After Manhattan District Attorney Robert M. Morgenthau handed down indictments against dozens of New York property managers in 1994 for taking kickbacks from contractors, New Yorkers, including the D.A.'s office, thought there would be at least a brief reprieve from local real estate corruption. Even so, the D.A.'s office continued to monitor the real estate industry. "This is Round One," predicted Dan Castleman, chief of the D.A.'s Investigative Division. This past June, Round Two was unveiled.
Indicted were 21 corporations and 62 individuals ranging from managing agents, building superintendents, vendors, and contractors to board members, architects, engineers and the head of New York University's maintenance department. The indictments were handed down in three phases. Those indicted earliest - Prism Management Ltd., Focus Real Estate Management, Inc., Taranto & Associates, and property managers Eric Dubbs, Scott Smith, Michael Wegielski and Mark Weinberger, and one super - allegedly defrauded a total of 31 New York City buildings through kickbacks from vendors and contractors. They are charged with felonies punishable by four to 15 years in prison.
On June 22, Marvin Gold Management Co., Elm Management Associates, Inc., Cantor Real Estate Corp. and individuals and businesses involved in illegal activities with them were charged. The biggest hit, involving bid-rigging and kickbacks in over 90 buildings, was to the waterproofing industry. Indicted were FPC Construction Corp., Kay Waterproofing Corp, L & M Larjo Co., Inc., Tindel Waterproofing & Restoration, Inc., C & D Restoration, Inc., H. Blum Contracting Corp., M & W Waterproofing, Inc., Stevemar Construction Estimators, Inc., among others.
The June 22 and 23 charges include bid-rigging, accepting kickbacks and Enterprise Corruption. Kickbacks ranged between five and ten percent of the contract price.
Waterproofing has become one of the most lucrative businesses in New York real estate with the advent of Local Law 11, and the wide-ranging need for roof, masonry and water damage work. According to Morgenthau, it was routine for waterproofing contractors to coordinate their prices and submit "sealed" bids in which the winner had been clandestinely chosen in advance. "This collusion meant that genuine competition was nonexistent," said Morganthau in a press release of June 23. It allowed the low bidder to inflate his price substantially while ostensibly being the most economical. "These bid-rigging schemes were, in turn, made possible by corrupt architects, engineers and managing agents who fraudulently encouraged building owners and co-op board members to award jobs to favored contractors," stated Morgenthau in the release. One of the largest contracts was a $1.295 million deck restoration job by FPC, inflated by at least $165,000.
As of late July, only one person, building manager Bernard Ehrlich of Marvin Gold Management, had pled guilty. "In 1994 we made a conscious effort to take guilty pleas and not send people to jail on the condition they pay back their ill-gotten gains," said Castleman. "At that time we didn't have the evidence to use the state racketeering statute [Enterprise Corruption, punishable by up to 25 years in jail], but now we do. People were put on notice that this conduct wouldn't be tolerated, but they continued anyway." According to Greg Carlson, president of the Federation of New York Housing Cooperatives, and of Carlson Realty in New York, the indictments came as no surprise. "Rumor on the street is that there will be another round coming out. I'm glad. This has been going on for centuries in the real estate world. We're trying to put guidelines into place that will minimize these problems.
The Last Time Around
The 1994 investigation ended with the conviction of 72 managing agents who were extorting payoffs from contractors, and, in turn, awarding the contractors large jobs in posh co-ops and condos. The contractors, unwilling to lose part of their wages to property managers, made up their losses by padding their bills to co-ops and condos. Only one managing agent was incarcerated. "We offered him a felony plea with a non-jail sentence," Castleman said. "He didn't want a felony record, so he plea-bargained for a misdemeanor and jail time." The sentence wasn't heavy, according to a spokesman.
Many of the convicted managing agents and companies paid money into a restitution fund that was to be distributed to the victimized properties. As of the unsealing of the June, 1999 indictments, the fund - totaling over $4 million - remains untouched. "The guilty parties returned what we calculated they owed," says Castleman, "but we couldn't reconstruct who was ripped off for what amounts." Eric Herschmann, a former assistant district attorney, was appointed by the judge to come up with an equitable solution. "We've made a preliminary determination of the distribution," said Herschmann in late July. "The distribution should take place in three weeks to a month."
Attorneys representing condos and co-ops outside Manhattan went to court to include their clients in the restitution fund. According to Herschmann, "Their evidence didn't go before the Grand Jury, but the same corrupt agents worked in their buildings. It was clear they were also victims. We've segregated 25 percent of the fund for those properties. The rest will be distributed to co-ops and condos within Manhattan."
A restitution fund will probably not be set up for the June indictments. "It was too unmanageable," notes Herschmann. "We started two years ago with hundreds of claims and thousands upon thousands of documents. This time the D.A.'s office may impose fines, and the money will go to the state. Individual buildings will have to file their own lawsuits in civil court."
What Can You Do?
"Affected buildings should notify their insurance companies and their Directors and Officers Liability Insurance," advises Carlson. "A shareholder could now sue the board, saying it should have been more vigilant. Managing agents should notify their Errors and Omissions policy insurer." The policy covers mistakes of management companies. "You might have a very good management company that hires someone who, even though all his credentials appear to be fine, does wrong things," notes Carlson. "Now the board can sue the company saying it didn't screen its employee properly. The Errors and Omission policy will help with that potential liability."
Co-ops and condos should be aware that it takes more than a good board president to prevent fraud. "The whole board must be involved and there must be regular monitoring of the management company's actions," cautions Carlson.
As far as the future is concerned, "Investigations will be continuing," says Castleman, who called the 1994 indictments Round One. "There is other evidence of criminal conduct we're following and it's likely there will be additional charges brought in the future. We thought back in '94, having convicted over 70 managing agents, that they would get the message. We were surprised to learn that people went right back to doing business the same way. We're not amused. People will have to go to jail to drive home the point that this is not the way to do business in New York City."