Hiding In Plain Site: Undisclosed Criminal Past Was Undetected

March 10, 2016

Contrary to what we would all like to believe, it's just not that difficult to hide in plain sight (or site) on the Internet, which has become less a source of discovery than a device for obfuscation. One can invent a whole new self with ease and, clearly, there just isn't all that much need to erase the unsavory details of a bothersome past. Overwhelmed by the amount of online data or simply too lazy to make the effort, many victims of fraud simply accept too much at face value -- forgetting that the Internet is a faceless parallel universe of make-believe and fabricated factoids.

Truly, it didn't take me much time or effort: I typed the name "Steven Zoernack" into Google search and came across his criminal history, replete with links to all sorts of court documents that were readily available for free on the Internet. Did potential investors do any due diligence on Zoernack at all? 

Promises of Mortgages

Exhibit One in the online dossier about Steven Zoernack as discovered by BrokeAndBroker.com Blog's publisher Bill Singer is a criminal case in which Zoernack was charged with 15 counts of wire fraud: United States of America v. Steven Zoernack (Memorandum Order, United States District Court for the Southern District of New York, 04-CR-00868 / August 1, 2005). In the Memorandum Order, which addresses Defendant Zoernack's Motion to Suppress, we are informed, in part:

[T]he Affidavit provides detailed accounts of how Zoernack persuaded victims to send him money in exchange for promises of mortgages they never received. (Affidavit at 4, 8-14.) The Affidavit also presents information indicating that Zoernack defrauded third-party contractors by not paying them for services rendered. (Id. at 15-16.) Furthermore, the information presented in the Affidavit is sufficient to support a determination of probable cause to believe that the Premises were likely to contain evidence of Zoernack's criminal activity. The Affidavit proffers evidence that Zoernack lived at the Premises and had conducted business from his residence over a lengthy period of time. (Id. at 22-23.) Mail sent to Zoernack's company, "Wall Street Credit LLC," a mortgage broker and conduit lender purportedly located in New York City, was actually forwarded to the Premises. (Id. at 24.) Wall Street Credit conducted business through an internet site administered by Zoernack, and Zoernack, who conducted his business from the Premises, communicated frequently by email with his alleged victims. (Id. at 32.) These facts are sufficient to support a reasonable inference that the relevant business records pertaining to the fraud would be located at the Premises.

Contrary to Defendant's claim, the information in the affidavit was not stale. *44 Defendant asserts "the information contained within the Affidavit was over two (2) years old" and "there are absolutely no allegations that any wire transfers or other allegedly criminal activity occurred at any time after March 29, 2001." (Mot. to Supp. at 6, 20.) This contention is factually incorrect. The Affidavit describes one victim who allegedly mailed Zoernack approximately $17,000 from December 2002 to February 2003. (Affidavit ¶   14.) This person also allegedly had a conversation with Zoernack on July 16, 2003 repeating a request for a refund (Id.) Additionally, the Affidavit proffered that the website operated by Zoernack, "which directs viewers to contact Wall Street Credit and Zoernack by sending electronic mail" was in operation on July 16, 2003. (Id. at 32.)

Criminal Plea

In addition to an original Judgment in the criminal case dated June 26, 2007, there was an Amended Judgment dated
September 20, 2007. United States of America v. Steven Zoernack (Amended Judgment, United States District Court for the Southern District of New York, 04-CR-00868 / September 20, 2007). The Amended Judgment informs us that Defendant Zoernack pled guilty to a single wire fraud offense. Pursuant to his plea, Zoernack was sentenced to 24 months imprisonment and 3 years of supervised release; and he was ordered to pay a $15,000 fine and to make $337,650 in restitution to 12 individuals.

Socially Responsible Hedge Fund

Let's forward a bit to May 2010, when we would come across a press release: "Socially Responsible Hedge Fund EquityStar Run by Steven Zoernack Plans a June 1 Launch" (Press Release, May 13, 2010). Among the revelations in this Press Release:

Socially responsible asset manager EquityStar Capital Management, run by Steven Zoernack, plans a June 1, 2010 launch for its new hedge fund, EquityStar Global Partners. The fund is unique in that it will invest some of the firm's own profits into goodwill projects in Africa.

"I've spent the past 2 years working with consultants and other groups all over the continent of Africa and have been surprised at the number of deserving projects we have seen," says Steven Zoernack, who will work hands-on with the consultants that will bring to the firm viable and worthy project ideas . . .

. . .

EquityStar's equity long/short strategy will aim for returns of 25-35% while attempting to keep volatility between 7-10%. The market neutral strategy will attempt to hedge most of the general market risk and volatility out of the portfolio. The new fund expects to raise $50 million by September 2010, with a target of $100 million or more by year end. Capacity of the fund is expected at $1.5B.

A few of the much sought after features of EquityStar include independent tier 1 service providers, transparency, weekly liquidity, no lockups, oversight by an outside risk manager, and a financially strong custodian to protect the assets. The fund's independent administrator manages $130 billion in funds and grants trading only access to the investor funds . . .

. . .

Mr. Zoernack has 25 years of experience in the investment and finance community and was formerly with Bear Stearns and Sun Credit. He advised a niche group of wealthy clients representing several hundred million dollars in investment assets spanning equities, commodities, and alternative investments.

Ummm . . . not much mention of that criminal problem in the Press Release, is there? Wasn't Zoernack in federal prison during some of those "last two years" referenced in the release when he claims to have been working with consultants in Africa? Y'all get the same feelin' that I got: This ain't gonna end well.

SEC Alleges Fraud

According to allegations by the Securities and Exchange Commission ("SEC"), Steven Zoernack, 53, Nokomis, FL, is the managing member/sole employee of EquityStar Capital Management, LLC., and he is also the managing member for two unregistered funds: the Global Partners Fund, LLC. and the Momentum Growth Fund, LLC, for which EquityStar purportedly served as an unregistered investment advisor. Following an investigation, the SEC alleged that Zoernack and EquityStar fraudulently offered and sold at least $5.6 million of interests in Momentum and Global Partners to more than 40 investors in about 20 states and two foreign countries. Accordingly, on March 8, 2016, the SEC instituted administrative and cease-and-desist proceedings: In the Matter of Steven Zoernack and Equitystar Capital Management, LLC, Respondents (Order Instituting Administrative And Cease-And-Desist Proceedings and Notice of Hearing; '33 Act Rel. No. 10051; '34 Act Rel. No. 77318; Invest. Adv. Act Rel. No. 4349; Invest. Co. Act Rel. No. 32024; Admin. Proc. File No. 3-17157 / March 8, 2016).

NOTE: The Respondents are presumed innocent unless and until found guilty by a preponderance of the evidence during an SEC administrative hearing.

According to the "Summary" section of the OIP:

1. These proceedings involve violations of the anti-fraud provisions of the federal securities laws by Steven Zoernack and his company EquityStar, an unregistered investment adviser, in connection with the offer and sale of interests in Global Partners Fund, LLC ("Global Partners") and Momentum Growth Fund, LLC ("Momentum"), two unregistered investment funds Zoernack created and then managed through EquityStar. From at least May 2010 through at least March 2014, EquityStar and Zoernack-EquityStar's managing member and sole employee- made material misrepresentations and omissions and engaged in a fraudulent scheme involving this and other deceptive conduct including:

  • taking extensive measures to hide Zoernack's identity as fund manager-while simultaneously advertising that the funds boasted a seasoned and reputable manager-and otherwise failing to disclose to investors and others, material facts about Zoernack's background, including two felony fraud convictions, a bankruptcy filing, and other money judgments and liens against Zoernack;
  • providing false and misleading data about Momentum to Morningstar, Inc. (a company that provides independent investment research to individuals, financial advisers and institutions) in order to obtain for Momentum the title of "Morningstar Five Star Rated Fund," which Zoernack then used to market the fund. For example, Zoernack misrepresented to Morningstar that the Momentum fund had been in existence for years longer than it actually had, and that its assets were more than 40 times higher than they actually were;
  • creating and distributing false and misleading investment marketing materials, which failed to adequately indicate that results were hypothetical and not based on actual fund performance;
  • hiring a firm to manipulate Internet search results for Zoernack and populating the Internet with false and misleading information about him, including that he was a successful fund manager, investor, and philanthropist. This had the effect of making it harder for potential investors and others to discover information about Zoernack's criminal convictions and other negative information about him; and
  • secretly withdrawing more than $1 million from about February 2012 to at least May 2014, without authorization, and without disclosing his withdrawals to investors, and falsely characterizing the withdrawals as assets of the funds.

The OIP asserts that Zoernack attempted to employ smoke and mirrors in an fraudulent effort to conceal what the federal regulator deems a "one-man operation." In furtherance of that alleged subterfuge, the OIP alleges that:

[Z]oernack used at least three other false identities in communications with investors, prospective investors and others. One of the false identities was a non-existent woman named Amanda Sutton, to whom Zoernack gave the title of Investor Relations Professional.

Further, the OIP asserts that:

10. In the offer and sale of interests in the funds, the solicitation and marketing materials Zoernack drafted and distributed stressed the funds' reliance on the manager and claimed that the unnamed manager had "an impeccable and unblemished past record with the SEC." The unnamed manager was Zoernack, who had two criminal fraud convictions, had previously filed for bankruptcy, and had numerous money judgments and liens against him. Neither he nor EquityStar disclosed to prospective investors these facts about his background, which would have been important to a reasonable investor's investment decision.

11. Zoernack also took extensive steps to conceal his criminal history and troubling financial record. Zoernack paid an Internet-based search engine manipulator ("Internet company"), $10,000 to make negative information about him appear less prominently in search engine results. The Internet company did this by acquiring multiple website domain names and populating them with positive information about Zoernack-provided and approved by Zoernack-then "hitting" the positive websites numerous times, thereby causing the positive information about Zoernack to appear in search engine results before negative information. However, much of the positive information that results from an Internet search of Zoernack's name is false or misleading.

In furtherance of his allegedly fraudulent efforts, the OIP explains Zoernack supplied false and misleading information to the independent investment research firm Morningstar Inc. in an attempt to secure a coveted Five-Star rating for the Momentum Fund. Pointedly:

14. Momentum's listing on Morningstar-which was based entirely on information Zoernack provided to Morningstar through its web portal-indicated that Momentum had a performance history that began in 2009 with returns in the top 20% of all funds, and that it had more than $120 million in funds under management. This statement was false and misleading for multiple reasons. First, Momentum did not exist prior to 2012. This was a significant misrepresentation because, according to Morningstar's requirements, without at least three years' worth of performance results a fund was not eligible to be listed on Morningstar's website. Second, most of Momentum's returns listed in the Morningstar report were hypothetical or the results of "back-testing," not actual performance results. Nowhere in the information Zoernack provided for the Morningstar listing-which then appeared on Morningstar's website-did Zoernack disclose the purportedly hypothetical or "back-tested" nature of Momentum's performance. Third, Momentum had nowhere near $120 million in total assets under management; in reality, the fund never had more than $3 million in assets. Finally, the Morningstar report contained a biography of Zoernack-which he provided-that failed to disclose his criminal convictions, bankruptcy, other money judgments or liens against him.

Bill Singer's Comment

I urge all industry participants and serious investors to read the OIP in order to gain a better understanding of why investor due diligence is a critical undertaking. Moreover, you should gain a healthy skepticism for Wall Street's purported ratings and for all the impressive looking documents that you think are amply vetted and reviewed.