By Virginia Lascara
virginia.lascara@insidebiz.com
A six-year roller-coaster ride has nearly come to an end. Although they had hoped for more, investors and creditors of WexTrust Capital will soon walk away with about $22.1 million, which represents only a fraction of their losses in the $238 million Ponzi scheme.
Earlier this month, WexTrust receiver Timothy Coleman asked presiding Judge Denny Chin to approve the distribution of about $17.1 million to the nearly 1,400 investors and creditors, making up for about seven percent of their losses. This is the second distribution to investors, who were given around $5 million in 2009. In total, investors recovered about 9.3 percent of their losses.
WexTrust owners Joseph Shereshevsky of Norfolk and Steven Byers of Chicago were convicted in 2008 of operating a Ponzi scheme that promised high returns to early investors by paying them with money from later investors. The pair targeted the Orthodox Jewish community in Norfolk and New York City.
Investments made in WexTrust, a real estate investment firm, ranged from $1,500 to more than $4 million.
The $17.1 million distribution comes after a long December for investors, who said they felt victimized after Securities & Exchange Commission attorneys agreed last month to pay professionals working on behalf of the WexTrust receiver even more money.
Prior to a Dec. 18 court hearing, the SEC had requested the remaining funds of $21.3 million in cash be distributed in a way that ensured investors would be paid at least as much as professionals. SEC attorneys initially expressed concerns that if the court were to grant the professionals their full requests, "then professionals will be paid substantially more than defrauded investors."
The hearing was supposed to be a light at the end of the tunnel for victims tired of professionals being well paid while investors had recovered only $5 million of the $238 million lost in the scheme.
But at the hearing, held in U.S. District Court in the Southern District of New York, SEC attorneys made a last-minute decision to modify their position, which originally asked Chin not to pay the professionals their full requests.
SEC attorneys announced that, after consulting with senior SEC staff with experience with receiverships, they determined the most consistent approach was to agree to more payment than stated in the original written submission to the court.
The result: Chin ruled Dec. 23 that firms involved in the case would receive $1.3 million of the $7.5 million they were seeking.
"It's been six roller-coaster years," said investor Vivian Orgel of Norfolk earlier this month. "Yet the investors have received such a minimal amount for all the time, aggravation, pain and financial hardship we've faced.
"We were disappointed because we didn't want the professionals to be paid any more," Orgel said about Chin's decision.
In his court order, though, Chin praised Coleman's law firm, Freshfields Bruckhaus Deringer, saying that under its guidance, the receivership estate had greatly benefited.
In August 2008, Coleman, then attorney with the now-defunct law firm Dewey & Lebouf, was appointed by the SEC as the receiver for WexTrust, making it his duty to manage the WexTrust companies, assess WexTrust assets and take action required by law and court orders.
Coleman withdrew as a partner at Dewey & Lebouf and joined Freshfields in 2010.
As part of his duties, Coleman sold WexTrust assets to raise money to recover investor losses. These assets included commercial and residential real estate properties.
Since its creation six years ago, the receiver acquired $108.4 million in income to the estate, made $46 million available for distribution to investors and unsecured creditors and for the payment of administrative expenses, and resolved substantial tax issues.
Professionals from Freshfields and other firms working on behalf of the receiver have earned approximately $21.7 million for their work.
Chin ordered that $2.2 million be left in reserve for further administrative fees to close up the receivership.
"I'm very proud of the work we've done," Freshfields attorney Jonathon Ware told The Virginian-Pilot last week. He defended his firm, saying that it worked hard to ensure victims recovered as much money as possible and that it takes time to liquidate a company the size of WexTrust.
Although pleased with Freshfields' work, Chin acknowledged that the launch of the receivership was marked with some errors.
"With the benefit of hindsight, it is apparent that Dewey was not the best choice as counsel, not with the fee arrangement that was put in place at the outset of the case, given the limited likely recovery," Chin said, referring to the $2.1 million fee requested by Dewey & Lebouf after just 20 days of work.
In his order, Chin also acknowledged investors' frustration, placing the blame on Byers and Shereshevsky rather than the receiver.
"The investors are distressed by the fact that they will recover only a fraction of their losses. That is understandable," he said. "But the receiver and Freshfields are not to blame. Rather, the investors placed their trust in Byers and Shereshevsky, both of whom are now in prison serving substantial sentences, and they are the ones to blame for the investors' predicament."
Shereshevsky and Byers,who pleaded guilty in 2011 to charges of mail fraud and securities fraud, are serving 22- and 13-year sentences, respectively.
"My life has been on hold for over six years with all this," Orgel said. "Now I have to move forward."