A
pair of Federal legal actions, both filed in U.S. District Court for the
Southern District of New York, have revealed a tangled web of financial fraud,
Mafia moves on Wall Street, and other bigtime criminal activity, all apparently
linked to circles intimately associated with at least one of the major
candidates for President of the United States, George W. Bush. At the very center of what appears to be a major criminal conspiracy, are
two investment firms ostensibly "above suspicion," Gotham Partners, a New York
City-based hedge fund, and Crescent Real Estate Equities/Crescent Operating, of
Dallas, Texas. Gotham has been the largest minority shareholder in Crescent
Operating, and has been steering investors to Crescent Real Estate Equities for
years. (See Richard Freeman, "The Bush Mob Destroys America's Psychiatric
Hospital System," EIR, March 3, 2000, for a profile of Crescent.) Several years ago, the directors of Crescent took the highly unusual step of
granting Gotham authority to purchase more than a 15% equity position in the
firm without filing the papers usually required by the Securities Exchange
Commission (SEC), assuring that they were not out to stage a hostile takeover.
Gotham has had as much as a 22% stake in Crescent Operating. In the
take-no-prisoners world of real estate investment trusts and hedge funds, that
was tantamount to an announcement of marriage. Gotham is currently the target of a Federal civil action, charging that
they, along with several other real estate investment trusts and hedge funds,
violated SEC rules, by concealing plans to engineer a hostile takeover of a
Texas company, Hallwood Realty Partners. Gotham has been allegedly involved in
similar kinds of illegal takeover schemes in the past, involving such major
targets as First Union Real Estate Investments and Rockefeller Center. And, in
every instance of this alleged illegal activity, Gotham has been partnered with
firms that also have intricate ties to Crescent. Crescent is the primary investment vehicle of Richard Rainwater, the Texas
money-man who "made" Texas Governor, now GOP Presidential hopeful, George W.
Bush. To this day, Rainwater personally manages Governor Bush's blind trust.
Governor Bush was, and may still be an investor in Crescent. He personally made
well over $1 million from his investments in Crescent, and there are
allegations that Bush's stake in the firm at one time may have been far
greater. Gotham's legal woes stemming from the Federal civil suit, make up just a
part of the picture. When Federal prosecutors announced, in June of this year,
that they had cracked a major organized crime move onto Wall Street, Gotham
emerged as the "black knight," bailing out one of the pivotal players in the
alleged mob racketeering scheme. And Gotham now appears to be positioned to
walk away with a handsome profit from the deal. On
June 14, 2000, one hundred and twenty individuals, including associates of the
five La Cosa Nostra crime families in the New York area, were indicted on
racketeering, securities-fraud, and money-laundering charges, stemming from a
$50 million scheme to manipulate the prices of a number of Nasdaq-traded "penny
stocks" through a number of brokerage houses on Wall Street that were either
penetrated by organized crime, or had been created as fronts for organized
crime. On the one hand, it is hardly surprising that the traditional La Cosa Nostra
families would be interested in getting in on the biggest legalized gambling
casino in the world--America's hyperinflated stock market. Nor is it surprising
that the mob resorted to the usual array of strong-arms tactics--from
extortion, to death threats, to kickbacks, to corrupt union, pension fund, and
even police detective benevolent association officials. What did pique the curiosity of even the New York Times, was the
presence on the list of those indicted, of Gene Phillips, a veteran of the
Michael Milken/Drexel Burnham Lambert junk bond, savings and loan, and
commercial real estate swindles of the 1980s and early 1990s. Phillips' name
was once synonymous with Arizona real estate fraudster Charles Keating, and the
infamous Neil Bush/Silverado S&L fiasco. Phillips' Southmark Corp. and its San Jacinto Savings and Loan subsidiary
went belly-up in the late 1980s, costing taxpayers more than $1 billion. All
told, Phillips had created--before it went up in smoke--a financial pyramid
swindle with a paper worth of more than $9 billion, making Phillips one of the
biggest real estate Ponzi schemers in recent history. But, unlike his financial "godfather" Michael Milken, and his partner in
real estate and S&L scamming Charles Keating, Phillips managed to avoid
criminal prosecution and time in prison, even though he was considered one of
the central players in the entire Milken marauders apparatus. In the indictment in the Southern District of New York, Phillips' American
Realty Trust (ARB) and Basic Capital Management (BCM) were placed at the center
of the $50 million scam. Preferred stock in ARB was to be sold by the mob-run
brokers to a list of vulnerable clients and mob-tainted union pension funds,
and, in return for artificially driving up the prices of the stocks, $2 million
out of every $10 million "invested" would be kicked back by Phillips to the
mob. On the day the indictment was handed down, Phillips' BCM offices in Dallas,
Texas were raided. Phillips is now free on $1 million bail, but he is
restricted to his Dallas home, and cannot travel. The
Wall Street-mob roundup by the U.S. Attorney's Office for the Southern District
of New York grabbed headlines in the June 15 New York Times and Wall
Street Journal. On June 18, the Times ran a short item, noting
Phillips' unceremonious re-emergence in the public spotlight, briefly reporting
his loftier criminal achievements in the 1980s and early 1990s. On June 19, a curious financial transaction occurred, that could have
dramatic ramifications. Gotham bought up a large block of shares in Phillips'
Transcontinental Realty Investors, Inc. Ten days later, Gotham filed the
required 13D report with the SEC, copies of which have been obtained by
EIR. Why, one must ask, would a legitimate entity buy into a company that has
just been the subject of a Federal racketeering indictment, linked to the five
New York City La Cosa Nostra families? True, following the indictment of
Phillips and the identification of his companies as fronts for mob kickback and
stock manipulation schemes, shares in Transcontinental fell from $15 a share
down to the $3 range. However, the likelihood that Gotham was merely engaging in the Wall Street
practice of "bottom feeding"--buying up depressed assets at a fraction of their
true value--is probably somewhere near zero. In fact, Gotham's intervention,
which, in effect, pumped urgently needed cash and credibility into Phillips'
endangered operation, was a mirror image of Phillips' bailouts of mob-tainted
Texas-Louisiana real estate and savings and loan figure Herman Beebe in the
summer of 1984, when Beebe was about to be indicted by the U.S. Department of
Justice. Phillips' Southmark bought up $58 million of Beebe's assets in two
deals that were not finalized until after Beebe had been indicted for
defrauding the Small Business Administration. In the early 1990s, Phillips
repeated the same favor for Keating, when he ran afoul of the law, and his
Lincoln Savings blew out the real estate markets in southern California and
Arizona. According to the U.S. Attorney's office, the trial of Phillips et al. will
not take place until September 2001. Sources close to the case suggest that
evidence already in the hands of Federal prosecutors establishes that there
were prior business ties between Gotham and Phillips. Indeed, Phillips'
long-time partner in Southmark, William Friedman, held a large block of shares
in a company, Excal, which was also, at the time, part of Gotham's
portfolio. In addition to the raid on Phillips' office, the FBI conducted more than
1,000 hours of wiretaps on the major targets, over a period of more than a
year. These wiretaps could also turn up damning evidence, implicating Gotham
and, perhaps, Rainwater, in the Phillips real estate and stock
manipulations. Further evidence that the Gotham buy-up of Transcontinental stock reflected
a likely prior Gotham-Phillips alliance, surfaced earlier this month. On Oct.
6, Dow Jones Newswire reported that a deal had been struck between two Phillips
entities, Income Opportunity Realty Investors, Inc. (IOT) and American Realty
Investors, Inc. (ARL), to buy 1.865 million shares in Transcontinental back
from Gotham. IOT and ARL paid Gotham an option fee of $4.50 a share, in effect,
paying back Gotham in full for the June bailout, and agreed to pay an
additional $12 a share for the stocks themselves. ARL and IOT can execute their
purchase options between Jan. 1, 2001 and April 4, 2001. Gotham's June buy-up
of Transcontinental stock had helped drive their value back up. In another unusual twist, Gotham's Oct. 4 SEC 13D/A filing on the stock
option agreement, revealed that the deal had been struck in the context of
settling a lawsuit between the various Phillips- and Gotham-linked entities.
Curiously, in the suit, defendant Gotham was aligned with Basic Capital
Management, one of the principal Phillips companies snared in the mob-Wall
Street indictment. According to one experienced investigator, it cannot be
ruled out that the filing of the legal action did not reflect a falling-out
among thieves, but rather, was aimed at placing the entire transaction under
attorney-client privilege, given the sensitive predicament in which Phillips
now finds himself. Gotham
Partners is the private domain of William Ackman and David Berkowitz, who
founded the hedge fund in 1992, shortly after they graduated from Harvard
Business School. Seven wealthy investors pitched in more than $6 million to the
two inexperienced newcomers to Wall Street, to help launch Gotham, a highly
unusual event in the notoriously inbred world of New York speculative finance.
To this day, Gotham refuses to disclose any information about their investors
and clients. However, it has been confirmed that the largest initial investors
in Gotham were the Ziff family, and New York real estate magnate Andrew
Farkas. Dirk Ziff was a classmate of Ackman and Berkowitz at Harvard Business
School, but, according to several news accounts, the Ziff investment only came
after Martin Peretz, a former Harvard professor and longtime friend of Ziff's,
gave his endorsement, and a chunk of his own money. Peretz, the owner of the
New Republic, was also a Harvard mentor and friend of Al Gore, and is
still today considered one of Gore's "kitchen cabinet" advisers, especially on
Mideast policy. He reportedly continues to be a big booster of Gotham. In addition to the Ziff family, one other initial investor in the
Ackman-Berkowitz venture was Andrew Farkas, a household name in big New York
real estate wheeling and dealing in the 1990s. Farkas got his start in real
estate management through the financial backing of Steven Roth, the chairman of
Vornado and Interstate Properties, and is a long-time business partner of
Richard Rainwater. Roth put up $5.5 million for Farkas's Insignia Financial
Group, when it was launched in 1989. Gotham not only has taken up an equity stake in Rainwater's Crescent
Operating. In virtually every major takeover move that Gotham has launched
since its initial capitalization, Farkas, Roth, and Roth's various corporate
entities, have been involved. The incestuous dealings of Gotham, Roth, Farkas, and other Rainwater
partners is already under a public spotlight, as the result of the civil action
in the U.S. District Court for the Southern District of New York. Attorneys
for Hallwood Realty Partners L.P., on Feb. 15 of this year, filed a civil court
action against Gotham and a string of co-conspirators, charging that they were
engaged in an illegal takeover plot, involving violations of SEC rules. Indeed,
the methods used by Gotham, Interstate Properties, EFO Realty, Steven Roth,
Private Management Group, and other Gotham-interlocked firms, parallels
precisely the kinds of deceptive practices that Phillips used for decades to
wage illegal takeovers, and then loot the assets once captured. The Hallwood
case has revealed that Gotham engaged in similar practices in two high-profile
earlier takeovers, of First Union and Rockefeller Center. The civil complaint charged that "Under the leadership and direction of
defendants Gotham Partners, L.P. and Gotham Partners III, L.P. (the `Gotham
defendants'), and acting with a common purpose, defendants have accumulated
over 40% of the outstanding units of Hallwood, a publicly traded company, with
the intent to acquire control of Hallwood and to substantially alter its
business and operations. Pursuant to Section 13(d) of the Exchange Act and Rule
13d-1, thereunder, defendants were obligated to disclose, in public filings
with the Securities and Exchange Commission, their true intent with respect to
their acquisition of Hallwood Units and their collective efforts to take
control of Hallwood." Put in laymen's terms, Gotham, in conjunction with a number of other hedge
funds and real estate investment trusts with which it had previous ties,
launched a hostile takeover of Hallwood, and concealed that fact from the SEC
by filing a dozen reports, claiming that the purchases of Hallwood shares were
"for investment purposes only." In 1997, once Gotham had taken control of a
little less than 15% of the Hallwood stock, it filed a civil suit in Delaware
against the Hallwood management, a tactic they had used earlier in their
successful takeover and looting of First Union. At that point, Gotham-allied
investors began taking stakes in Hallwood, that eventually gave the group 40%
control of the company, enough to mount a stockholders' revolt, to throw out
the management of Hallwood, install their own people, and, ultimately, loot the
company's assets. The First Union affair was cited in the Hallwood suit as evidence of the
modus operandi of the Gotham/Crescent group. "In or about the Summer of
1999," the complaint stated, "the M&A Journal published a
comprehensive investigative report chronicling Gotham's battle to take over
First Union Real Estate Equity and Mortgage Investments (`First Union'), a
publicly traded real estate company based in Cleveland, Ohio. "The investigative report, entitled `The Ugly Battle to the Death for the
Last Paired-Share REIT,' . . . detailed Gotham's attack on First
Union. That attack included an initial strategy of accumulating First Union's
shares, the subsequent commencement of shareholder litigation against First
Union and its management, and, ultimately, a collaboration with other First
Union shareholders, whom Gotham had recruited to the deal to accomplish the
takeover. Indeed, Gotham and its allies eventually took control of First Union.
Under Gotham's management, however, First Union's stock lost over 60% of its
value." The complaint concluded, "The M&A Journal provides an
invaluable insight into Gotham's modus operandi and helps explain PMG's
and Interstate's interest in Hallwood in 1998. On information and belief,
Gotham had been planning a takeover of Hallwood from the beginning,
accumulating Hallwood Units, suing Hallwood's management, and ultimately
soliciting allies to accumulate Hallwood Units for a final push.
. . . As it turns out, both PMG and Interstate have been actively
involved in prior investments with Gotham or its principals." The coincidence of the Hallwood civil suit and the Federal criminal
prosecution of Phillips, et al., represents an unusual and unique opportunity
to delve into the netherworld where apparent "citizens above suspicion," who
have important political connections, intersect organized crime. And this story has only just begun to unravel.
A Tale Of Two Lawsuits
by Jeffrey Steinberg
The Mafia and Wall Street
The Plot Thickens
The Gotham Nexus
The Civil Case
