M.D. Sass Investors Services Inc., a closely held manager of more than $5 billion, participated in an auction of New Jersey tax liens that has come under the scrutiny of U.S. antitrust investigators probing rigged sales.
A representative of M.D. Sass, whose tax-lien funds have as much as $110 million in assets, was among seven bidders vying for liens in the New Jersey borough of Newfield, according to records of a March 5, 2007, auction. Three people associated with the seven bidders pleaded guilty to antitrust charges and are cooperating with prosecutors. The Justice Department subpoenaed records of the auction on Feb. 15. M.D. Sass hasn’t been accused of wrongdoing.
The U.S. records request comes amid a widening probe into rigged liens sales in New Jersey. Since August, five men have pleaded guilty to conspiracy charges. The guilty pleas were to an overall conspiracy and not to the particular auction in Newfield, 35 miles south of Philadelphia.
Units of Royal Bank America, which operates branches in Pennsylvania and New Jersey, co-owned lien-buying firms with one of the men admitting guilt. The units are subjects of the probe, regulatory filings show. Royal Bank America is a unit of Royal Bancshares of Pennsylvania Inc.
Justice Department prosecutors want “all tax sale bidder information,” according to a copy of the subpoena disclosed by Newfield in response to a request under the state’s public records law. That includes “the name and address of each person who attended the relevant tax lien sale,” according to the subpoena.
“M.D. Sass companies have no comment on any activity or investigation that may be under way at the Department of Justice,” Mark Rotert, a lawyer for the New York-based firm, said in an e-mail.
Separately, M.D. Sass was found liable last year in a Chicago trial over civil racketeering claims involving tax liens.
Committed to Compliance
The firm says on its website that it is “committed” to complying with antitrust laws.
“This not only means following the written law, but also conducting all business in conformity with the highest standards of ethics and morality, and avoiding conduct that might give even the appearance of wrongdoing,” the firm says. “Because of the pervasive impact and complexity of the antitrust laws, M.D. Sass has established a formal antitrust training and compliance program for its tax liens business.”
Gina Talamona, a Justice Department spokeswoman, declined to comment on the U.S. investigation. The probe is being conducted by prosecutors in the antitrust division’s New York office, according to the subpoena. In addition to the New Jersey guilty pleas, at least three people have pleaded guilty to similar charges related to auctions in Maryland.
Tax Debt Sales
New Jersey municipalities seeking revenue sell about $100 million a year in local tax debt on commercial and residential property to investors, said Vincent Belluscio, executive director of the Tax Collectors and Treasurers Association of New Jersey.
Firms that buy liens at auctions pay the tax liability in full and then seek to collect from the property owner. They may earn as much as 30 percent on their investment, Belluscio said in a phone interview. In addition to interest of as much as 18 percent on delinquent taxes, the firms may add penalties of as much as 12 percent, he said.
18 Percent Interest
Bidders on the liens are supposed to compete fairly for the right to buy them and collect taxes on property. Buyers, who seek the return of their principal investment and interest, begin bidding at 18 percent interest and then lower that rate with each bid.
Each of the 59 liens sold in the Newfield auction went for 18 percent, according to borough records. That suggests the seven participants didn’t bid against one another, Belluscio said in a phone interview.
“It makes it a little suspicious,” he said. “It’s very strange if you have that many lines up for sale, and they’re all going up for 18 percent.”
M.D. Sass bought four liens, including the two largest. Other firms purchased as many as 11, according to records. Daniel Lebar, a lawyer and tax lien investor who bought three, said participants at the auction chose not to compete because there were many liens available for the few bidders who showed up.
“The sense was the list is long, we all know each other, there is no need to kill each other, so we’ll just bid round-robin,” Lebar said in a phone interview. “It was really just spur-of-the-moment,” he said. “There was no conspiracy.”
Lebar said lien buyers sometimes followed that practice at other New Jersey auctions including some in Camden County. “It’s a niche business,” said Lebar, 55, who followed his father into the business. “We have camaraderie among each other. If we get a sense that there’s enough for everybody, we’ll bid round-robin.”
Harry First, who teaches antitrust law at New York University School of Law, said such spur-of-the-moment decisions may violate antitrust law.
“If you agree beforehand, there’s no requirement how beforehand it has to be,” First said in a phone interview. “If people show up and agree to allocate the bids, and there’s no bidding, they’ve done it.”
The Newfield auction attracted individuals or firms associated with individuals who pleaded guilty to an antitrust conspiracy charge in federal court in Newark, New Jersey. The three pleading guilty were Robert Stein, David Farber and William Collins. Stein’s lawyer, Paul Zoubek, and Farber’s attorney, Michael Mustokoff, didn’t return calls. Collins’ lawyer, Jack Wenik, declined to comment.
Other auction attendees, in addition to Lebar and M.D. Sass’s agent, were Chun Li, who lives in Wayne, New Jersey, and a representative of Michael Fabrikant & Associates Inc. of Freehold, New Jersey, according to records. Li didn’t return calls seeking comment. Michael Fabrikant has died, Lebar said. Calls to his firm weren’t returned.
With liens carrying annual interest rates of 18 percent, some homeowners had to pay hundreds or thousands of dollars in interest to pay off their debt. Among them was Raymond Contarino, whose $5,224 lien was bought by M.D. Sass. It was the largest sold at the auction.
A supervisor for a New Jersey landscaper, Contarino, 52, said his debt began piling up after his parents died and he withdrew funds from an annuity to pay funeral expenses. He was able to stave off foreclosure and pay the lien and other debt by refinancing his mortgage.
Contarino said in a phone interview that the process was confusing and that he doesn’t know what it cost to pay off the lien. He was surprised to hear that he may have paid a higher interest rate because of the round-robin bidding.
“It’s aggravating as hell,” he said after being told that prosecutors were scrutinizing the auction. “You’re simply trying to scrape along. For a big company to put the screws to you, that’s aggravating.”
The liens are recorded in the name of an entity associated with M.D. Sass and U.S. Bank National Association. The U.S. Bancorp unit acts as custodian of M.D. Sass funds and serves in a “purely” administrative function of processing payments and other such roles, said Nicole Garrison-Sprenger, a spokeswoman for the Minneapolis-based bank.
“We’re not the purchaser. We’re not the owner,” she said, declining to comment on the U.S. probe.
John Eastlack, a lawyer for Newfield, declined to comment.
M.D. Sass has been buying tax liens since 1993, according to testimony in October at the unrelated civil racketeering trial in federal court in Chicago.
The firm has invested hundreds of millions of dollars buying liens in states including New Jersey, Kentucky and Massachusetts, Kirk Allison, a vice president at M.D. Sass Investors Services, testified at the trial.
Vinaya Jessani, who helped create M.D. Sass’s tax lien unit, testified that most homeowners repay liens carrying high interest rates, making the business a safe venture.
“There’s low risk,” he testified, according to a trial transcript. “A very significant percentage of the tax liens that we invested in will end up paying back with interest, and the interest is a pretty good interest rate. So each asset is likely to make money.”
A federal court jury found in favor of two lien-buying firms that claimed that M.D. Sass and other companies secretly worked together to buy and trade liens, according to court records. The damages awarded will exceed $10 million, said Jonathan Quinn, a lawyer at Reed Smith who represented the plaintiffs.
Rotert, the lawyer for M.D. Sass at the trial, said the firm plans to appeal.
“We believe the verdicts are incorrect as to the facts and we think certain errors of law took place before and during the trial,” Rotert said.
The Chicago case is Phoenix Bond & Indemnity Co. v. Bridge, 05-cv-04095, U.S. District Court, Northern District of Illinois (Chicago).