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JPMorgan Unit Subpoenaed in U.S. Tax-Lien Inquiry

A tax-lien auction in Orange, New Jersey
Carl Smith, tax collector for the town of Orange, center, calls out starting bids for properties during a tax-lien auction at the municipal building in Orange, New Jersey, on April 13, 2010. Photographer: Emile Wamsteker/Bloomberg

A JPMorgan Chase & Co. subsidiary is among at least three companies being investigated as part of a U.S. Justice Department antitrust probe of bidding at municipal tax-lien auctions in New Jersey.

JPMorgan’s Xspand unit and Vienna, Virginia-based Mooring Tax Asset Group received grand jury subpoenas last year, according to an August prospectus for New York City tax-lien bonds that are serviced by the firms. Two units of Royal Bank America were subpoenaed, its parent, Royal Bancshares of Pennsylvania Inc. said in a March 2009 regulatory filing.

New Jersey municipalities auction about $100 million a year in tax debts on commercial and residential property to investors, said Vincent Belluscio, executive director of the state tax collectors and treasurers association. Antitrust officials are probing whether investors colluded to limit competition on sales to win a higher return, he said. In New Jersey, the liens can carry annual interest of as much as 18 percent. The auctions are designed so that investors bid down the interest rate they’re willing to accept.

“The problem is these investors have a tendency to meet in the hallway before a sale and divvy up the list,” Belluscio said. “They say, ‘We’ll buy these properties, and you buy those.’ And the interest rate holds at 18 percent.”

Belluscio said his information comes from a tax collector who was visited by a federal investigator.

Lien Buyers

Cities and towns in New Jersey and 27 other states sell tax debts to investors to raise cash and help plug budget deficits. Some of the debts are packaged into bonds and sold. Tax-lien buyers also get the right to collect penalties imposed on delinquent taxpayers by governments, and have first priority to take possession of properties when the owners don’t pay their taxes.

About $5 billion of property-tax delinquencies are sold each year, Xspand officials told the Unified Government Commission of Wyandotte County and Kansas City, Kansas, according to a transcript of the Nov. 25 meeting on the municipality’s Web site.

In Florida, $1.8 billion of the liens were sold last year, making it the largest property-debt auction market in the U.S., according to Plantation, Florida-based, which conducts online tax sales in counties throughout the state.

Expensive Cost

“Everybody’s concerned,” said Adam D. Greenberg, managing partner of law firm Honig & Greenberg in Cherry Hill, New Jersey, whose clients include tax-lien investors. “Even if you’re innocent, just responding to an investigation is expensive.”

Greenberg said he knows of other investors who received subpoenas, though he declined to identify them or say if they are clients.

Justin G. Perras, a JPMorgan spokesman, declined to comment, as did Mark Sanders, a spokesman for Narbeth, Pennsylvania-based Royal Bank, whose Crusader Servicing Corp. and Royal Tax Lien Services LLC units are subjects of the probe.

“Anybody who is a significant buyer in New Jersey has been subpoenaed,” said John M. Jacquemin, president and founder of Mooring Financial Corp., which has managed and serviced more than $1 billion in delinquent tax liens since starting Mooring Tax Asset Group in 1997. “We certainly were not involved with any collusion.”

Training to Prevent

Mooring for at least eight years has trained its bidders on the company policy against anti-competitive behavior and requires them to sign statements confirming that they understand the expectations, he said.

Alisa Finelli, a spokeswoman for the Justice Department in Washington, declined to comment.

Xspand, which was founded by former New Jersey Governor James Florio in 2000, was acquired by Bear Stearns Cos. six years later. Also known as Plymouth Park Tax Services, it became part of JPMorgan when the New York-based bank took over Bear Stearns in 2008 to prevent a collapse.

Xspand, based in Whippany, New Jersey, effectively stopped participating in open-outcry auctions about nine months ago, a person familiar with the decision said. It had become the largest tax-lien investor in the U.S., buying $2 billion of public debt across the country since 2008, The New York Times reported Aug. 18.

The company continues to service tax liens and bid on them in Internet auctions and bulk sales by municipalities, said the person, who asked not to be identified because of the investigation.

Florio Unaware

Florio, who sold his Xspand interest in 2006, said he wasn’t aware of the Justice Department investigation. Tax-lien sales were heated when he ran the company, he said in an April 16 telephone interview.

“It was very, very competitive,” he said.

Paul V. Scura, who founded Xspand with Florio and left when Bear Stearns took it over, said Xspand employees got thorough training on avoiding anticompetitive behavior.

“I can’t imagine any of the employees of Xspand doing that given how they’ve been sensitized to the importance of this issue,” Scura said in an April 19 telephone interview.

Last June, Harvey M. Nusbaum and Jack W. Stollof were indicted in federal court in Maryland for conspiring to rig tax-lien bids at auctions in the state. Nusbaum and Stollof and others “agreed among themselves which of them would bid on specific tax liens or groups of tax liens, and agreed upon specific prices to be bid in certain auctions,” according to a June 16 statement by the Justice Department.

Plea Agreement

Nusbaum entered a plea agreement and Stollof pleaded guilty early this year.

“With so many homeowners struggling these days, it is more important than ever that all aspects of real estate transactions, including tax-lien auctions, remain competitive and free from collusion,” Scott D. Hammond, deputy assistant U.S. attorney general for criminal enforcement of the department’s antitrust division, said in a prepared statement last June.

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