The commission alleges that David R. Bergstein stole millions from investors and used the money to buy firearms, an antique watch and jewelry retailer, and a bonsai tree nursery. Bergstein’s lawyer says it’s a “misunderstanding of the complex business transaction at issue.”
The SEC has charged David R. Bergstein, a movie producer and private equity executive, with defrauding hedge-fund investors to “support his extravagant lifestyle.”
Bernstein, 54, also is under indictment on seven federal criminal counts, brought in New York, charging him with defrauding investors of $26 million.
He was arrested at his home in Hidden Hills, Calif., a Los Angeles suburb, on Nov. 9, according to Hollywood trade papers, and was later released on bond.
The indictment is a “misunderstanding of the complex business transaction at issue,” one of Bergstein’s attorneys, Steven Jay Katzman, of Bienert, Miller & Katzman, PLC, says in a statement.
Among the seven counts charged in the New York indictment are investment advisor fraud, securities fraud and conspiracy to commit wire fraud, each of which has a maximum penalty of 20 years in prison, as well as a substantial financial penalty.
Bergstein’s co-defendant, arrested in New York on the same day and on the same charges, is Keith Wellner, 49, the former general counsel, chief operating officer (COO), and chief compliance officer of Weston Capital Asset Management.
Wellner “previously settled SEC charges filed in federal district court in Florida and [since 2014] has been barred from working in the securities industry,” according to the commission.
It was Weston’s investors who were defrauded, according to the New York prosecutors.
The commission, which calls Bergstein a “former movie producer and self-proclaimed private equity executive,” alleges that he “stole millions from investors in 2011 and 2012 and used the money for purchases with a firearms dealer, an antique watch and jewelry retailer, and a bonsai tree nursery.”
Bergstein has “never been registered” with the SEC and “holds no securities licenses,” the commission says, adding that he “holds himself out as the chief executive officer of a private equity company that performs a range of services, including private and public debt structuring. Bergstein is also the president and secretary of Swartz IP.” He also has headed several film production companies and produced major Hollywood motion pictures.
The commission says it is looking for the return of Bergstein’s “ill-gotten gains,” plus penalties.
Both the SEC’s civil case and the New York criminal case are related to a probe of market manipulation in the shares of reinsurer Gerova Financial Group, in 2010 and 2011. The SEC alleges that Gerova is a “former purported reinsurance company controlled by securities fraud recidivist Jason Galanis.”
According to the commission, Bergstein approached Wellner and Albert Hallac, Weston’s president, saying that “he had lent money to Gerova, that Gerova had never repaid him, and that he thought that he and Weston had been wronged by Galanis in their business dealings with Gerova.” (Galanis has pled guilty to securities fraud and Hallac has pled guilty to attempting to defraud Weston investors, according to news service reports.)
Furthermore, the commission says, Bergstein proposed a two-step transaction that would get his Gerova debts repaid, and “ostensibly allow Bergstein and Weston to make money by investing in a new venture that would purportedly invest in medical-billing businesses.”
The SEC Allegations
“Hallac and Wellner agreed to Bergstein’s proposal,” the SEC alleges.
“On or about August 3, 2011, Hallac and Wellner caused the WFF Fund to pledge its recently-returned illiquid hedge fund interests to Arius Libra [which purportedly invested in medical-billing businesses] in exchange for an equity interest in Arius Libra, despite the fact that the WFF Fund’s investment mandate, as set out in its offering documents, did not permit that kind of investment.
“On or about August 3, 2011, Bergstein caused Arius Libra to issue a note to the P2 Fund with a principal amount of $3.6 million that was later increased to $9 million. From on or about August 4, 2011 through on or about November 18, 2011, Hallac and Wellner caused the P2 Fund to lend more than $8.6 million to Arius Libra for the purported purposes of paying off Gerova’s debts and investing in medical-billing businesses.
“Hallac and Wellner caused the P2 Fund to enter into the note with Arius Libra and lend it $8.6 million thereunder, despite the fact that the P2 Fund’s investment mandate, as set out in its offering documents, did not permit that kind of investment,” per the SEC’s filing.
In 2010, according to the New York indictment, Weston agreed to a transaction with Gerova 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.
When Weston subsequently sought to unwind the transaction, Hallac, Weston’s president, was introduced to Bergstein, according to the indictment. Wellner, Bernstein and Hallac, “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. … as part of an investment in a separate business. Certain payments would be made along the way to facilitate the transfers.”
To facilitate the transaction, Bergstein, Wellner and others “agreed to loan money from the P2 Fund, another Fund operated and managed by Weston, to Arius Libra,” and the P2 Loan was 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,” the federal indictment charges, adding that both Bergstein and Wellner, “well knew” that “P2 Fund investors were neither informed of the existence of the P2 Loan nor given any information about Arius Libra.”
As the SEC puts it, the funds’ investors “continued to ask Hallac and Wellner for additional details about these transactions and, most important, the identity of the lender to Arius Libra.
“In response,” the SEC says, “Bergstein drafted, and Wellner signed, a sham note that purported to make the lender to Arius Libra, not the P2 Fund, but rather another Bergstein-controlled nominee, Swartz IP Services Group Inc….
“Wellner then lied to investors,” the SEC contends, “telling them that the counterparty to the P2 Note was Swartz IP. Bergstein and Wellner lied to another investor at an in-person meeting in Los Angeles in or about May 2012, where Bergstein told the investor that the P2 Note’s counterparty was Swartz IP. This lie was material to Weston’s investors because it concealed a substantial conflict of interest by Weston, and a significant credit risk exposure to Arius Libra and Bergstein.”
Bergstein used a “substantial portion of the P2 Loan proceeds” to pay for, “among other things, his own personal expenses, including credit card bills and attorney’s fees,” the indictment alleges.
The SEC also alleges that Bergstein’s “scheme relied on a series of intricate transactions by Weston Capital Asset Management, then a registered investment adviser, with two of its unregistered hedge funds, Weston Capital Partners Master Fund II Ltd. and the Wimbledon Fund SPC Class TT Segregated Portfolio.”
Specifically, the SEC claims that Bergstein “misappropriated at least $2.3 million of money that was purportedly meant for investments in medical-billing businesses [i.e., the P2 monies intended for Arius Libra] and helped Weston Capital Asset Management conceal the true nature of the transaction from Weston investors. In a second allegedly fraudulent transaction, Bergstein stole more than $3.5 million of funds also purportedly meant, in part, for investments in medical-billing businesses.”
The New York Indictment
The New York indictment alleges that 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.”
The criminal indictment also claims that Bernstein 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 indictment is largely based on misleading information’
“Mr. Bergstein went to great lengths to make the medical billing investment a success, including incurring substantial personal expense,” Bergstein attorney Katzman says in a statement. “The transaction derailed, and Mr. Bergstein pursued civil remedies to enforce his rights…. The indictment is largely based on misleading information from third parties affiliated with Weston concerning other larger transactions, some of whom have already been convicted and pled guilty while looking out for their own financial and criminal interests.”
The allegations in the indictment, it is important to note, are “merely accusations, and the defendants are presumed innocent unless and until proven guilty,” as the U.S. attorney’s office for the southern district of New York itself points out.
The SEC, which is seeking “injunctions, the return of allegedly ill-gotten gains, and monetary penalties,” charges Bergstein with violating Section 10(b) of the Securities Exchange Act and Rules 10b-5(a) and (c) and aiding and abetting violations by Weston Capital Asset Management of Section 206 of the Investment Advisers Act of 1940 and Rule 206(4)-8.
In 2014, Weston was “permanently [enjoined] from further violating the respective securities laws it had violated,” the SEC says.
In 2015, Weston “consented to a final judgment against it, which ordered Weston to pay $406,254 in disgorgement plus pre-judgment interest and a civil penalty of $406,254,” according to the SEC.
Also in 2015, Hallac “consented to a final judgment in which he was ordered to pay $268,461 in disgorgement plus pre-judgment interest and a civil penalty of $268,461,” the commission says.
Weston, Wellner and Hallac have neither admitted nor denied the SEC’s allegations, according to reports.
Bergstein’s producer and executive producer film credits include “Before the Devil Knows You’re Dead,” a 2007 thriller directed by Sidney Lumet and starring Ethan Hawke and the late Philip Seymour Hoffman; “The Laws of Attraction,” a 2004 comedy starring Pierce Brosnan and Julianne Moore; and “The Heart of the Sea,” a 2015 period adventure directed by Ron Howard and starring Chris Hemsworth and Cillian Murphy; and others.
“Devil” had an estimated budget of $18 million, but its box office grosses were less than half of that in the U.S.
“Attraction” had an estimated budget of $28 million, but grossed less than $18 million in the U.S.
“Heart” had an estimated budget of $100 million, but grossed just under $25 million in the U.S.
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