Published on Monday, 09 September 2013 14:11
In the District, six firms took turns winning tax liens on properties worth $540 million. The odds that their irregular bidding pattern was a coincidence?
Less than 1 in 1,000.
Debbie Cenziper, Michael Sallah, Steven RichBill O’Leary
Published on September 9, 2013Steven Berman, son of a Baltimore banker,
swept into the District during the height of the housing boom, flush with money and ready to take on hundreds of bidders at the city’s high-stakes tax lien auction.
From 2005 to 2007, Berman’s companies dominated the bidding room, spending millions to buy the liens placed on properties when owners fall behind on their taxes.
He was a big player at tax lien auctions in Maryland, too, where he was caught in 2007 rigging bids
at sales across the state, leading to the largest criminal conspiracy case of its kind at the time.HOMES FOR THE TAKING:
LIENS, LOSS AND PROFITEERS — Part 2 of 3Part 1
— How a small debt becomes a big problem.Coming Tuesday:
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At the District’s auctions, no one was watching.
A Washington Post investigation found that during Berman’s spectacular spending spree in the city, his companies engaged in dozens of rounds of irregular bidding similar to what federal agents had discovered in Maryland.
All told, six companies, three owned by Berman, took turns winning hundreds of liens on real estate worth $540 million through unusual back-and-forth patterns of bidding never detected by city government.
Of hundreds of participants, only those six companies stood out for bidding that was so irregular that the odds of it happening by chance were less than 1 in 1,000, according to The Post’s analysis, which was conducted with a team of economists and antitrust experts from Boston.
Once the liens were won, the companies charted an aggressive course through the District that would shake families for years to come, pressing to foreclose on homes in every ward — often over tax debts of $500 or less.
The patterns call into question the city’s vigilance in policing tax auctions at a time when the industry is under intense scrutiny, with a dozen tax lien purchasers pleading guilty to rigging auctions across the country.
“Where is the protection for people?” said Sylvia Richins, whose ailing mother’s house in Northwest Washington was targeted for foreclosure by a Berman company. “It just doesn’t seem fair or right.”
Berman, 55, who pleaded guilty in federal court in Maryland to criminal conspiracy, declined requests for comment about his activities in the District.
Officials from the D.C. Office of Tax and Revenue
said no purchasers have ever stepped forward with allegations of bid rigging and that federal agents in Maryland did not contact the District with concerns.
“There’s no evidence that they’re doing it here,” said deputy chief financial officer Stephen Cordi.
The tax office said the bidding patterns identified by The Post are not “sufficient to determine that there is collusion among bidders” or any quid pro quo.
“This information, on its own, does not inform us about any collusion activities, nor is it sufficient to reject the existence of such collusion,” the agency said in a statement
But Berman’s lawyer revealed in court three years ago that his client had not only told investigators about suspicious activities at Maryland’s auctions, but at the District’s, too.
“There was a sincere effort on Mr. Berman’s part to help,” attorney Geoffrey Garinther said at Berman’s sentencing.
Steven Berman admitted that he had talked about divvying up liens with a competitor at a 2007 D.C. auction.
Click on the image to read the document
In addition, Berman admitted to federal investigators that during the District’s auction in 2007, he had talked about divvying up liens with a top competitor. A “cooperative effort,” according to an FBI report obtained by The Post.
Cordi said if bid rigging had occurred, it would not have deprived the city of money or affected property owners.
“There’s no harm to the District, and I don’t think there is any harm to the owner,” he said.
But The Post analysis showed that five of the six companies that engaged in irregular bidding have hauled hundreds of homeowners to court, with one of the firms demanding legal fees that were so high, the city’s attorney general called them “predatory” and “unlawful” and pushed to stop the company in court.
Howard Liggett, former executive director of the National Tax Lien Association,
said the District had an obligation to investigate after the problems in Maryland came to light — and set up safeguards for the future.
“There’s no excuse,” said Liggett, a vocal critic of an industry he represented for a decade. “The person in control of the sale should be in control of it.”
Six companies — half of them owned by Steven Berman, above — bought more than 2,300 D.C. tax liens from 2005 to 2007. In 2005, as the District’s housing market
was thriving, Berman’s Mason-Dixie Tax Sale showed up for the annual auction at the tax office, then in a sprawling headquarters on North Capitol Street NE.
So did a competing company owned by prominent Maryland businessman Harvey Nusbaum, a former Internal Revenue Service agent, and partner Jack Stollof, deep-pocketed bidders who were later convicted along with Berman in the federal investigation in Maryland.
Over the course of the District’s five-day auction, packed with more than 340 investors, Berman, Nusbaum and Stollof took the lead, spending millions and picking up more liens than any other firms.
Unusual patterns quickly followed.
Instead of scooping up liens in consecutive fashion — a common pattern among top bidders at competitive auctions — Berman, Nusbaum and Stollof alternated wins in a distinct, back-and-forth pattern not seen among any other bidders.
During one round of bidding on a series of houses in Northwest Washington, the first lien went to Nusbaum and Stollof’s company, 2005 DC. The second went to Berman’s Mason-Dixie. The rotational pattern continued for the next three liens.
The pattern played out again and again over the course of the auction. In the end, the two companies won a total of 531 liens — one in four — capturing nearly half through the irregular bidding.
It appeared the two companies were “making room” for the other to win, said Daniel S. Levy, an economist and national managing director of Advanced Analytical Consulting Group
in Boston, which studied the data at The Post’s request. The firm, founded by a top Deloitte statistical director, analyzes collusion and fraud in financial markets.
“It does not make sense if they’re bidding to compete against each other,” Levy said.
The rotational patterns did not escape the attention of one veteran investor, who recently told The Post that it appeared several bidders were working together instead of competing.
“They were controlling the entire sale,” recalled longtime investor Christopher Hauser. “It was literally A,B, A,B.”HOW THE BIDDING WORKS:
At the District’s tax auctions, liens are awarded to the highest bidders.The minimum bid
is the same as the lien — the back taxes plus penalties and interest. Because the city’s auctions are so competitive, participants often bid more than that, putting up what’s known as a “surplus.”The surplus money,
which can range from $25 to hundreds of thousands of dollars, is only used to determine the winning bidder. The city ultimately returns the surplus money to the bidder after a lien has been repaid by the homeowner. If the lien is not repaid and the bidders decides to foreclose, the city applies the surplus money to any subsequent unpaid taxes, fines or other costs.Well-financed bidders
often win the most liens, pushing out mom-and-pop participants, because the bidders can afford to put up the highest surpluses. The Post’s study of irregular bidding from 2005 to 2007 showed that six companies put up high enough surpluses to push out the smaller bidders, and then won liens in back-and-forth patterns that did not appear in subsequent years.
In 2006, a similar pattern emerged between another Berman company and Aeon Financial of Chicago, which collectively won 760 liens, half through the back-and-forth bidding.
In 2007, a Berman company was back again, this time engaged in similar patterns with Aeon as well as a second company, Heartwood, of Florida.
The Post found that Berman even admitted to FBI agents during the Maryland case that he and a Heartwood executive, Michael DeLuca, had sat in the back row during the bidding at the District’s auction in 2007, where there was talk about “sharing” liens.
“The liens that DeLuca wanted was (sic) made clear to Berman,” according to an FBI report.
A spokeswoman for the Department of Justice declined to comment on Berman’s statement about bidding in the District or whether the agency pursued the matter. DeLuca could not be reached for comment.
All told, the six companies identified by The Post picked up more than 2,300 liens over three years — half through the rotational bidding, The Post found. The patterns have not appeared in any other year since 2007.
Nusbaum, 75, said he didn’t want to discuss his activities in the District, adding: “That’s something that happened eight years ago. I’ve put this thing behind me.”
Stollof, 78, declined to comment through his attorney.
A representative for Heartwood, formerly a subsidiary of Florida’s BankAtlantic Bancorp, did not respond to questions about the firm’s bidding but said the company stopped buying liens more than five years ago.
Aeon did not respond to repeated calls and letters seeking comment.
Cordi, with the tax office, acknowledged that the agency never went back to review the bidding in the District for signs of wrongdoing after the Maryland criminal case became public. D.C. law requires the agency to cancel any sales where fraud is found.
Cordi also said the tax office doesn’t have the authority to ban bidders who get in trouble in other places — and wouldn’t necessarily want to.
“If you exclude bidders, you take in less money,” he said.
Bidders hold up their identifying cards while Lawanda Edwards, center left, conducts the D.C. Office of Tax and Revenue's auction on July 15. While the companies were dominating
the District’s auctions, the FBI in 2006 began to find suspicious bidding patterns in Maryland. Agents suspected that Berman, Nusbaum and Stollof had struck secret agreements not to compete
so they could win a similar share of liens, including those in Baltimore, Prince George’s, Montgomery and Anne Arundel counties.
The men had ties that dated back years: Stollof had worked with Berman’s father, who ran a prominent Baltimore savings and loan.
FBI agents also turned up evidence that Heartwood’s attorneys, John Reiff and Anthony DeLaurentis, were engaged in the same scheme. Aeon was not part of the case.
In 2006 at a Prince George’s County auction, investigators found Berman and Nusbaum “rotated their winning bids” to each take an equal share.
The next year, agents went into the auction room in Baltimore County and secretly recorded Berman calling to Nusbaum as a lien came on the block, “Next one is mine.” Nusbaum won lien 959; Berman won lien 960.
“It was pure bid rigging,” longtime Prince George’s tax collector Porter Venn recently told The Post. “There was no secret about it.”
Now retired, Venn said he saw similar “rotational” bidding at his own auctions but did not alert authorities because his primary job was to get the liens sold and money collected for the county.
Besides the suspicious bidding, federal agents in 2007 noted a troubling practice among the purchasers after the liens were won.
Maryland homeowners were stepping forward, saying the firms were demanding excessive fees on top of the tax debts and were taking homes when families couldn’t pay. A series of stories in the Baltimore Sun
in 2007 detailed the problems.
Prosecutors estimated that Nusbaum and Stollof alone amassed nearly 15,000 liens over the course of the Maryland conspiracy between 2003 and 2007, reaping at least $6 million in fees.
“These people were running factories to generate fees,” Stan Milesky, former chief of treasury management for Baltimore, told The Post.
A tax-lien sale notice hangs on the door of a house in Northwest Washington last month. The name and address have been redacted by The Post. (Michael S. Williamson / The Washington Post)In the District, Heartwood and Berman’s companies
were also making money on the liens they won, pressing to foreclose and ultimately taking homes throughout the city.
From a garden rowhouse in Northeast Washington to a brick house on a bustling corner of Columbia Heights, Heartwood foreclosed on more homes and other properties in recent years than any other investor — 40 in all — and then sold each one.
The company took in nearly $6 million through the sales, for liens that totaled $107,000. The Post was unable to determine how much of that was profit because companies don’t disclose their costs when taking houses, which could include additional property taxes, legal fees and other expenses.
Companies owned by Berman, who owns a sprawling horse farm in Pennsylvania, foreclosed on 15 properties. The law offices of Heidi Kenny, Berman’s wife, handled much of the legal work.
Many of the homeowners were elderly. One was a 97-year-old woman who had owned her cream-colored rowhouse in Northwest Washington for five decades when she fell behind on a $959 tax bill. Berman’s company took the house and sold it for $241,500.
A Berman company also foreclosed on a stately home a mile from American University, owned by a 66-year-old woman who lived alone and had been suffering from mental health problems when she failed to pay her $2,944 tax bill.
The firm picked up the tax lien in 2006 and foreclosed on the house, assessed at the time for more than $1 million.
The family fought back in court, saying the woman was legally incapacitated and unaware of what was happening. But in the end, the family paid Berman’s firm $200,000 to get the house back, taking out a loan to cover it, records show.
Richins, the woman’s daughter, said the city should have offered more protection.
“My mother was an elderly person with limited resources and ability to manage her affairs,” she said.
Kenny’s firm declined to comment on the case, saying the litigation was handled by another firm.
In recent years, Steven Berman's companies have spent millions on D.C. tax liens — including $1.2 million in 2011 to win 326 liens — despite Berman's high-profile sentencing in a bid-rigging conspiracy in Maryland. In 2010, Nusbaum and Stollof pleaded guilty
in federal court in Maryland to one count of felony conspiracy. Berman was sentenced to two years of probation and ordered to pay $750,000 in restitution.
“While it’s not in my nature or my heart to collude, I now realize that’s exactly what I did and it’s wrong,” Berman said at his sentencing, where several witnesses spoke on his behalf, including a Baltimore pastor, who said Berman had bought the congregation a building the year before.
“He had a heart,” pastor Derrick Truesdale said in an interview.
Prosecutors did not charge Heartwood lawyers DeLaurentis, 71, and Reiff, 49, who cooperated during the investigation. The men were stripped of their law licenses in Maryland. Reiff did not return calls and letters seeking comment. DeLaurentis declined to talk about his activities in Maryland or the District.
None of Berman’s co-conspirators returned to the District after their convictions.
But a year after his sentencing, while still on probation, Berman signed up for the city’s auction. Over the course of three days in 2011, his firm once again emerged as the top buyer.
Although The Post found no signs of irregular bidding, Berman’s company won 326 liens that totaled $1.2 million, taking control of properties across the city.
He has moved to foreclose on 144.Jennifer Jenkins and Timothy P. Smith contributed to this report
About this story
To report this story, The Washington Post carried out an analysis of bidding patterns at the District’s annual tax lien auctions from 2005 through 2011, using methods employed by expert statisticians in pattern detection, including bid rigging.
The Post first examined the bidding of more than 800 participants at the city’s seven annual auctions by studying the order and frequency in which bidders won liens.
Using statistical analysis, the newspaper found clusters of back-and-forth bidding among top competitors that did not appear randomly in the running of 1,000 simulations.
The Post presented its findings to Daniel S. Levy, a statistical and modeling applications expert and the national managing director of Advanced Analytical Consulting Group in Boston. The firm, founded by a top Deloitte statistical director, analyzes fraud and collusion in financial markets.
Levy has been a court-appointed expert arbitrator for the Internal Revenue Service and has testified before state and federal courts on antitrust, tax and statistical matters.
Levy and a team of economists ran their own frequency tests to determine how often bidders deviated from their expected bidding, finding that six tax lien companies stood out for winning liens in patterns that did not appear random.
The patterns, found from 2005 to 2007, have not appeared in subsequent years.http://www.washingtonpost.com/sf/investigative/2013/09/09/suspicious-bidding/?hpid=z1