Geoffrey S. Berman, the United States Attorney for the Southern District of New York, announced that DAVID BERGSTEIN, a film producer and entrepreneur, was convicted yesterday of defrauding investors of more than $26 million. BERGSTEIN will be sentenced on June 8, 2018, by U.S. District Judge P. Kevin Castel, who presided over the four-week trial.
Co-defendant Keith Wellner had previously pled guilty and has been cooperating with the Government.
Manhattan U.S. Attorney Geoffrey S. Berman said: “As a unanimous jury swiftly found, David Bergstein defrauded investors out of more than $26 million. He withheld material information, transferred funds without disclosing conflicts of interest, and misappropriated funds for his own use. He now stands convicted of serious federal crimes.”
According to the Indictment and evidence presented at trial:
From 2011 through 2012, BERGSTEIN engaged in a scheme to defraud investors in Weston Capital Asset Management (“WCAM”), a New York-based registered investment adviser, 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 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. BERGSTEIN and Weston’s principals 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 and Weston’s principals 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. BERGSTEIN 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 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 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 millions of dollars of 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 Weston’s principals 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, BERGSTEIN arranged for approximately $17.7 million from the TT Portfolio to be transferred to to Swartz IP. In exchange, BERGSTEIN agreed to provide certain investment returns and to meet investor redemption requests. BERGSTEIN induced this transaction by misrepresenting to Weston’s principals that a wealthy investor had capitalized Swartz IP and guaranteed the transaction.
The TT Portfolio 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 directed that approximately $3 million be transferred to the P2 Fund to pay back part of the P2 Loan. BERGSTEIN thus arranged for money from one set of Weston’s investors (the TT Portfolio investors) to 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.
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, including credit card bills, impressionist artwork, and private jets.
BERGSTEIN 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 his criminal conduct.
BERGSTEIN, 55, of Hidden Hills, California, was convicted of the offenses set forth in the chart attached to this release. He was remanded following the return of the jury’s verdict. The statutory maximum sentences are prescribed by Congress and provided here for informational purposes only, as any sentencing of the defendant will be determined by the judge.
Mr. Berman praised the investigative work of the Federal Bureau of Investigation, Internal Revenue Service-Criminal Investigation, and the Office’s Criminal Investigators.
COUNT
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CHARGE
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MAXIMUM PENALTIES
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1
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Conspiracy to Commit Investment Adviser Fraud and Securities Fraud (18 U.S.C. § 371)
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Five years in prison and a $250,000 fine or twice the gross gain or loss from the offense
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2
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Investment Adviser Fraud (15 U.S.C. §§ 80b-6 & 80b-17; 18 U.S.C. § 2)
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Five years in prison and a fine of $10,000
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3
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Investment Adviser Fraud (15 U.S.C. §§ 80b-6 & 80b-17; 18 U.S.C. § 2)
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Five years in prison and a fine of $10,000
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4
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Securities Fraud (15 U.S.C. §§ 78j(b) & 78ff; 17 C.F.R. § 240.10b-5; 18 U.S.C. § 2)
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20 years in prison and a $5,000,000 fine or twice the gross gain or loss from the offense
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5
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Securities Fraud (15 U.S.C. §§ 78j(b) & 78ff; 17 C.F.R. § 240.10b-5; 18 U.S.C. § 2)
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20 years in prison and a $5,000,000 fine or twice the gross gain or loss from the offense
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6
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Wire Fraud (18 U.S.C. §§ 1343 and 2)
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20 years in prison and a $250,000 fine or twice the gross gain or loss from the offense
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7
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Conspiracy to Commit Wire Fraud (18 U.S.C. § 1349)
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20 years in prison and a $250,000 fine or twice the gross gain or loss from the offense
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