SEC, USAO Charge Film Producer With Fraud
The Commission brought a fraud action against a movie producer who is alleged to have misappropriated client funds in two complex transactions. SEC v. Bergstein, Civil Action No. 1:16-cv-08701 (S.D.N.Y. Filed Nov. 9, 2016). The U.S. Attorney’s Office for the Southern District of New York filed a parallel criminal action.
David Bergstein, a producer of films, is the CEO of a private equity company that performs services such as debt restructuring. He is also the president and secretary of Swartz IP. Each transaction primarily involves: Weston, a registered investment adviser; Keith Wellner, the firm’s general counsel and COO; Gerova Financial Group Ltd., a reinsurance firm controlled by Jason Galanis, a repeat securities law violator currently in prison for securities fraud; Wimbledon Financing Fund Fund, a Cayman Island exempt company; and the P2 Fund, also a Cayman Island exempt company with multiple classes of shares.
In 2010 Weston entered into a transaction with Gerova Financial in which the adviser forwarded assets from one of its hedge funds – Wimbledon Financing – that were illiquid to Gerova for restricted shares of that firm which was publically traded. The next year Weston sought to unwind the deal after trading in Gerova’s shares were suspended by the New York Stock Exchange following reports that the firm was a fraud.
To facilitate that transaction Defendant Bergstein approached Weston’s president, Albert Hallac, and general counsel and COO, Keith Wellner. Mr. Bergstein claimed that Gerova owed him money which had not been repaid. Mr. Bergstein thus claimed that he and Weston had been wronged by scofflaw Jason Galanis.
A plan was formulated by Mr. Bergstein which called for Gerova to unwind the transaction by having its assets placed in a firm he controlled, Arius Libra Inc., as an investment in another business. To facilitate the transaction, a loan was extended to a special purpose entity, Arius Libra, by the P2 Fund which was managed by Weston. The loan was to pay certain debts associated with Gerova and fund the medical billing businesses of Arius Libra. The loan was secured by assets of Wimbledon Financing Fund. If the loan was not repaid the P2 fund had the ability to liquidate the assets and repay its investors. About $9 million in investor funds were made available to the P2 Fund under the loan arrangement. The transaction was not disclosed to the P2 investors.
Mr. Bergstein failed to use the P2 loan proceeds to pay Gerova creditors and fund the medical billing businesses in accord with his representations. Rather, he misappropriated a substantial portion of the loan proceeds, diverting the funds to his own use.
The second transaction involved essentially the same parties along with TT Portfolio, another Cayman Island exempt fund managed by Weston. In this transaction Mr. Bergstein arranged for TT Portfolio to enter into a swap agreement with Swartz IP. Wellner and others transferred about $17 million to Swartz IP from TT Portfolio. Swartz IP issued a note in return – essentially Mr. Bergstein agreed to provide certain investment returns and to meet investor redemption requests. The transaction was premised on false financial statements for Swartz IP. The transaction also involved the diversion of about $3 million to the P2 Fund to repay the P2 loan – essentially funds were moved from one fund managed by Weston to another. Neither the deal nor the resulting conflict were disclosed to the shareholders of TT Portfolio.
The representations made by Mr. Bergstein were false – investment returns were not paid nor were investor redemption requests honored. Rather, he had the funds secretly diverted to his use. The Commission’s complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The parallel criminal action, which names Messrs. Bergstein and Wellner as defendants, contains counts of conspiracy to commit investment adviser and securities fraud, investment adviser fraud, securities fraud, wire fraud and conspiracy to commit wire fraud. Both actions are pending.