Thursday, March 11, 2010

The mystery of Ridge Hill: however FCR avoided indictment, does the developer remain (as per ESDC) "a good corporate citizen"?

Forest City Ratner, as a developer, is resilient and resourceful, able to renegotiate deals for the Atlantic Yards project with government agencies like the Metropolitan Transportation Authority (MTA) and the Empire State Development Corporation (ESDC).

But when it comes to the federal corruption case in Yonkers (p. 10-15 of indictment below), which involves FCR's Ridge Hill mixed-use project but does not implicate the developer, FCR looks more than lucky.

After all, City Council Member Sandy Annabi changed her vote to approve the project and was indicted for accepting bribes. Her cousin, Zehy Jereis, was indicted for giving them.

FCR, which hired Jereis for an apparent no-show job, was not indicted and issued a statement indicating that it had been told by federal prosecutors that neither it nor its employees was a "target" of the investigation.

If so, that suggests either that prosecutors lack sufficient evidence to indict the developer and/or that they believe the developer's cooperation justifies not seeking its indictment.

Thus, FCR not only escaped sanction for some questionable behavior--it has never explained or justified the no-show contract--it also can continue to benefit from a zoning change that was, according to prosecutors, illicitly gained.

A confounded ex-prosecutor

Is the developer bulletproof?

I spoke to a former federal prosecutor experienced in investigating corruption and fraud. Though he’s no fan of the AY project, he also emphasized that any knowledgeable practitioner of criminal law--whether for the defense or for the prosecution--would read the indictment and be left with numerous questions about FCR's conduct.

The indictment, he said, leaves a reader wondering whether FCR has--or had--potential criminal exposure or even if not, whether it engaged in conduct incompatible with participation in a public-private development.

A confident ESDC

The ESDC, asked last month if they'd looked into the Ridge Hill case, told me yes and concluded that they "remain confident in Forest City as a developer and as a good corporate citizen."

(I was unable to get a comment from the Metropolitan Transportation Authority or the New York City Department of Transportation, both of which have also entered into contracts with FCR regarding, respectively, the Vanderbilt Yard and the Carlton Avenue Bridge.)

Well, FCR and its employees have not been indicted. They may not be indicted. But the evidence, however insufficient for prosecution, does not point to good corporate citizenship.

And it does not look like the developer was "bilked"--in the parlance of the New York Times--by Jereis, as was painstakingly pointed out by Noticing New York blogger Michael D.D. White.

Looking at the indictment

Let's recap. According to the federal indictment (also embedded below) announced 1/6/10, Yonkers Annabi reversed her opposition to a zoning change regarding FCR's Ridge Hill project after Jereis, then Chairman of the Yonkers Republican Party, arranged a meeting with FCR, referred to only as "Developer No. 2."

(Annabi's press release announcing her change in position was drafted by representatives of FCR and Jereis.)

At the meeting and while he was helping secure Annabi's support, Jereis asked representatives of FCR for a consulting job. They reached an agreement in principle in which FCR agreed to give Jereis a job after Annabi formally voted in favor of Ridge Hill.

That happened on or about 7/11/06. Around October 2006, Jereis signed a consulting contract with FCR to serve as a "real estate consultant," even though he was not a broker and had little or no relevant experience.

The contract was backdated to 8/1/06 and he began receiving his $5000 monthly payments retroactively starting with August 2006. Only until 3/12/07, after news reports about the federal investigation surfaced, did Jereis submit required monthly reports, dating back to August 2006.

The indictment refers to those reports as "purported" justification for the prior payments--a word that prosecutors would not include unless they questioned whether Jereis had in fact performed any of the claimed services.

The indictment involves both Ridge Hill and another project. Annabi, the former Democratic Majority Leader of the Yonkers City Council, is charged with conspiracy, bribery, extortion, false statements, and tax crimes. Jereis is charged with conspiracy, bribery, and extortion.

But Count One's "Conspiracy To Accept Corrupt Payments" does not name FCR as a defendant, even though it specifically incorporates the conduct involving "Developer 2" that is alleged at the beginning of the indictment.

The "not a target" statement

While Forest City Ratner's "not a target" statement was not confirmed by prosecutors, it was surely made on advice of counsel. So, had it been a lie, prosecutors would have come down on the developer.

It leaves open the possibility that FCR or its employees could be a target at another time, or that the developer's "representatives"--but not employees--may remain a target.

But the statement, according to the ex-prosecutor I spoke with, likely reflects FCR's conclusion that it either did nothing wrong or that it negotiated some kind of arrangement with prosecutors that gives it actual or effective immunity.

That could mean prosecutors concluding FCR committed no crime, or that it's a crime not worth pursuing given other elements of the case, or that the developer's cooperation has diminished the risk of prosecution.

Defense lawyers might go after FCR as a witness, suggesting that the no-show contract diminishes their credibility. But unless FCR knew they were underwriting the bribe of Annabi, it's hard to prosecute them federally.

The no-show contract might represent a state crime--one for which FCR has received effective immunity as a result of its arrangement with federal authorties.

Untangling the mystery

Assuming the allegations of the indictment are true, the current, publicly-available record fails to resolve several questions, the ex-prosecutor explained.

1. What they knew
At either the time of their meetings with Annabi or by the time they agreed to arrange a “consulting job” for Jereis, did the “representatives of” FCR understand that Jereis was paying bribes to Annabi?

If they knew about the bribery while they were negotiating with Jereis about that job or arranging it for him, that could be a basis for finding that he and they shared illicit intent.

If they did not know about the bribery, how did they think he was going to influence her?

Could FCR have been the victim of extortion by Jereis? Annabi was going to vote against Ridge Hill, so Jereis presumably had little leverage to threaten to ensure she voted against the project. And if FCR had been extorted, it apparently didn't go to prosecutors quickly.

2. Illicit intent

Assuming the “representatives of” FCR shared Jereis’s illicit intent, is that intent attributable to the developer itself?

The answer depends in part on the identity of the “representatives,” who, according to the indictment, on FCR’s behalf met with Annabi to lobby her to change her mind about Ridge Hill. They may have been FCR employees--or outside lobbyists/consultants.

If the “representatives of” FCR included an FCR employee, their intent would be attributable to the developer so long as the employee was acting within the scope of his employment when he agreed to compensate Jereis for having corruptly influenced Annabi to change her vote.

It appears that prosecutors concluded that FCR lacked the intent, or they lacked sufficient proof to establish such intent.

On the other hand, if the “representatives of” FCR were outside lobbyists, their knowledge would be attributable to FCR only if the lobbyists so informed FCR during the pendency of its payments to Jereis.

It appears that prosecutors concluded that the lobbyists lacked the intent, or prosecutors lacked sufficient proof to establish such intent.

3. False business records

Even if FCR did not know that Jereis was paying Annabi to change her vote, does FCR have any liability for having agreed to pay Jereis $60,000 over a twelve-month period for “real estate consult[ing]” services when he had no real estate experience, and paid him $5000/month from October 1, 2006 to March 12, 2007 despite his failure contemporaneously to document his performance of any services?

While this might not amount to a federal crime, or at least not one easy to prosecute, under New York State law, it is a class “A” misdemeanor to falsify business records and a class “E” felony to falsify business records with the intent to conceal a crime.

So, did FCR knowingly and intentionally enter into a contract with Jereis intended to conceal the reality of a no-show job with illusion of a real estate consultancy? And if so, was this done with knowledge on the part of FCR that Jereis had corruptly obtained Annabi’s vote for Ridge Hill?

Either way, this could create potential state exposure and FCR would need to alleviate that exposure via some kind of cooperation arrangement.

4. Why did FCR get off the hook?

On what basis did federal prosecutors make the determination, reported by FCR, that neither it nor its employees are targets of the investigation? Was that determination made only after the government debriefed FCR employees?

Did FCR condition its cooperation on the government providing it or its employees either with informal immunity, such as a non-prosecution agreement or a formal order of immunity?

(Note that, at least according to anonymous sources quoted in the Daily News, Ratner was not exactly dropping a dime: At no time during these meetings and agreements with Jereis did Ratner go to the FBI, according to two sources familiar with the investigation.)

Even persons who've received word that they're not presently prosecution targets often condition their cooperation on assurances of immunity, to avoid even “residual” liability in the future.

Did FCR believe that it had residual or greater criminal liability, whether under federal or state law, and therefore demand immunity of one kind or another?

We may learn eventually how much the developer cooperated.

5. What will come out?

Will FCR’s “representatives” who lobbied Annabi and negotiated the deal with Jereis testify, if there is a trial? If so, what will their testimony be about their knowledge, if any, of the bribes that Jereis allegedly paid Annabi?

What would their testimony be about knowledge, if any, of their superiors at FCR about the methods used to persuade Annabi to change her vote and the basis and terms of compensation that they agreed to provide Jereis?

Would that testimony be credible? If not, how will it reflect on FCR?

We likely will know only if there is a trial.

FCR and VENDEX

New York City's VENDEX system helps the city identify responsible contractors and appears to be much more stringent than the system used by the state:
The City is legally required to use the Vendor Information Exchange System (VENDEX), a computerized data system, to help it make decisions regarding vendor responsibility as required by law. A responsible contractor is one which has the capability in all respects to perform fully the contract requirements and the business integrity to justify the award of public tax dollars.
Ridge Hill would qualify as an "investigation"

It looks like Forest City Ratner's role in the Ridge Hill project could fit under the broad definition of investigation under VENDEX:
An individual or entity has been investigated if there has been any inquiry by any prosecutorial, investigative or regulatory agency concerning such individual or entity or the activities and/or the business practices thereof.

An “inquiry” includes, but is not limited to the following:

...g) any questioning of an employee concerning the individual/entity, or the conduct of the individual/entity’s or the affiliate’s business which relates to the possible commission of any act or acts that could expose the individual, the entity, or its affiliates to either criminal or civil liability;
An inquiry has been ongoing for a while, give that nearly two years ago, in a 5/5/08 article headlined U.S. Investigates Yonkers Development After Official’s Surprising ‘Yes’ Vote, the New York Times reported:
Ms. Annabi’s lawyer said she had done nothing wrong, and the councilwoman has previously said that a change in the tax structure of the deal led to her change of heart. A spokesman for Forest City Ratner said the company — which partnered with The New York Times to build its new headquarters — was cooperating with the investigation.
Updating VENDEX to include Ridge Hill?

The Q&A in the guide lays out guidelines for updating VENDEX:
If a VENDEX questionnaire has already been completed and submitted within the last three years and the submitting vendor is seeking a new contract, does the new VENDEX questionnaire have to be completed and submitted?

The VENDEX questionnaires remain current for three years from the date of the notarized signature on the certification page. However, if, during the three (3) years, any of the submitting vendor’s circumstances change causing modifications to any answers in the vendor and/or principal questionnaire(s) previously provided, the submitting vendor may choose to update the appropriate questionnaire at the time the information changes, but MUST update the appropriate questionnaire no later than the time of award of the subsequent contract.
On January 25, I visited the Mayor’s Office of Contract Services and looked up the VENDEX questionnaires for Forest City Ratner and various affiliates. None mentioned Ridge Hill.

The ESDC, VENDEX, and "Prohibited Person"

ESDC spokeswoman Elizabeth Mitchell responded last month to my query about VENDEX:
In evaluating ESDC projects within NYC, ESDC works in tandem with the City. The City does perform a Vendex review of vendors – based on City policies. ESDC does not have an independent Vendex process, although the Corporation does ascribe to a "Prohibited Person" concept (as described, in detail, in the Project Documents).
On the 19th page the Development Agreement excerpted below, a Prohibited Person describes a relatively high bar:
--a person in monetary default...
--a person convicted in a criminal proceeding for a felony or any crime involving moral turpitude or that is an organized crime figure or is reputed to have substantial business or other affiliations with an organized crime figure...
--a person in violation of export regulations or trading with U.S. enemies
--a person in default of property taxes or utility charges greater than $10,000
--a person whose property has been foreclosed

The ESDC's Ridge Hill bottom line

FCR clearly doesn't qualify as a Prohibited Person.

I asked if ESDC was informed formally or informally by FCR of the Ridge Hill investigation in 2008 (when it was reported) or this year. And I asked if ESDC confirmed FCR's public statement that it's not a target of the ongoing investigation.

The response was non-specific:
ESDC is fully aware of the Ridge Hill investigation; we have discussed the same directly with Forest City and we have reached out to official authorities. We remain confident in Forest City as a developer and as a good corporate citizen and we are moving forward with the Project.
That they are, as the arena groundbreaking is today.
Ridge Hill Indictment Press Release Ridge Hill Indictment Atlantic Yards Development Agreement 17.2

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