The SEC alleged that a former movie producer stole millions of dollars from hedge fund investors and used his ill-gotten gains to fund a lavish lifestyle, including extravagant trips and high-dollar purchases from a firearms dealer, an antique watch and jewelry retailer and a bonsai tree nursery. In a civil enforcement action filed in the U.S. District Court for the Southern District of New York, the SEC claimed that David R. Bergstein violated Exchange Act §10(b) and Rules 10b-5(a) and (c), and aided and abetted Investment Advisers Act violations by the hedge fund, Weston Capital Asset Management (Weston). The agency is seeking injunctive relief, disgorgement of ill-gotten gains and monetary penalties.
In one transaction, the SEC claimed that Bergstein aided Weston in an attempt to conceal a failed investment by the fund in Gerova Financial Corp., a purported reinsurance company that was, as stated in the complaint, “controlled by securities fraud recidivist Jason Galanismis.” The scheme involved a complex series of transactions between various Weston-controlled entities, all made without proper disclosures to the fund’s investors. As alleged, Bergstein represented to Weston that disbursements from one of the controlled entities would be used to pay off Gerova creditors and to fund a medical billing businesses. According to the complaint, however, Bergsten misappropriated at least $2.3 million of the fund’s money, and helped Weston to conceal the true nature of the transaction from fund investors.
In a second allegedly fraudulent transaction, Bergstein and Keith Wellner, Weston’s former general counsel, COO and chief compliance officer, arranged for a Weston-controlled fund, TT Portfolio, to enter into a swap agreement with Swartz IP Services, an entity controlled by Bergstein. The parties entered into the swap without disclosing the transaction to TT Portfolio investors. As part of this swap agreement, Wellner and others transferred approximately $17.7 million from TT Portfolio to Swartz IP. Bergstein allegedly stole more than $3.5 million of the funds for his personal use.
“The use of elaborate corporate transactions to mask old-fashioned theft of investor monies will not prevent the SEC from enforcing the federal securities laws and protecting investors,” said Andrew M. Calamari, director of the SEC’s New York Regional Office. “Violators will be held to account no matter the artifice used to perpetrate their frauds.”
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Bergstein, as well as against Wellner, a repeat offender who had previously settled SEC fraud charges and been barred from working in the securities industry.
Manhattan U.S. Attorney Preet Bharara said that “as alleged, David Bergstein and Keith Wellner defrauded investors out of more than $26 million. They allegedly withheld material information, transferred funds without disclosing conflicts of interest, and misappropriated funds for their own use. For their web of alleged deception and self-dealing, Bergstein and Wellner now face federal criminal charges.”
FBI Assistant Director-in-Charge William F. Sweeney Jr. said that “Bergstein and Wellner allegedly tricked their victims into thinking their money would be invested responsibly, but they essentially used these investments to fund their own lifestyle to the tune of several million dollars. People have the right to trade in an uncorrupted market, and today’s charges are proof of the FBI’s continued determination to root out those who unlawfully interfere with this process.”
The multiple charges carry maximum prison terms of from five to 20 years per offense, and fines ranging from $10,000 to $5 million (or twice the gross gain or loss from the offense) for each count.
See this story for more information.
SEC v. Bergstein, Dkt. No. 1:16-cv-08701 (S.D.N.Y., Nov. 9, 2016).
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