Home Banking & Finance Criminal charge could motivate testimony in alleged $60M Ponzi scheme in Rockland

Criminal charge could motivate testimony in alleged $60M Ponzi scheme in Rockland

Mitchell Klein may have changed his mind on testifying about an alleged $60 million Ponzi scheme that he and two partners ran.

Klein maintained the books of FKF 3, a Rockland County real estate investment fund that was forced into bankruptcy in 2010. He has refused to cooperate in a lawsuit brought by U.S. Trustee Gregory Messer to recover investors’ money, asserting his Fifth Amendment right against self-incrimination.

Rockland Ponzi scheme Klein, however, was facing possible criminal charges, and his attorney began discussing a plea agreement with the U.S. Attorney’s Office.

“If the plea agreement is accepted,” Klein “intends to be immediately available as a witness,” according to a letter addressed late last year to Magistrate Judge Judith C. McCarthy from Messer’s attorney.

On Feb. 22, Klein was charged with withholding information on a crime. He pleaded guilty the following day.

From October 2009 to February 2010, according to the one-page criminal complaint, he concealed information that one of his co-principals in FKF 3 had committed securities fraud and wire fraud.

Who he protected, and the details of the alleged frauds, were not disclosed.

Klein and his partners, John Magee, a developer, and Burton Dorfman, a former Rockland assistant district attorney, formed FKF 3 in 2004. Their business model, according to the 2010 lawsuit filed by Messer, was to borrow money from investors, loan it out at slightly higher interest rates and profit from the difference.

Most of their investors were people with whom they had close relationships – friends, family and clients – who accepted their word that the investments were safe.

They persuaded investors that they would obtain “exceptional and consistent returns safely,” Messer said, through their “superior knowledge of the real estate development, investment and construction businesses.”

None of their creditors were institutions or professional investors who would have expected more information.

FKF 3 operated free of oversight, the trustee claims. The fund was never registered as a security. Financial statements were never provided. In many instances, investors were not given a promissory note, mortgage, security interest or personal guarantee.

Secrecy, Messer said, enabled them to play both sides of the fence. He said they loaned investors’ money to high-risk real estate projects in which they also had ownership interests.

They also paid themselves $4.2 million over four years while the fund, Messer said, was constantly insolvent. They managed to keep it afloat by borrowing more money.

FKF 3 “devolved into little more than a Ponzi scheme,” the trustee alleges, “whereby the principals continued to borrow money to keep interest payments flowing to creditors and keep the fraud from being discovered. Like all Ponzi schemes, the debtor ultimately collapsed once it was unable to find sufficient new money to take out old money.”

The collapse began in 2008 as the real estate market went into sharp decline. In 2010, three creditors forced FKF into involuntary Chapter 11 bankruptcy. The court confirmed a liquidation plan, establishing the FKF Trust with Messer as trustee.

Messer alleges that the partners, in acting on both sides of loan transactions, had created impermissible conflicts of interest and had breached fiduciary duties to their investors. As of October, he claims, the damages totaled nearly $101 million.

FKF 3 had 23 loans on the books when it went into bankruptcy. Most of the portfolio was concentrated on a few projects: $30.7 million for One Madison Park condominiums in Manhattan; $7.6 million for the Aventine condominiums in Edgewater, New Jersey; $5 million for a 55-and-older community in Newtown, Connecticut; $1.6 million in Jerry’s Self-Storage in New Windsor.

In each project, Messer said, the FKF 3 partners held ownership interests, ranging from 6 percent to 80 percent, for which they put up no personal money.

The trustee said the partners received other “perks” from their borrowers, such as five Hoboken, New Jersey condominiums, or cash equivalents, that went to family members.

They “reaped significant benefits” from FKF 3, Messer said, without giving notice to creditors “despite the clear conflicts of interest.

Jury selection for the trustee’s lawsuit is scheduled to begin on May 14 in federal court in  White Plains.

Klein is scheduled to be sentenced by federal Judge Kenneth M. Karas on June 26.


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