The DOJ has a spotty reputation for selling seized property — and is now facing its biggest test yet with two Manhattan trophy towers
From top left: U.S. Attorney General Jeff Sessions, Ponzi schemer Bernie Madof, Malaysian billionaire Jho Low, U.S. Senator Chuck Grassley and Iranian President Hassan Rouhani
Harry’s Bar — tucked away on the second floor of the Park Lane Hotel — isn’t the sexiest place for a nightcap. Narrow and dark, it has heavy wood paneling and low lighting, with no hint of the building’s dazzling Central Park views. On a recent weeknight, an anemic crowd sat nursing drinks mostly in silence as an episode of “Jeopardy!” flickered across a flat-screen TV.
It’s hard to imagine the hard-partying Malaysian billionaire Jho Low ever had anything to do with the place.
But according to federal prosecutors, Low’s investment in the Park Lane was part of a massive scheme to defraud a development fund in his home country out of $4 billion. And in 2016, the U.S. government moved to seize the 47-story hotel — where a prominent investment group led by developer Steve Witkoff had planned to build a posh condo tower. It also seized a condo at the Time Warner Center, a London penthouse and an estate in Beverly Hills in an attempt to recoup some of those allegedly stolen funds.
For years, law enforcement has used “asset forfeiture” to punish criminals and compensate their victims. In the years following Sept. 11, forfeitures skyrocketed as prosecutors sought legal remedies to keep terrorism financing out of the United States.
In some of the best-known forfeiture cases, the government liquidated the assets of Ponzi mastermind Bernie Madoff, “kleptocrat” Taiwanese president Chen Shui-bian and hip-hop producer (turned cocaine trafficker) James Rosemond.
But with the Park Lane — valued around $1 billion — the stakes are infinitely higher, and the hotel is just one of two massive properties in the government’s crosshairs. This past July, a federal jury decided that the U.S. government can seize 650 Fifth Avenue, which sits in a prime Midtown location at the edge of Rockefeller Center on 52nd Street.
Prosecutors are also seeking forfeiture of tens of millions of dollars of residential real estate owned by Paul Manafort, President Donald Trump’s former campaign manager. An indictment against Manafort in connection with the current Russia investigation cites several properties in New York and Florida, including a condo at Trump Tower in Manhattan, a brownstone in Park Slope in Brooklyn and homes in Bridgehampton and Palm Beach Gardens.
But the Department of Justice has had a spotty record when it comes to real estate — including bungled sales and mismanaged properties. And these latest cases are raising questions about whether it’s out of its league.
The Park Lane Hotel, where Jho Low owned a majority stake
Early on, the inexperience of the U.S. Marshals Services, which oversees the management and sale of real estate for the DOJ, led to a “lot of mistakes,” according to David Smith, former deputy chief for DOJ’s Asset Forfeiture Program (AFP), who now runs a private law practice. “They have improved,” he said. “[But] they’re still not getting fair value for the real estate in a lot of real estate fields.”
In 2016, for example, the DOJ sold a seized Malibu estate for $38 million — only to see the buyers flip it for $69.9 million a year later.
Some noted that the agency just isn’t interested in keeping major assets on its books. “Everyone knows it’s a distressed sale,” said Peter Henning, a law professor at Wayne State University in Michigan who studies white-collar crime. “The government needs to get rid of it,” he said. “They want to get the money and move on; they don’t want to make victims wait two to three years.”
As the government has gone after corruption and money laundering, real estate is increasingly a DOJ target because it’s vulnerable to shady practices, said Laura Marshall, a former prosecutor who is now a partner at Hunton Williams in Virginia.
“We’ve seen more focus on real estate being the subject of forfeiture because of all the information we’ve been receiving showing that real estate is at high risk for money laundering,” Marshall said.
A civil action
Since the 1970s, the DOJ has used asset forfeiture to fight crimes ranging from money laundering to drug trafficking. The basic premise of the program is to seize cash, art, jewelry or real estate purchased with ill-gotten gains and use the proceeds to repay victims and help fund law enforcement.
Since 2000, the agency has returned $4 billion-plus to victims of financial fraud, according to the AFP’s fiscal 2018 budget, which estimated that the program would generate $1.98 billion in revenue this year.
According to the Institute for Justice — which advocates limiting the size and scope of government — the DOJ seized 5,540 properties nationwide valued at $1.2 billion between 2008 and 2016, including 304 properties valued at $188 million in New York State. The program netted $1.6 billion from cash, weapon and drug seizures in 2017 with some $306.5 million from New York, according to the AFP.
“Asset forfeiture can be unbelievably harsh; make no mistake, it’s a punishment,” said Sharon Cohen Levin, former chief of the Money Laundering and Asset Forfeiture unit at the U.S. Attorney’s Office for the Southern District of New York.
“But while it can be harsh, it has important compensatory results,” added Levin, who’s now a partner at the law firm WilmerHale. “It can be used as an important means of providing compensation to victims.”
However, the program isn’t without critics.
Forfeiture takes two forms — criminal and civil, the latter of which has been a lightning-rod issue in recent years.
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In criminal cases, federal prosecutors can seize a property only after a conviction if they can prove that the money used to buy it was dirty.
Civil forfeiture, however, offers something of an end run around that. It requires no criminal charges and allows the government to bring an action against a property (think USA vs. Luxury Condo.) And the DOJ has capitalized on that loophole.
“The reason why they go often to the civil forfeiture tool is because it’s easier to prove,” said Evan Barr, a former assistant U.S. attorney for the Southern District who is now a white-collar defense attorney at Fried Frank. “A criminal case requires proof beyond a reasonable doubt — a much higher standard.”
Low thresholds, critics argue, have given law enforcement too much power to seize cars and cash from innocent people. Under President Barack Obama, the DOJ rolled back so-called adoptive forfeiture, which allows police officers to take property from suspected criminals without approval from a judge. But the Trump administration has taken the opposite tack.
Politics aside, prosecutors have increasingly used civil forfeitures to go after white-collar criminals.
Levin acknowledged the program gets a “bad rap,” but she insisted it’s been crucial in cases where criminal convictions are not possible.
In 2011, for example, her office filed a claim against now-defunct Lebanese Canadian Bank, based in Beirut, for its role in a complicated scheme involving used cars, the West African drug trade and money laundering by Hezbollah, which is considered a terrorist organization by the U.S.
“It was something where there weren’t people to criminally prosecute,” Levin said. “The participants in the U.S. were bit players.”
In 2013, the U.S. Attorney’s office announced a $103 million settlement with the bank — proceeds of which Levin said went to a government task force.
650 Fifth Avenue
Similarly, Levin’s team went after 650 Fifth — a 36-story office building owned by an Iranian charity, the Alavi Foundation. In June, a jury determined that the foundation is controlled by the Iranian government. The verdict gave prosecutors the green light to seize the property, which throws off millions of dollars in rent each year in violation of U.S. sanctions against Iran.
Levin said proceeds from any eventual sale of the building — reportedly valued around $500 million — would be distributed to victims of Sept. 11 and other terrorist attacks.
“There was unbelievable interest,” she said of the property. “It’s an expensive piece of real estate in a prime location.”
For that reason, how the DOJ handles it will be closely watched in real estate and legal circles. A lucrative deal would be a huge win for prosecutors. But anything less than that could leave hundreds of millions of dollars on the table. And worse, it would send the message that even though the DOJ has grown more ambitious in its mission to crack down on corruption and financial crimes, it’s not prepared to deal with the most valuable properties involved in the criminal schemes it uncovers.
The DOJ declined multiple requests for interviews. “Department guidelines are designed to assure properties are sold on commercially reasonable terms,” a spokesperson said via email.
That means “open market, arms-length sale at fair market value using qualified and approved brokers,” the spokesperson added.
One early test of civil forfeiture took place in 1994, when the Feds seized the Kenmore Hotel — a seedy, 621-unit, single-room occupancy hotel on 23rd Street that was a hub for drug trafficking. At the time, the building was owned by a Vietnamese shipping magnate Tran Dinh Truong, who allegedly turned a blind eye to the squalor and crime under his nose.
“You’d see a guy mopping and … the water would be so thick with black dirt that he’d end up making [the floors] dirtier,” recalled Scott Kimmins, a former New York Police Department officer whose precinct coordinated with the DOJ on arrests in June 1994.
But the Kenmore also became a cautionary tale for the Marshals Service, which was then inexperienced when it came to managing tenants. “The U.S. Marshals Service became the landlord, basically, and that was kind of an awkward situation, because at least back then they had precious little experience in the real estate arena,” Barr said.
Eventually, the Feds brought in a new management company, but not before tenants, facing eviction over unpaid rent, sued and claimed that the government had failed to control drug-dealing and prostitution there.
In 1996, the nonprofit group Housing and Services bought the property for only $750,000.
Over the past two decades, law enforcement has refined its processes, sources said.
And the program has greatly expanded since 2000, when Congress broadened the parameters of civil asset forfeiture to include money laundering and other financial crimes, such as public corruption and wire fraud.
“When I first started as a prosecutor in the Southern District [in the early 1990s], it was not routine to even seek forfeiture as part of a criminal case,” said Barr. “Now in almost every criminal case, whether it’s white-collar or drug-related, there is a forfeiture count included in the indictment.”
But the marshals’ track record is mixed.
Take the Bicycle Hotel and Casino in Bell Gardens, California, which the Feds took over in 1990 after declaring it was built with $12 million in illegal drug money. The casino remained a haven for criminal activity under the government’s tenure, and by the time it finally sold in 1999, annual profits had plummeted to $4 million from $23.4 million, according to the Los Angeles Times.
“It was a disaster for the marshals,” said Smith, the former deputy chief of the Asset Forfeiture Office. “It attracted the attention of Senate investigators.”
Can someone say slush fund?
Last September, Sen. Chuck Grassley, a Republican from Iowa, blasted the Marshals Service for turning money recovered through asset forfeiture into a “slush fund.”
“There are laws governing the use of this money for a reason,” he wrote in a September letter to Attorney General Jeff Sessions accompanying a 15-page memo, outlining how the marshals allegedly used recouped cash for swanky office renovations and other frivolous expenses.
“Playing games with unappropriated funds to avoid accountability is outrageous and cannot be tolerated,” wrote Grassley, who has argued for better oversight of the program’s finances.
The memo cites an asset forfeiture training facility in Houston, Texas, that was outfitted with high-end granite countertops and custom artwork. The facility was used for just 32 days in 2014. Last year, it was booked for only 52 days.
The Institute for Justice noted that allowing an agency that seizes assets to then add that money to its own budget creates an environment ripe for abuse.
“No one is checking line-item expenditures,” said Jennifer McDonald, a research analyst at the institute, citing a Texas district attorney who bought a margarita machine with money seized through civil forfeitures.
A copy of a forfeiture training manual used by the Department of Homeland Security, which was leaked this past fall, included a dozen pages describing how agents should turn to real estate experts and commercial property databases to appraise real estate and avoid wasting time on “liabilities” — properties not profitable enough to make it worth their time.
“The mission is supposed to be stopping criminal activity,” said McDonald. “They’re telling people, ‘We have a profit incentive here. If it’s not worth our time, we’re not going to take it.’”
The Marshals Service’s Complex Asset Team is one division that’s come under heavy fire for mismanaging sales and for cronyism. The team, which handles the most complicated cases, was involved in seizing assets from Madoff as well as Marc Dreier, the notorious lawyer serving a 20-year sentence for a $400 million Ponzi scheme, and Hassan Nemazee, an investment banker convicted in a $292 million fraud scheme.
In 2010, an employee at Forfeiture上海同城对对碰交友社区