Muni Middleman’s Financing in Dark Keeps Homeless Out (Update1)

March 15 (Bloomberg) -- David Rubin, accused of rigging hundreds of investment contracts for local governments across the U.S., is at the center of investigations by city and federal authorities into a Los Angeles housing development.

The $31 million subsidized project for the poor and homeless was put on hold by local officials after the Oct. 29 federal criminal indictment of Rubin, 47. He is the founder of Los Angeles-based CDR Financial Products Inc. and one of the first targets charged in a three-year Justice Department probe of alleged anti-competitive practices in the $2.8 trillion municipal bond market.

City auditors are due to report this week on their examination of possible “irregularities or manipulation of the underwriting, financing or sources of funds” for Bonnie Brae Village, according to interviews and records obtained by Bloomberg News under a public records act request.

The review by the city has halted tenant screening at the 92-unit project for low-income people 62 or older. One applicant is Lucia Garcia, 62, who was among about 20 residents evicted in August 2008 from an older building that was razed to build the new one.

Garcia found other lodgings, and her monthly rent more than doubled to $1,200, absorbing three-quarters of her household income, she said in an interview. She and her ex-husband spent $43,980 in relocation assistance to pay higher rent and retire personal debts and credit cards.

“What’s going to happen to me?” she asked. Bonnie Brae tenants would pay no more than 30 percent of their incomes on rent, with the balance covered by federal subsidies.

‘Propensity for Manipulating’

The stalled complex reflects local officials’ suspicions about Rubin’s track record and shows one of the costs of a public finance system that Arthur Levitt Jr., the former head of the Securities and Exchange Commission, called “a rotten business” that receives too little scrutiny.

“The municipal business has been largely a cash cow for a universe of people that operate well in a lightly regulated environment,” Levitt said in an interview. He is a director of Bloomberg L.P., the parent company of Bloomberg News.

Citing Rubin’s indictment, the Housing Authority of the City of Los Angeles, a public landlord that administers federal aid, withdrew $11.9 million in rental vouchers for the program on Nov. 2.

“Given Rubin’s propensity for manipulating complicated financial structures, HACLA has grave concerns about Rubin’s involvement with Bonnie Brae project,” wrote Rudolf Montiel, the authority’s president, in a memo to the Los Angeles Housing Department, which helped finance and supervise the development.

Kickbacks Alleged

Federal prosecutors accuse Rubin, CDR and two former employees of fixing as many as 250 contracts with banks to manage investments for local governments between 1998 and 2006 and pocketing kickbacks from winning bidders. The defendants have pleaded not guilty.

Three former CDR employees not named in the original indictment have since pleaded guilty to related accusations in federal court in New York, including former senior vice president Douglas Goldberg, who entered his plea today.

Goldberg admitted to government charges of defrauding local governments and the IRS by conspiring to allocate and rig investment bids. He pledged to testify for the prosecution. The others who pleaded guilty are Daniel Naeh and Matthew Rothman.

Side Deals

CDR made secret side deals with banks and insurers while diverting millions of dollars from local governments and the U.S. Treasury, Bloomberg reported in November, based on information from more than 30 public records requests in six states. Over the past decade, Rubin’s firm served as an investment broker and financial consultant on more than 1,000 transactions totaling more than $25 billion, according to CDR’s Web site.

Rubin declined to comment for this story.

While serving as a commissioner of the housing authority known as HACLA from 2002 to 2004, Rubin formed a company called Enhanced Affordable Development Co. to develop subsidized housing. His partner in the venture was a long-time friend and neighbor, Marc Gelman, 51.

Gelman, chief executive officer of Enhanced Affordable, wasn’t part of the CDR indictment and denies any wrongdoing. He told city officials in November that Rubin had voluntarily resigned from the development company and said he would hold the city accountable for its losses while the building stands vacant, according to the released city records.

Housing Official Objects

Montiel, of the housing authority, objected to Gelman submitting the effective date of Rubin’s resignation as Jan. 1, 2009, when the California Secretary of State wasn’t notified until Nov. 12. He also expressed concern that Enhanced Affordable had earlier transferred its ownership of Bonnie Brae Village to a limited partnership, whose managing members were Rubin and Gelman.

Gelman said in an interview that Rubin’s resignations from the development company and the partnership’s management arm were made retroactive for tax and accounting purposes. He said “there never was and never has been any intention to mislead anyone.”

Former city Housing Department General Manager Mercedes Marquez, who headed the agency when it recommended Enhanced Affordable and Bonnie Brae Village for city council approval in 2008, is now an assistant secretary of the federal department of Housing and Urban Development, or HUD. She declined to comment for this story.

Developer Fee

Enhanced Affordable’s principals stand to collect a $2.4 million developer fee, city records show. ZRS Construction Management Inc., which built the project, would receive $1.3 million, according to the records. Gelman said he is the builder’s majority owner.

The Los Angeles housing department asked the controller’s office to investigate Nov. 19.

“The primary purpose of our review” is to determine whether “undue pressure influenced” the department’s selection of Enhanced Affordable to build Bonnie Brae and “if there were any irregularities or manipulation of the underwriting, financing or sources of funds,” City Controller Wendy Greuel wrote in authorizing the audit.

Greuel’s spokesman, Ben Golombek, declined to comment.

The Federal Bureau of Investigation got involved in January and is examining whether a city employee leaked information about the audit to Enhanced Affordable, according to people with knowledge of the inquiry who spoke on condition of anonymity. Laura Eimiller, a spokeswoman in the FBI’s Los Angeles office, declined to confirm or deny the agency’s involvement.

Funding Sources

Bonnie Brae Village was funded with $16.5 million in tax- exempt municipal bonds, a $10.3 million loan from city funds for the chronically homeless and a state allocation of $10.8 million in federal tax credits phased in over 10 years.

Citigroup Inc., the New York-based bank that is 27 percent owned by the U.S. government, bought the bonds in a private placement through its Citicorp Municipal Mortgage Inc. unit. Citigroup spokesman Alex Samuelson declined to comment.

Pittsburgh-based PNC Financial Services Group, the fifth- largest U.S. bank by deposits, purchased the tax credits, paying 92 cents on the dollar for the income-sheltering investment, documents show. PNC spokesman Fred Solomon declined to comment.

City officials were unaware that Rubin’s CDR also played a role in arranging the financing, documents and interviews show.

Interest-Rate Swap

Enhanced Affordable’s Gelman said in the interview that CDR arranged a $16.5 million interest-rate swap on the bonds. A swap is an agreement between two parties to exchange periodic interest-rate payments. They can help borrowers fix their costs and reduce their rate exposure. This one lost money.

In March 2009, Enhanced Affordable asked the city to reimburse it for $91,913 in losses on the swap, city records show. Los Angeles rejected the request.

Vasken Djansezian, manager of the city’s affordable housing bond program, said in an interview he objected to paying for an investment hedge his office hadn’t authorized.

Ari Majer, Enhanced Affordable’s chief financial officer, said by e-mail neither Rubin nor CDR was paid for the swap.

Demolition of the building that used to stand on the project’s site began Aug. 15, 2008. Los Angeles Fire Department recruits, on a training exercise, scaled its walls and tore through the roof only to find apartments still inhabited, according to Garcia and other former tenants.

‘The Shining’

“They came through the wall with an axe like that scene from ‘The Shining’ with Jack Nicholson,” said Marcos Loya, a guitarist and lecturer at California State University, Dominguez Hills, who said in an interview he confronted the recruits.

The exercise ended when the building was found to be occupied, said Capt. Stephen Ruda, a fire department spokesman.

Gelman said that while he authorized the firefighters’ use of the building, he didn’t know the apartments were inhabited.

“I never, ever heard of a person being in there,” he said. “If it is true, I am shocked.”

Former tenants said city officials have asked them how Enhanced Affordable and the property manager, Michael K. Bernstein of MKB Management Inc., handled their evictions. Bernstein and Gelman declined to comment about the relocations.

The housing department has denied requests by the developer for $444,352 in reimbursement for tenant relocation costs, saying Enhanced Affordable has not documented the expenses, according to the released records.

E-Mail Chain

City officials and the FBI also are examining an e-mail chain that began on Nov. 25, when Timothy Elliott, the acting manager of the department’s major projects division, forwarded Greuel’s memo authorizing the audit to Gelman at Enhanced Affordable. A copy of the e-mail was among the records released by the city.

“That would be inappropriate to be sharing that sort of information,” Los Angeles Housing Department General Manager Doug Guthrie said in an interview. Guthrie was appointed to the job in November. Elliott declined to comment for this story.

Gelman forwarded the memo to Sarah Dusseault, a senior policy aide in City Council President Eric Garcetti’s office, asking for help, the e-mail chain shows. Gelman declined to comment.

Dusseault, a former Los Angeles Deputy Mayor for housing from 2002 to 2004, received $3,500 from Enhanced Affordable for consulting work in 2006, three months before she went to work for the council member, city records show.

Dusseault said in an e-mail to Bloomberg that she reported the payment in an October 2006 filing with the city Ethics Commission. She wrote that she doesn’t recall receiving the memo.

To contact the reporter on this story: Elliot Blair Smith in Washington at esmith29@bloomberg.net.