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Justice News

Department of Justice
U.S. Attorney’s Office
Southern District of New York

FOR IMMEDIATE RELEASE
Wednesday, November 9, 2016

Manhattan U.S. Attorney Announces Charges Against Film Producer And General Counsel Of Investment Adviser For Multimillion-Dollar Investment Scheme

Preet Bharara, the United States Attorney for the Southern District of New York, William F. Sweeney Jr., the Assistant Director-in-Charge of the New York Office of the Federal Bureau of Investigation (“FBI”), and Anthony J. Orlando, the Acting Special-Agent-in-Charge of the Los Angeles Office of the Internal Revenue Service, Criminal Investigations (“IRS-CI”), announced today that DAVID BERGSTEIN, a film producer and entrepreneur, and KEITH WELLNER, the former General Counsel, Chief Operating Officer, and Chief Compliance Officer of Weston Capital Asset Management (“Weston”), a registered investment adviser, were arrested this morning and charged with defrauding investors of more than $26 million.  BERGSTEIN was arrested in Hidden Hills, California, and will be presented later today before a Magistrate Judge in Los Angeles.  WELLNER was arrested this morning in Manhattan, and will be presented later today before United States Magistrate Judge Sarah Netburn in Manhattan federal court.  The case is assigned to U.S. District Judge P. Kevin Castel.

Manhattan U.S. Attorney Preet Bharara said:  “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:  “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.”           

IRS-CI Acting Special Agent in Charge Anthony J. Orlando said:  “Many investors feel comfortable entrusting their hard-earned dollars with well-known movie financiers and attorneys, but this case brings to light that investors need to perform their due diligence before turning over their money to others.  IRS Criminal investigation is proud to work with our federal law enforcement partners in identifying and investigating those who seek to dupe investors with false promises.”

According to the Indictment unsealed in Manhattan federal court,[1] from 2011 through 2012, the defendants engaged in a scheme to defraud by (i) concealing material information from Weston investors about financial transactions involving their money; (ii) transferring funds from one pool of Weston’s investors to make payments to, provide a security interest for, or otherwise benefit, another pool of Weston’s investors, without the required disclosures to investors concerning conflicts of interest; and (iii) misappropriating a portion of funds transferred from investor accounts for their own and others’ benefit.  BERGSTEIN and WELLNER orchestrated this scheme in part through two transactions involving Weston investors’ assets: first, a loan from a Weston fund called the Partners 2 (or “P2”) Fund, and, second, a swap agreement with a Weston fund called the Wimbledon TT Portfolio (the “TT Portfolio”). 

            The Partners 2 Loan Scheme

In 2010, Weston agreed to a transaction with an entity named Gerova Financial Corporation (“Gerova”), an international reinsurance company, in which Weston sent assets from one of its hedge funds (the Wimbledon Financing Fund, or “WFF”) to Gerova in exchange for restricted shares of Gerova stock.  This exchange was intended to replace illiquid hedge fund assets with stock, which could be bought and sold more easily.  In 2011, however, Gerova’s stock price plummeted.  Weston subsequently sought to unwind the transaction, and Weston’s president was introduced to BERGSTEIN for this purpose.  Weston’s president, WELLNER, and BERGSTEIN subsequently formulated the outlines of a structure in which Weston would return its Gerova stock, receive its assets back from Gerova, and place those assets into another entity called Arius Libra Inc. (“Arius Libra”) as part of an investment in a separate business.  Certain payments would be made along the way to facilitate the transfers.  

In order to complete this transaction, BERGSTEIN, WELLNER, and others agreed to loan money from the P2 Fund, another Fund operated and managed by Weston, to Arius Libra.  The purpose of this loan (the “P2 Loan”) was purportedly (i) to pay certain debts associated with Gerova, and (ii) to fund Arius Libra’s purported medical billing businesses.  WELLNER arranged for the P2 Loan to be secured by certain of the assets of WFF.  Thus, in the event the P2 Loan was not repaid, the P2 Fund had the ability to liquidate WFF assets to make P2 investors whole, to the detriment of investors in WFF.  In total, approximately $9 million in investor money was disbursed from the P2 Fund pursuant to the P2 Loan. 

As WELLNER and BERGSTEIN well knew, however, P2 Fund investors were neither informed of the existence of the P2 Loan nor given any information about Arius Libra.  And no disclosures were made to inform either P2 Fund or WFF investors of the conflict of interest arising from the P2 Fund’s security interest in WFF assets, as WELLNER and BERGSTEIN also knew.  And although BERGSTEIN had represented to Weston that disbursements made pursuant to the P2 Loan would be used both to pay off Gerova creditors and to fund Arius Libra’s medical billing businesses, in fact, BERGSTEIN misappropriated a substantial portion of the P2 Loan proceeds and used them to pay for, among other things, his own personal expenses, including credit card bills and attorney’s fees.

            The TT Portfolio Swap Agreement Scheme

In late 2011, BERGSTEIN and WELLNER secretly arranged for Weston’s TT Portfolio to enter into a swap agreement with an entity controlled by BERSTEIN known as Swartz IP Services (“Swartz IP”), a transaction that was not disclosed to TT Portfolio investors.  As part of this swap agreement, WELLNER and others transferred approximately $17.7 million from the TT Portfolio to Swartz IP.  In exchange, BERGSTEIN agreed to provide certain investment returns and to meet investor redemption requests. 

This transaction was completed without disclosure to investors, even though, for other swap agreements, Weston had amended the TT Portfolio offering memorandum to reflect the particular swap agreement at issue.  Of the money that was transferred to Swartz IP, moreover, BERGSTEIN and WELLNER directed that approximately $3 million be transferred to the P2 Fund to pay back part of the P2 Loan.  BERGSTEIN and WELLNER thus directed that money from one set of Weston’s investors (the TT Portfolio investors) be used to pay back part of a debt owed to another set of Weston’s investors (the P2 Fund investors) – another conflict of interest that was not disclosed to P2 or TT Portfolio investors.

In addition to diverting TT Portfolio money for unauthorized and improper investments, WELLNER and other Weston officers improperly paid themselves with TT Portfolio investor money, which was not disclosed to investors.  As a further part of the scheme, moreover, BERGSTEIN made false representations about Swartz IP’s assets and ability to meet redemption requests and secretly diverted TT Portfolio investor proceeds to pay BERGSTEIN’s personal expenses, among other things.

BERGSTEIN and WELLNER also gave a false and misleading investor presentation, made false investment disclosures, and distributed a fake loan note concealing the origin of the P2 Loan in order to attempt to conceal their criminal conduct.

*                *                *

BERGSTEIN, 54, of Hidden Hills, California, and WELLNER, 49, of Manhattan, are charged with the offenses set forth in the chart attached to this release.  The statutory maximum sentences are prescribed by Congress and provided here for informational purposes only, as any sentencing of the defendants would be determined by the judge.

Mr. Bharara praised the investigative work of the FBI, IRS-CI, and the Office’s Criminal Investigators.  He also thanked the Securities and Exchange Commission, which has filed civil charges against BERGSTEIN in a separate action. 

The charges were brought in connection with the President’s Financial Fraud Enforcement Task Force.  The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.  With more than 20 federal agencies, 94 U.S. attorneys’ offices, and state and local partners, it is the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud.  Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions and other organizations.  Since fiscal year 2009, the Justice Department has filed over 18,000 financial fraud cases against more than 25,000 defendants.  For more information on the task force, please visit www.StopFraud.gov.                

This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Edward A. Imperatore and Robert W. Allen are in charge of the prosecution.

The allegations contained in the Indictment are merely accusations, and the defendants are presumed innocent unless and until proven guilty.

 

COUNT

CHARGE

DEFENDANTS

MAXIMUM PENALTIES

1

Conspiracy to Commit Investment Adviser Fraud and Securities Fraud (18 U.S.C. § 371)

 

DAVID BERGSTEIN

KEITH WELLNER

Five years in prison and a $250,000 fine or twice the gross gain or loss from the offense

2

Investment Adviser Fraud (15 U.S.C. §§ 80b-6 & 80b-17; 18 U.S.C. § 2)

DAVID BERGSTEIN

KEITH WELLNER

Five years in prison and a fine of $10,000

3

Investment Adviser Fraud (15 U.S.C. §§ 80b-6 & 80b-17; 18 U.S.C. § 2)

DAVID BERGSTEIN

KEITH WELLNER

Five years in prison and a fine of $10,000

4

Securities Fraud (15 U.S.C. §§ 78j(b) & 78ff; 17 C.F.R. § 240.10b-5; 18 U.S.C. § 2)

DAVID BERGSTEIN

KEITH WELLNER

20 years in prison and a $5,000,000 fine or twice the gross gain or loss from the offense

5

Securities Fraud (15 U.S.C. §§ 78j(b) & 78ff; 17 C.F.R. § 240.10b-5; 18 U.S.C. § 2)

DAVID BERGSTEIN

KEITH WELLNER

20 years in prison and a $5,000,000 fine or twice the gross gain or loss from the offense

6

Wire Fraud (18 U.S.C.      §§ 1343 and 2)

DAVID BERGSTEIN

KEITH WELLNER
 

 

20 years in prison and a $250,000 fine or twice the gross gain or loss from the offense

7

Conspiracy to Commit Wire Fraud (18 U.S.C. § 1349)

DAVID BERGSTEIN

20 years in prison and a $250,000 fine or twice the gross gain or loss from the offense

 

 

 

 

 

[1] As the introductory phrase signifies, the entirety of the text of the Indictment and the description of the Indictment set forth below constitute only allegations, and every fact described should be treated as an allegation.

16-294
Topic: 
Financial Fraud
Securities, Commodities, & Investment Fraud
Updated November 9, 2016