv, Johannesburg and Boca Raton, Fla.