The mechanics of a con job

A behind-the-scenes look at three New York City case, with allegations of bribery, fraud and embezzlement

Real estate scams are the crime du jour, it seems. In the 2000s, the era of easy credit and lax lending standards created a compelling motive for fraud that legal experts say is still being uncovered. Even now, with prices down from the peak, New York City real estate is pricey enough to tempt would-be criminals.

“You’re going to have a big problem with this kind of fraud [when] there’s so much money to be made,” said Richard Farrell, head of the Brooklyn District Attorney’s mortgage fraud and real estate crimes unit, which was created last year.

Farrell estimated that mortgage- and real estate-related crime has been “an epidemic” for about five years, but only recently came under the close scrutiny of law enforcement officials.

To shed light on the inner workings of these scams, The Real Deal took a behind-the-scenes look at three different cases: a construction bribery scam, a Bronx investor who sold a building he didn’t own, and a high-profile Manhattan developer accused of embezzlement.

Selling without owning

On April 20, 2009, New York City landlord Mark Benun was arrested on charges of selling a building for nearly $6 million — a building that wasn’t his to sell.

Prosecutors said that Benun forged documents to sell a commercial property at 67-79 East 161st Street for $5.96 million, despite the fact that he only owned 25 percent of it, according to the indictment. He later wired some of the proceeds of the sale to out-of-state bank accounts.

The majority interest in the building was held by Brooklyn-based Lido Realty, with whom Benun had purchased the property in 2006 for $9.5 million.

Benun pleaded guilty in December to all of the charges against him and faces 40 years in jail and fines of least $1 million, as well as forfeiture of the proceeds of his crimes. He is scheduled to be sentenced March 19.

“I sold a property that I did not own,” he admitted to the judge, according to a court transcription.

The question now circulating among real estate insiders is how Benun pulled it off.

“How does this happen?” wondered Long Island attorney Jack Mevorach. “There’s quite a bit of paperwork at a closing. All this false paperwork slipped through?”

Mevorach represents SCH Enterprises, a children’s clothing company that Benun had done business with. Like many of Benun’s business associates, SCH was named in a civil case filed by the building’s unwitting buyer in an attempt to recover some of the purchase price.

SCH had nothing to do with the Bronx deal and didn’t receive any of the proceeds from the sale, Mevorach said. In fact, Benun owes SCH money, and the company is suing him in a separate suit.

Benun, a Manhattan resident, formerly worked as a stockbroker at the now-defunct Weatherly Securities. In 2004, he pleaded guilty to wire fraud after an unsuccessful attempt to transfer $42,000 from a client’s account to his own personal account.

After serving six months at Otisville Federal Prison, Benun was barred from working in the securities industry, so he turned to real estate. He founded MBM1 Owners, which had an office at 275 Madison Avenue and four employees.

In 2006, Benun teamed up with Lido Realty to purchase 67-79 East 161st Street, a one-story retail property near Yankee Stadium.

Benun, who also brokered the deal, received a 25 percent interest in the property, while Lido bought the remaining 75 percent after fronting $4.5 million in cash for the purchase. Lido owner Leon Goldstein (who also heads the Brooklyn real estate brokerage Slope Realty) did not respond to calls for comment.

The building had tenants in place, but the income they generated was less than the mortgage payments, so the new owners “were losing money,” according to the indictment. Benun took out more loans to stay afloat, and by 2009, the property was encumbered with three mortgages, securing loans of approximately $7.7 million.

In 2009, according to the indictment, Benun contacted a prospective buyer — a Bronx-based entity called 67-79 LLC. The two parties agreed to a sale price of $5.96 million.

“At no time did Benun advise the buyer that he did not have the consent of the co-purchaser or the seller to engage in the transaction,” the indictment said.

The attorney for the building’s buyer, Floyd Grossman of Dollinger Gonski & Grossman, declined to comment on the case.

At the closing, prosecutors said, Benun produced several forged documents, including false satisfactions of the three mortgages on the property, and a deed showing that Lido had transferred its ownership in the property to MBM1 for $4 million.

Though they were fake, the documents had been recorded in the chain of title for the property, the indictment said.

In New York, that’s easier to do than one might think, said the Brooklyn DA’s Farrell: Clerks at the office of the City Register, which handles the recording of such transactions, don’t have to verify the information on the documents they receive, he said.

In fact, they are required to record it, as long as the correct paperwork is provided, he said.

“The biggest chink in the armor is the recording systems,” said Farrell, who has prosecuted several recent cases where buildings have been “stolen.” “The recording office is not set up to prevent fraud.”

This point was vividly illustrated in 2008, when a New York Daily News reporter temporarily became the owner of the Empire State Building by filing a bogus deed with the city.

Benun convinced a notary who worked across the hall from him to notarize his forged documents, claiming that his partner was stuck in traffic. But even if he hadn’t been able to do that, Farrell said, would-be building thieves can easily steal or make their own notary stamps (as the Daily News reporter did).

The fraudulent deed showing Lido Realty transferring the property to Benun can still be viewed on the city’s ACRIS system.

The unsuspecting buyer of 67-79 East 161st Street gave Benun $4 million in
cashier’s checks and a note for $1.96 million. Benun sold the note for $1.46 million, and then wired at least $450,000 to bank accounts in New Jersey and Georgia.

Benun also spent some $1.4 million on bars of gold, the indictment said.

Still, much of the money is not yet accounted for.

“He stole almost $6 million and at the current time the government is not aware of where the vast majority of that money is,” Assistant United States Attorney Christopher Frey, who prosecuted the case, told the judge. “It’s doing everything it can to try to figure that out.”

The day he entered his guilty plea, Benun acknowledged the role that the easy-credit days of the real estate boom played in his crime.

“It was a long six or seven years of free money in New York and credit markets,” Benun told the judge, according to a transcription. “My luck in big money is, [as a result of] my own will, over.”

Benun’s attorney, David Breitbart, declined to comment, other than to say Benun pleaded guilty and will be sentenced this month.

Manhattan high roller

Adam Hochfelder’s status as a charismatic wunderkind of Manhattan real estate changed permanently in 2008, when he was arrested and accused of stealing more than $17 million from banks, friends and family through fraudulent loans and a fictitious real estate venture.

Then, last month, he was indicted again, this time on charges that he stole some $2.5 million from business associates and friends by leading them to believe they were investing in deals to acquire the Sagamore Hotel on Lake George in upstate New York and the Peaks Resort and Spa in Telluride, Colo.

The second round of scams took place, prosecutors allege, even after Hochfelder had turned himself in to the Manhattan District Attorney’s office.

Hochfelder, who is out on $1 million bail in connection with the 2008 indictment, has pleaded not guilty to both indictments. His next court date is March 8.

The DA is asking that the 38-year-old Hochfelder receive multiple consecutive prison sentences of up to 25 years.

The former mogul has become not only a symbol of the excesses and greed of the boom, but a focal point for anger aimed at white-collar criminals in the post-Madoff era, his lawyer said.

“He’s become a little bit of a whipping boy,” said Hochfelder’s attorney, Marc Agnifilo, who added that his client steadfastly denies that the Sagamore and Telluride deals were fraudulent. “The government is playing on the public’s worst fears of the white-collar criminal.”

A Long Island native whose father owned a women’s sportswear manufacturing company, Hochfelder earned a Wharton MBA and got his start with an internship at Newmark and Co., the predecessor of Newmark Knight Frank.

In 1996, he formed real estate investment firm Max Capital with Richard Kalikow, a scion of a well-known New York real estate family.

A joint-venture agreement with financier Robert Bass funded a buying spree that allowed the young firm to snatch up trophy properties like 230 Park Avenue, 1440 Broadway and 350 Madison Avenue. At its peak, Max Capital reportedly owned and managed 8 million square feet of office space.

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Ensconced in Harry Helmsley’s old office at 230 Park Avenue, Hochfelder seemed to have the world at his feet. “He was the golden boy,” recalled Marcus & Millichap broker Adelaide Polsinelli, who showed Hochfelder properties for sale in the early 2000s.

But the partnership with Kalikow soured, the partners ended up in court, and — in a move that would prove to be his undoing — Hochfelder bought out Kalikow in 2002 for $35 million, according to published reports.

The way Hochfelder’s lawyer Agnifilo tells it, Hochfelder couldn’t afford that price, but agreed to pay it because he was so anxious to be rid of Kalikow, eventually turning to criminal activities to dig himself out of an ever-deepening financial hole.

“Kalikow gave an incredibly inflated price for Adam to buy him out, and Adam was so desperate to get away from Kalikow that he agreed to this price, and was [then] desperate to get the money, and committed crimes in getting the money,” Agnifilo said.

Kalikow did not respond to requests for comment.

After dissolving the partnership with Kalikow and taking on a new partner, Anthony Westreich, Hochfelder in 2002 approached well-known developer Joseph Chetrit for a $3 million loan, offering his 975 Park Avenue co-op as collateral and promising to repay him within a year, according to the indictment.

Instead, he began having trouble making payments on the Chetrit loan, eventually defaulting on it in 2004, according to court documents.

A few months after taking out the Chetrit loan, Hochfelder was still in need of cash, so he used an Upper East Side apartment he co-owned with the family of his then-wife, Amy, as collateral for a $1.1 million loan from Arbor Commercial Mortgage, prosecutors alleged. The lender required Hochfelder to provide written consent from his father-in-law — who lived in the 1025 Fifth Avenue apartment — and other family members, so Hochfelder forged their signatures, according to prosecutors. He extended the Arbor loan multiple times over the next five years, allegedly forging the signatures each time, prosecutors claim.

Hochfelder’s lawyers say he always believed he’d be able to repay his debts. It helped that it was the middle of the boom, when credit was plentiful and the market seemed like it would escalate forever.

“There was something of an ‘anything goes’ attitude because people were making money no matter what they did,” Agnifilo said. “He could borrow large sums of money and really believe in his heart that he would be able to pay it back. Good times breed recklessness and a lack of accountability.”

Instead, the situation deteriorated. Hochfelder took out more loans to feed his rapidly mounting debt and convinced family and friends to invest $1.3 million in an “entirely fictitious business venture” to buy and renovate foreclosed-on brownstones, the prosecution said.

In 2004, after a “crisis of conscience,” Agnifilo said his client decided “it was best to go to the DA’s office and tell them what he had done.” Hochfelder even offered to inform the DA on others’ crimes he knew of in exchange for leniency.

But the prosecution later claimed that Hochfelder approached them only because his scheme had begun to collapse and creditors were on the verge of discovering his fraud. They also said he admitted to some, but not all, of his misdeeds, and that even after he’d begun cooperating with them, he engaged in new scams: the Sagamore and Telluride deals, which later constituted the basis for the 2010 indictment.

In the spring of 2007, Hochfelder won a bid to purchase the Sagamore Hotel for $93 million.

Claiming he would turn the hotel into a year-round resort with a world-class spa and high-end boutiques, Hochfelder recruited investors Robert Marcus and John Nguyen, who each contributed more than $200,000, the prosecution said.

Unknown to both investors, however, “the defendant’s bid had expired because he never had the $93 million to make the purchase,” prosecutors said in court documents.

Then, in early 2008, Hochfelder began negotiations to purchase the Peaks Resort and Spa, a 177-room hotel in Telluride. He solicited some $2 million from friends and associates to finance the deal, “all of it constituting larceny,” prosecutors claimed.

Instead of putting the money towards the Peaks deal, Hochfelder used it “to repay earlier creditors and finance his own extravagant lifestyle,” the prosecution said in court documents.

Some $150,000 went to reimburse the “victims” of the Sagamore deal, they said. Hochfelder spent another $200,000 on lawyer’s fees, and the rest on private school tuition for his children, a personal driver, private jet, and his own bank accounts.

When investors began to ask questions about their loans and investments, Hochfelder told them he “was gravely ill and suffered from a rare blood disorder,” the prosecution claimed. In reality, Hochfelder, a self-described cocaine user, entered a drug treatment program at St. Luke’s, the government said.

Hochfelder was finally arrested in 2008, after Nguyen approached the DA’s office to say that his $200,000 investment had not been returned.

Agnifilo said Hochfelder had turned straight by then, and believed Nguyen’s money was a non-refundable deposit.

Still, the incident caused the DA to look at Hochfelder differently, he said.

“The DA’s office probably thought that Adam was taking them for fools,” he said. “At that point, [they] took a very hard line on Adam.”

Agnifilo said Hochfelder, who has refused to take a plea bargain on the first indictment, claims there was no wrongdoing in the Telluride and Sagamore deals, and that the DA is simply using the second indictment to pressure him to resolve the case.

Hochfelder deserves credit, Agnifilo said, for cooperating with authorities.

“He brought his misdeeds to the attention of the DA,” he said of his client. “I think as a matter of policy we should reward that.”

Construction crimes

Corruption is still a significant factor in New York’s construction industry, experts say, thanks to the lingering influence of organized crime.

“The construction industry in New York for quite a long time had been dominated by racketeers and corrupt union officials,” explained Edwin Stier of Thacher Associates, a former prosecutor who has worked for years auditing construction projects. “In the 1970s and ’80s, a lot of that corruption was broken up. The problem is that a lot of the practices that had their roots in that corrupt era weren’t changed.”

Kickbacks and shortcuts only increased as the construction industry expanded in the mid-2000s, he said. “Given the way [the industry] exploded during the real estate boom, whatever problems there were became magnified,” Stier said.

In one recent investigation, federal and local authorities arrested seven people– two construction testing company heads, three contractors, and an engineer — in November 2009 on charges of falsifying documents at New York projects.

In one of five separate cases, the defendants were caught on tape agreeing to pay for fake inspection reports to be submitted to the city for their projects, prosecutors said.

The arrests came in the midst of a citywide crackdown on construction industry corruption that followed the deadly Upper East Side crane collapse of March 2008. The highly publicized accident ushered in an era of heightened scrutiny for the construction industry, starting with the arrest of the city’s chief crane inspector on charges of taking bribes to allow cranes to pass inspection and crane operators to pass required exams.

The November arrests provide a glimpse into the day-to-day workings of construction-related corruption.

In order to make the arrests, investigators had the help of “cooperating witnesses,” who were previously arrested and had worked with the targeted companies and contactors in the past.

One such witness, posing as an employee of a construction testing company, in 2006 recorded telephone conservations with Frank Acocella, 40, the owner of Scarsdale-based Xavier Contracting, and his employee, Daniel Ferreira, 38, who were targets of the investigation. The two discussed asphalt installation along the Bronx River Greenway — a bike and pedestrian path — that Xavier was working on, the United States Attorney of the Eastern District of New York said in its complaint.

Xavier’s contract with the city’s Department of Parks and Recreation required that the asphalt meet state standards for its chemical makeup and mixing temperatures, and that an inspector be present when it was fabricated, the complaint said.

The cooperating witness told Acocella that the asphalt had been made without an inspector present. According to the complaint, Acocella responded, “We can work this out, right?”

The witness, in turn, offered to issue a report falsely stating that an inspector had been present, in exchange for a fee. According to the complaint, Acocella responded, “Ok yeah … I’ll work with you, no problem.”

Contractors are sometimes tempted to skip inspections, Stier said, because if materials are found to be non-compliant with city standards, the work has to be redone and retested.

“All of that takes time and money,” Stier explained. “It can be done much more cheaply if you just make up the results.”

Over the next few days, the complaint said, Ferreira worked with the witness and an undercover investigator to provide information for the false asphalt inspection report, which would then be submitted to the city.

At one point, Ferreira told the inspector to “make up” details for the report. In exchange for creating the document, the inspector received an envelope in the mail from Xavier containing a check for $1,100, according to the indictment.

Acocella also allegedly asked the witness to provide fake test results for concrete that Xavier had installed five years earlier at the McKinley Houses, a Bronx housing project, the complaint said.

Acocella and Ferreira were arrested on charges of mail fraud and conspiracy to commit mail fraud, but more charges may be filed when the two are indicted, according to a spokesperson for the United States Attorney’s offices. The two haven’t yet entered a plea, but Acocella’s attorney, Charles Abercrombie, of Manhattan law firm Seiff Kretz & Abercrombie, told The Real Deal: “We don’t believe there was a crime committed here.”

The prosecutors’ investigation yielded four additional cases and five more arrests. One defendant was accused of creating a fictitious soil boring report to be submitted to the city’s Department of Buildings. Another was charged with allegedly obtaining an engineer’s stamp with someone else’s name on it, and accepting $500 for using it to stamp documents he believed would be submitted to the DOB.

Luckily, the falsification of construction testing documents doesn’t automatically mean a building poses a safety hazard, Stier said.

“There are many margins of safety in all designs,” he said. “Don’t assume that just because a batch of concrete doesn’t meet specifications that the building is necessarily going to fall down.”