The following story appeared in The Plain Dealer and Cleveland.com on September 5, 2013:
CLEVELAND, Ohio — More than three dozen prominent Clevelanders – many of them titans of Northeast Ohio business and philanthropy — have potentially lost millions of dollars in an investment fund, led by a young entrepreneur, which is now the subject of questions by the FBI and Securities and Exchange Commission.
Oscar Villarreal was 24 years old in 2009 when he began schmoozing well-known civic and corporate leaders with the promise to leverage his connections in Mexico, according to several investors. He said these connections could lead to untapped investment opportunities, particularly in oil-related deals with Mexico’s state-run oil company.
Investors were impressed by Villarreal, a personable guy written up in the business press as a rising star. He is also an accomplished pianist and lived among some of his clients in the wealthy East Side hamlet of Gates Mills. He is part of their world, attending charitable events and joining civic organizations. In 2011, he hosted a reception for the Cleveland International Piano Competition at his home, which features a large pipe organ.
What investors really liked about Villarreal was his target to produce a profit of 15 percent to 25 percent a year for investors with a new fund he created called WW Capital III. But investors interviewed by cleveland.com say they have repeatedly asked for but have never seen an audited statement detailing where their money went.
Their frustration was on display last Tuesday, when dozens of investors, or their representatives, met at the Union Club, Cleveland’s bastion of business elite, to press Villarreal for answers. Several others were patched in to the meeting via conference call. Villarreal was there with his attorney, Ned Searby of BakerHostetler, a former federal prosecutor.
Business and civic heavyweight Ed Crawford, CEO of Park-Holdings Corp, was among those who demanded that Villarreal explain himself. In the end, Crawford and others were told it will take time to get financial statements together but the investment was sound.
More than a half-dozen Cleveland business leaders originally lent their names to Villarreal’s WW Capital III fund. Among those who first appeared on WW Capital III’s “advisory board,” according to a copy the fund’s 2009 prospectus obtained by cleveland.com, are Albert Adams, a partner at BakerHostetler; James C. Boland, a retired partner at Ernst & Young and former president of the Cavaliers who is chairman of JobsOhio, the state’s newly created non-profit economic development agency; Michael Clegg, the past president of Ostendorf Morris Company; and Christopher M. Connor, chairman and chief executive of The Sherwin-Williams Co., who is also chairman of the Greater Cleveland Partnership.
Among those listed in the prospectus as members of the fund’s “investment advisory committee” are Matthew W. Crawford of Park-Ohio Holdings Corp; Michael T. Novak of Wellspring Financial Advisors; and Steven Rosen of Resilience Capital Partners.
Sometime after meeting Villarreal, but before joining the advisory committee, Boland, Connor and others went to Mexico with Villarreal to meet Villarreal’s contacts and see his operations, according to several investors. They returned satisfied, and Cleveland investors started writing checks. The fund’s prospectus called for a minimum investment of $250,000 per person and set a goal of raising around $20 million. Investors put in amounts ranging from $1 million to as little as $50,000, according to several investors.
“I did go to Mexico because I wasn’t about to go on the board until I see what the hell was going on,” Boland said in an interview Wednesday.
Boland, who invested $50,000, said Villarreal was charming and his contacts were also impressive. He says he left the advisory board years ago and let go of his investment because of a conflict of interest.
Other well-known investors include A. Malachi Mixon III, chairman and chief executive of Invacare; Jack Kahl, who previously sold the company that produced Duck brand duct tape; BakerHostetler partner Jose Feliciano, and developer and attorney John Carney.
Carney, who described his investment in the firm as “very substantial,” said Wednesday he has been interviewed by the Securities and Exchange Commission, which would not confirm for cleveland.com the existence of any inquiry.
Despite the SEC scrutiny, Carney remains upbeat about eventually making a profit.
“The bottom line is none of the investors, as far as what I know and believe, is going to lose money,” said Carney. “I think we have an opportunity to make a substantial return on our investment.”
Some investors are embarrassed by their decision to invest in the fund led by Villarreal, who, according to a 2006 article in Crain’s Cleveland Business, is a native of Spain and came to Cleveland as an exchange student in 2002. Some investors chalk up their potential loss to a bad bet. But other investors are unhappy and demanding more answers.
FBI officials have interviewed investors about the WW Capital III, as recently as last week. One investor interviewed by the FBI told cleveland.com he was asked if Villarreal was given permission to transfer money into his personal account.
The FBI would not confirm the existence of any investigation.
Before last week’s Union Club meeting, BakerHostetler’s Adams wrote an email to investors. He urged investors to remain patient, especially in light of the investigation. Cleveland.com obtained a copy of his email.
Adams wrote that BakerHostetler is representing Villarreal in the investigation but said he was offering advice only as a fellow investor. (BakerHostetler was counsel for the fund when it was created, according to the prospectus.)
“While BakerHostetler is representing Oscar in connection with the ongoing investigation, because I am an investor, I am ethically precluded from participating in his defense,” he said in the email that was sent from his law firm’s account. “However, I want to assure that prior to the meeting you understand the tremendous opportunities presented to us in the oil drilling business and the impact the investigation could have on the value of our investment.”
Adams did not respond to a request for comment. But his email shed some light on the WW Capital III’s investment. He wrote that the fund owns portions of a couple of companies involved in oil drilling. These companies, Adams asserted, are in the process of forming a joint venture with a major Texas oil concern, which is seeking a large contract from PEMEX, Mexico’s state-owned oil company.
Adams said in the email that principals of the Texas oil concern believe that if the joint venture wins the work, it could realize gross revenues of approximately $180 million.
“It is anticipated that WW Capital would indirectly own approximately 10 percent of the combined entity. Obviously that 10 percent interest would have a tremendous value – a value well in excess of our capital contributions,” Adams wrote.
But Adams also warned in the email that the principals of the Texas oil company are “understandably very concerned about the investigation” and could be reluctant to proceed if “concern continues to heighten.”
Some of the investors left the Union Club unsatisfied. Several investors told cleveland.com that they believe a couple of other investors planned to go to Mexico this week to try to check the progress of the deal – or at least get answers.
Villarreal, who travels frequently to Texas and Mexico, according to Adams’ email, could not be reached for comment. A receptionist at his office said “he’s out of the state.” His attorney, Searby, did not respond to a call and email.
Other named investors did not respond to calls and emails, or declined to comment.
Plain Dealer Reporter Jo Ellen Corrigan contributed to this report.