Mensch next door charged with Ponzi scheming

…elaborate means of concealing his ill-gotten gains. If the poker message boards are to be believed, Steve Haris's poker style – a combination of feckless and reckless – bears little resemblance to the quick-witted musical prodigy capable of bluffing investors, friends, and family. “Tzvi has rather a high intellect,” says one of his creditors, Wesley Roitman. “If he's a poker player, he's a good poker player. I don't believe he lost all the money.”

The Globe and Mail
February 12, 2010

Mensch next door charged with Ponzi scheming
Nicholas Stein

TzviErezPonzie.jpg

Printer and master pianist suspected of $27-million fraud

The North Toronto enclave of Ledbury Park radiates suburban tranquility. On Saturdays, well-heeled denizens take their children on bike rides past the faux chateaux that have colonized its streets; processions of devout Jewish families – fathers and sons clad in black hats and coats, wives and daughters pushing baby carriages – walk home from synagogue.

On the night of March 25, however, the calm was disrupted by a terrifying sound: gunfire. At 613 St. Germain Ave., dentist David Meisels and his family awoke to find their glass front door shattered, its wooden frame pockmarked by bullets. On a nearby lawn, police discovered a gun – a warning, neighbours later speculated, from the Israeli Mafia.

The violence likely was not aimed at the dentist. It was intended instead for his brother-in-law, Tzvi Erez, a 42-year-old former printer who lived around the corner. The bankruptcy of Mr. Erez's Toronto company, E Graphix, exposed a $27-million Ponzi scheme that would lead to his arrest and to charges of seven counts of fraud, on which he is now awaiting trial. A series of threats had forced him, his wife and three children underground – where he remains – and those responsible for the gunshots evidently believed he was using his sister's place as a safe house.

Seemingly an unlikely target for gun-toting thugs, Mr. Erez by background and appearance was largely indistinguishable from many young Jewish professionals who call this Bathurst and Lawrence area home. He graduated from two of the city's most buttoned-down parochial schools, Associated Hebrew School and the Community Hebrew Academy of Toronto, and holds an MBA from York's Schulich School of Business. The one-time piano prodigy also performed recitals at the city's most prestigious concert halls, and had released a couple of well-received classical CDs, including Tzvi Erez Plays Chopin. Pictured on the CD cover, the musician appears a decade younger than his then 36 years.

His smooth, round baby face, crowned by a full head of close-cropped brown hair, emerges almost incongruously from his tuxedo, as if it had been Photoshopped. The biography Mr. Erez posted on his website at the time of the album's release – before he is suspected of launching his scheme – suggests he already possessed the self-confidence, bordering on arrogance, needed to pull it off: “Singularity, originality, and a deep understanding of music inform and define the towering musical talent of Tzvi Erez,” begins the 620-word paean, which concludes with an acknowledgment of his family, “who are destined to share their lives with a charismatic genius.”

“He was a bit nerdy, a bit chubby,” says Aaron Sher (not his real name), one of several creditors who spoke on condition of anonymity. “He presented himself as having this little business, which through his ingenuity produced great returns. It wasn't rocket science. It was something people could understand.”

But there was a profligate Mr. Hyde to the hard-working, somewhat nebbishe Dr. Jekyll. It emerged that Mr. Erez was secretly a heavy gambler, taking covert trips to casinos and playing high-stakes poker online under an alias. Indeed, he previously had been charged with fraud for writing fraudulent cheques to several Ontario casinos.

For many of his 76 creditors, some of whom face financial ruin, the revelations about Mr. Erez's gambling habit left a host of unanswered questions: Was their money really gone? Could Mr. Erez have used online casinos as a vehicle to conceal it? And how did he manage to deceive them for so long? “Six weeks before all this happened, he was dancing with his baby at his mother-in-law's retirement party,” says Sheldon Esbin, a close friend of Mr. Erez's father-in-law who loaned him money because of their family connection. “To look at him, so happy, you would think that everything was fine. But nothing was fine.”

THE MUSICAL MENSCH
“I used to thank God for the day I met Tzvi Erez,” says Jamie Gold, his voice choked with emotion.

We are sitting at a Starbucks on Avenue Road, a few blocks from Mr. Erez's former home. All around us, women heavily made up to look as though they just rolled out of bed chat animatedly over non-fat lattes.

Mr. Gold had known the Erez family for more than a decade, so when a friend approached him about investing with the printer, he was already predisposed. “This wasn't just two guys meeting in a coffee shop and one says, ‘Give me your money,'” said Mr. Gold (not his real name), who spoke on the condition that I shield his identity. “I knew this was a good person from a good family that I had a history with.”

He began investing with Mr. Erez in 2006, eventually committing the six-figure line of credit on his home. Later he raised another $3-million from close family and acquaintances on Mr. Erez's behalf.

For Mr. Gold, everything about Mr. Erez's background conveyed stability. The Erez family was well known among Toronto's observant Jewish community, who rallied around them after Tzvi's younger brother Niv was fatally shot during a robbery attempt at the Richmond Hill jeweller where he worked. Mr. Erez's stepfather, Yehuda, who adopted young Tzvi in his native Israel, was a respectable real-estate developer and lived with Mr. Erez's mother in a multimillion dollar home near Chabad Gate, the upscale Jewish neighbourhood in Thornhill. While Tzvi drove a late-model BMW and lived in a comfortable home, there was nothing flashy about his dress or demeanour. “He was a fixture,” says Mr. Gold. “The fact that he had a family, roots, gave me confidence he wouldn't run off with our investment.”

Mr. Erez told investors his business was based on “factoring,” an established financial strategy in which a company borrows money against the value of its accounts receivable. In the case of E Graphix, these ostensibly were purchase orders from customers such as Subway and Movado placed three months in advance of payment. He said he used the loans from investors to pre-pay all his suppliers, enabling him to negotiate steep discounts for paper, printing-press time, and other production costs. As a result, he could claim outsized profits – 20 per cent or more on each three-month contract – which translated into mammoth annual returns of between 80 per cent and 100 per cent. Mr. Erez promised Mr. Gold annual returns of 20 per cent or more on his investment, and at first he didn't disappoint. “I gave him money,” says Mr. Gold, “and every three months I'd get it back with interest – and there would be a new contract to roll the money into.”

Mr. Gold didn't realize though that the purchase orders he was supposedly funding were alleged later to be forgeries, and that the returns Mr. Erez paid him would be said to be coming straight from the pockets of other investors – a classic Ponzi scheme in which funds from new investors are used to pay out older ones.

Mr. Erez also cultivated a Bernard Madoff-like air of exclusivity. Periodically, he approached investors with what he called “pops,” rare deals that carried much higher returns. “You felt thankful to him for bringing you in,” says a creditor, “as though you were taking someone else's place.” So when difficulties arose, including the occasional bounced cheque, investors were quick to dismiss them. “Nobody wanted to rock the boat,” says Mr. Sher. “And the more you got paid, the more you let your guard down.”
Mr. Erez's alleged method of co-opting existing investors to become brokers was also reminiscent of Mr. Madoff.

Some time in 2007, Mr. Erez approached Mr. Gold to raise more money. E Grafix's services were in demand, he said, and he wanted to double the $3-million Mr. Gold and a handful of friends already had invested. Mr. Gold secured the additional funds from friends and family, among them seasoned investors with successful track records, including several lawyers and accountants. “They all met Tzvi and did their own due diligence,” he said. For added security, Mr. Erez named the investors as beneficiaries on his life-insurance policy and provided a personal statement of net worth – printed on the letterhead of a respected Toronto accounting firm – valuing his assets at $3.4-million and stating he was the 50-per-cent inheritor of a $57-million trust fund.

Above all, Mr. Erez's scheme relied on the appearance of transparency, achieved by providing investors expertly forged documents. “He used his expertise as a printer to create documents that fooled a lot of smart people,” said Lou Brzezinski, a lawyer with Toronto firm Blaney McMurtry, who brought a civil lawsuit against Mr. Erez on behalf of a creditor, William Tencer.

One supposed deal with Movado, for example, involved printing the booklets that accompany the company's watches. Mr. Erez provided the purchase order and a sample; invoices from suppliers to show the work had been completed; a copy of the signed check from Movado; and a bank statement from CIBC with the corresponding amount deposited in one of his accounts. The records were convincing enough to secure a $250,000 credit line from CIBC.

None of the creditors anticipated a widely distributed e-mail last February from Mr. Erez's lawyer Howard Manis, which explained that his client was bankrupt and would not be able to repay their loans. “There were all these names on the e-mail I had never seen before,” says Mr. Gold, who attended a hastily arranged meeting that night at the Bathurst and Lawrence home of one of the creditors. “There was nervous laughter each time someone new walked in the door, saying they were owed $800,000, $1-million, $2-million,” he added, estimating 20 people attended that night, many representing more than one investor. They calculated Mr. Erez owed them more than $25-million – a staggering sum for a small printing business with a single employee. “People were in shock,” says Mr. Gold. “I went to my brother's house and told him his money was gone, and he started crying. Then I called my largest investor, and he started crying. Everybody said, ‘I'm ruined. I'm ruined.' And that's how I spent the next two days – ruining people's lives.”

Later that night, several creditors tried unsuccessfully to contact the printer, showing up at his business, his house, and family members' homes. The police eventually posted an officer outside his sister's house, and later charged a creditor, Gad Elmaleh, with seven counts of threatening death and one count of criminal harassment (he was released after paying a $500 surety and is not a suspect in the shooting). The following day, an e-mail from Mr. Manis informed creditors that, “for the safety of his family, Tzvi Erez has gone into protection until further notice.”

IS HARIS EREZ?
In the spring of 2008, the online poker world was abuzz over the exploits of Steve Haris, a virtual No Limit Texas Hold'em player who wagered enormous stakes – $100,000 or more on a single hand. “Notice the list of hungry sharks awaiting a chance to felt steve haris, its [sic] getting bigger and bigger,” writes someone using the handle Lucoo in the forum on FullContactPoker.com. “This guy is every poker player's wet dream,” adds JaNnN. “Probs [sic] some rich businessman, apparently stuck 150k in the last week or something,” speculates HighwayStar.

As it turned out, Steve Haris was an alias used by Mr. Erez, according to the report issued by court-appointed receiver Jerry Henechowicz. After Mr. Tencer filed his lawsuit against the printer last February, Ontario Superior Court Justice Colin Campbell granted Mr. Henechowicz's firm special investigative power to vet creditor claims and locate and seize any remaining assets.

Both tasks, however, proved difficult. In his nine-month investigation, Mr. Henechowicz reviewed over 4,000 transactions at a single CIBC branch near the former premises of E Graphix, and found that its owner moved $38.9-million through the bank over the two-year period before his scheme collapsed. As would be expected for a Ponzi scheme, the majority, about $29-million, appeared to go to Mr. Erez's investors. Most of the remaining $9.9-million was wired to various casino accounts and withdrawn in cash.

But this figure may not reflect the true scope of the alleged fraud. Mr. Henechowicz also uncovered more than 90 other bank accounts Mr. Erez directly or indirectly controlled, 15 of them outside Canada. With limited resources, the receiver couldn't pursue most of them. Moreover, those close to the case believe some of his creditors chose not to make their claims public in court. “There are a whole group of people owed a ton of money that haven't declared,” says Mr. Brzezinski, who became the lawyer for the receivership. “The allegation is that they are using alternative means of justice.”

In interviews, Mr. Erez told the receiver he kept almost nothing, and there is some evidence to support this assertion. His house was mortgaged for more than its value, and the receiver only managed to recover $35,000 for his remaining assets. (Mr. Erez didn't respond to The Globe and Mail's request for an interview, and his civil lawyer Howard Manis and criminal lawyer Mark Sandler, both of whom no longer represent him, declined to comment.) Mr. Erez said he became indebted to “various parties” – someone close to the case referred to them as “loan sharks” – and hatched the Ponzi scheme in order to extricate himself. While the names of these mysterious “parties” were redacted from the receiver's report, the title of Mr. Erez's former home indicates he borrowed heavily in 2006 from an entity called First Mortgage Banx – enough that he had to take out a subsequent $1.3-million mortgage from CIBC to clear the debt.

The alternate theory, held by Mr. Brzezinski and some of Mr. Erez's creditors, is that his gambling was an elaborate means of concealing his ill-gotten gains. If the poker message boards are to be believed, Steve Haris's poker style – a combination of feckless and reckless – bears little resemblance to the quick-witted musical prodigy capable of bluffing investors, friends, and family. “Tzvi has rather a high intellect,” says one of his creditors, Wesley Roitman. “If he's a poker player, he's a good poker player. I don't believe he lost all the money.”

According to gaming experts, Mr. Erez could have opened casino accounts under different names and played against himself, thereby transferring phantom losses by one alias to an offshore account registered to another alias. He could also lose deliberately to another player, who surreptitiously would return the money later. (Forensic analysts discovered the Steve Haris alias on Mr. Erez's laptop, but they also found evidence that he stored large amounts of data on a portable hard drive, which was never recovered.) A third option, posted on the FullContactPoker.com message board, is that Mr. Haris's loose play was a ploy to present himself as an easy mark – a tactic he could later use to his advantage. “Let's say… you had $3-million you just didn't need,” writes Monoatomic. “You hop online and tank like 500K in a few displays of just absolute donkey play where your name gets passed around every poker forum for being a complete whale. Then one day you switch up your play to such extremes where you make back the 500K … plus a whole boatload more.”

We likely will never know the true answer. Registered in the Isle of Man, Gibraltar, and other tax havens, online casinos remain largely impenetrable to foreign legal inquiries.

Whether or not they ever recover any of their losses, creditors will soon be on the hook for more. Under Canada's new bankruptcy laws, all the funds they received as investment payouts from Mr. Erez in the three months prior to the receivership – approximately $1-million – are now considered “preference payments” and must be returned. Mr. Brzezinski says he would like to use them to fund future investigations, perhaps into the offshore casinos. But some of Mr. Erez's creditors already have accused him of overreaching, racking up fees on an investigation with little chance of success.

ANOTHER VICTIM, ANOTHER COFFEE SHOP
On a cold morning in January, I meet Mr. Erez's father-in-law, a distinguished university professor, at a Tim Hortons on Steeles Avenue, not far from E Grafix's former premises. He has offered me an exclusive glimpse inside Mr. Erez's life, provided I agree to keep his name, and the name of his daughter, private. Although everyone associated with the case insists Mr. Erez's wife knew nothing of her husband's activities, her father still fears for her safety and the safety of her children. Last September, the two older ones were asked to leave their school – mere months after they had to leave their home with little more than the clothes on their back. The school had received a few threatening messages, and apparently wanted to insulate itself.

“We don't want anyone's pity,” says the father-in-law, “but we are victims in this too.”

He tells me the first time he met his son-in-law, Mr. Erez came across as caring, loving, and accomplished. “He was doing his MBA, his piano playing was incredible; it just seemed perfect.” Until news of the scandal broke, he never had reason to suspect anything. “He didn't drink. He didn't tell dirty jokes. He was just normal in every way … I was happy to have a nice, normal, stable guy.”

Last January, Mr. Erez told him business was down, and that he had some debts. “We assumed they were business debts, and our confidence in him was such that we assumed he would get through it.” Even when the receiver took over the house and changed the locks, Mr. Erez's father-in-law believed it was because of business-related debts. “We had no idea about his gambling,” he says.

But once his daughter learned about Mr. Erez's secret life, the couple separated. “He's not in the picture,” says the father-in-law. “The Tzvi Erez we knew bears no resemblance to the guy out there now. They are nothing alike. I don't even know who this guy is.”

Special to The Globe and Mail

http://www.theglobeandmail.com/news/national/toronto/mensch-next-door-charged-with-ponzi-scheming/article1466665/


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