Big Game Asset Hunters

by Shu on July 13, 2009

in News


It’s boom times for the asset-forfeiture experts who reclaim ill-gotten gains from Ponzi schemes and other frauds


By Roben Farzad


Puerto Plata, Dominican Republic -Here in Puerto Plata, on the northern coast of the Dominican Republic, world-class opulence and wretched poverty are neighbors. Barefoot children mill among the shanties that dot the inland hills, while down on the coast, Americans enjoy Lobster Thermidor and candied papayas at lush resorts. Miami is just 90 minutes away by plane, New York a tad over three hours.


The proximity to the U.S. has been convenient for Michael Diaz Jr., a Miami lawyer whose team of investigators has been making frequent trips to this 517-year-old former Spanish slave colony. Diaz is representing U.S. investors who say they were burned in a $170 million Ponzi scheme. The plaintiffs allege that a pair of Canadian real estate developers, Frederick C. Elliott and his son, Derek, used their money to pay back earlier investors in a Puerto Plata resort and to fund shopping sprees and vanity projects. The investors are suing to get their hands on the Elliotts’ assets. Meantime, the Securities & Exchange Commission is looking into the Elliotts’ dealings, according to people familiar with the matter, though no criminal charges have been filed. The Elliotts declined to comment.


The case is one of many recent financial blowups, from Bernard Madoff to Allen Stanford, that are reinvigorating the murky business of "asset forfeiture." Long a staple of the drug wars—and before that, bootlegger-busting in the Prohibition era—asset forfeiture is simply the process of reclaiming the spoils of crime (cash, homes, boats, and the like) from swindlers and parceling the plunder out to their victims.


Asset forfeiture is a civil action: Plaintiffs in effect sue for pieces of property, forcing the owners to explain how they paid for them. If the defendants can’t come up with satisfactory answers, the judge can order the assets seized. Lawyers often file asset suits before prosecutors file criminal charges—the better to surprise the swindlers. Wayne B. Black, a Drug Enforcement Administration (DEA) task force veteran who now heads a financial investigation and security firm in Miami, calls the business "private law enforcement."


These are good times for asset hunters. Reports of Ponzis and other investment scams have tripled in the past year. While no reliable statistics track the size of the industry, Black says his firm has seen demand double so far this year.

The surge in activity has lured scores of former FBI, DEA, and customs agents; defense attorneys; and private investigators to join forces—many using skills honed decades ago during the height of the war on drugs. Diaz is a prototypical asset specialist, having earned his crime-fighting cred on the mean streets of 1980s Miami. "The two worlds aren’t all that different," says Michael

R. McDonald, a former IRS agent who 30 years ago spearheaded Operation Greenback, an interagency effort to gum up the financial works of drug kingpins. "As with drug dealers, asset forfeiture is about hitting financial criminals where it hurts—the money."


Yet helping crime victims is only a part of the business. Most practitioners also serve another set of clientele: the crooks. Financial scammers, wealthier and more sophisticated than the average criminal, often hire top lawyers to fend off asset grabs. For the shrewdest criminals, "there’s a 99.9% chance that the dirty gains won’t be confiscated," says Charles A. Intriago, a former federal prosecutor in Miami who took on drug traffickers and money launderers and now heads AssetForfeitureWatch, a consultant to law enforcement. All told, criminals in the U.S. rake in more than $500 billion a year, Intriago estimates. Of that, just

$4 billion or so is forfeited, he says—mostly by drug dealers. Protecting the other $496 billion is big business.


Asset hunters and legal mercenaries traded secrets during the first Asset Forfeiture Global Conference in April at the Westin Diplomat Resort in Hollywood, Fla. Bernie Madoff’s visage served as the event’s unofficial logo, adorning PowerPoint presentations and handouts. Attendees took in sessions with such titles as: "It Don’t Mean a Thing if You Don’t Take Their Bling: An Introduction to Asset Forfeiture Basics and the Legal Rules of the Game." During one Q&A came this tip: "Seizing cash in a panel of a car is a whole lot easier than seizing a house. Think about the upkeep, the maintenance costs, legal hurdles, selling into this kind of market."


Left unsaid was that many of these skills can be—and often are—applied in reverse. The confab, however unintentionally, served as a great opportunity for people to glean advice on helping criminals protect ill-gotten assets. The more tricks the offense learns, the more the defense picks up.


In going after the Elliotts, Michael Diaz is calling on decades of experience on both sides of the courtroom aisle. After graduating from the University of Miami School of Law in 1986, the Cuban immigrant took a job as assistant state attorney in Florida. In the mid-1980s, Miami’s cocaine-related homicides were so rampant that President Ronald Reagan put Vice-President George H.W. Bush in charge of a local task force. The city’s morgue, filled to capacity, had to lease refrigerated trucks from Burger King (BKC) to store dead bodies. Diaz thrived in the gunslinging environment before leaving in 1990 to join a firm specializing in international money-laundering cases. Now he heads Diaz Reus & Targ, which boasts 50 lawyers and consultants who speak eight languages among them.


The Elliott case has consumed most of Diaz’s time lately. The alleged scam dates back to the 1980s, when the Elliotts set out to acquire waterfront land in Puerto Plata. By 2000 they had relocated their business operations to the island and scooped up several prime parcels. The operator of a nearby hotel, Hacienda Resorts, approached the Elliotts with a proposal to build a resort on their land. In 2001 the Elliotts struck a deal to construct Sun Village Resort & Spa, a 300-room complex offering lush villas, five restaurants, nine bars, and seven pools.


Over the next three years the father-son team raised $32 million from at least 1,600 private investors, according to court papers. A 2001 offering brochure projected 60% total returns over three years and reassured investors that "your investment is as secure as the land it’s built on, and you will receive your income on the calendar quarter, every 90 days."

But three years later, Sun Village was still under construction—and burning cash. The Elliotts needed more capital.

Luckily for them, real estate was in the midst of a global boom. Investors the world over were hungry for that rare mix of market appreciation and bondlike yields, and the Elliotts came up with a proposition that married the two: They offered the chance to buy seasonal stakes in luxury suites, much like a time-share arrangement, with periods parceled out in one-week increments. But there was a sweetener: Any unused weeks would be turned over to travel agents, who would find renters. The proceeds would then kick back to the investors in preset quarterly payments.


The Elliotts snared $64 million from the new plan and continued to add amenities to Sun Village, including a spa and an open-air theater. But the resort, still unfinished, was posting annual cash losses of more than $1 million. The Elliotts, who were paying themselves a management fee, allegedly started using money from new investors to pay off earlier ones. And they kept rolling out projects and fund-raising schemes, first offering stakes in adjacent bungalows co-branded with Maxim magazine (Maxim later sued to pull out), then restoring an abandoned resort on the island’s Juan Dolio beach.

By spring 2008, despite having raised $170 million for the three projects, the Elliotts had completed none. They stopped making quarterly payments to investors—and began sounding warnings that investor suits would be fruitless. "We have a complex structure designed to insulate these properties from claims and lawsuits," wrote Derek Elliott in an e-mail to staffers. "These companies are completely judgment proof."


It was no empty boast. The Elliotts had structured their company so that some assets could be pursued only in a Delaware court; others in St. Vincent, the Grenadines, or Gibraltar; still others in the Dominican Republic or Turks & Caicos; and most in some combination thereof." There are telltale signs of an offshore financial fraud," says Diaz’s partner, Robert I. Targ, a veteran of the U.S.Customs Service.




Diaz knows from complex financing schemes. He has spent thousands of hours defending money managers and other financiers from asset forfeiture. In 2006 he won a case on behalf of an alleged Argentine Ponzi artist who was sued for $1 billion. On Mar. 3, Diaz filed a civil suit in U.S. District Court in Miami, the closest American jurisdiction to the Caribbean. The suit alleges that the Elliotts used their company as a "personal piggy bank," siphoning investor proceeds to personal holding companies and "fraudulently diverting funds" to finance Artisan, a luxury cigar brand, and pay for a private plane, a $520,000 yacht, a film festival, a $300,000 country music tour bus, land holdings, and other items.


But proving that a defendant has used investor proceeds to buy particular toys isn’t easy. Who’s to say the Elliotts didn’t lose money alongside everyone else? That they didn’t buy personal effects with legitimate savings? That the real culprit for the losses wasn’t the global real estate collapse?


The Elliotts’ legal team, which is co-led by Coral Gables (Fla.) attorney Nelson C. Bellido, a former prosecutor, has been counterpunching vigorously. Bellido has filed two motions to disqualify Diaz, alleging that Diaz was illegally soliciting new clients from the hundreds of investors who have yet to join the suit. (A magistrate is considering the charge.)

Despite the roadblocks, Diaz scored a coup in March when he flipped Greg Clark to his side. Until last summer, Clark, 48, had been the Elliott Group’s chief financial officer. Diaz says he laid it out for Clark starkly: "You can either tell your story now or sit and take your chances" in further civil and criminal actions. Over the ensuing 48 hours, Diaz says, he was able to wear the executive down. Clark reasoned that he could protect his own assets better—and gain favorable treatment in criminal proceedings—by detailing the fraud for the plaintiffs. "He looked like he had the weight of the world off his shoulders," says Diaz. Clark declined to comment.


Diaz says Clark diagrammed the Elliotts’ dealings, showing how earlier investors were paid with proceeds from new ones—and backed up his claims with financial records. "Instead of utilizing the funds raised in the manner in which they represented to purchasers," Clark asserted in his sworn Mar. 20 statement, "the Elliott Group paid themselves large fees and diverted funds to acquire personal assets."


In a May 8 deposition, Diaz cited Clark’s testimony when asking Frederick Elliott about $17 million diverted from the incomplete Juan Dolio project to an unrelated real estate venture. Frederick cracked. He said he couldn’t account for discrepancies between monies raised and monies used.


The admission was a turning point in the case. By May 19 judges in both Miami and the Dominican Republic had frozen $36 million of the Elliotts’ U.S. assets and certain assets in the Dominican Republic. Nine days later plaintiffs won a freeze order for an additional $68 million in assets, including the Elliotts’ 54-foot yacht, the Independence. The Elliotts have signaled they’ll challenge the orders. "The plaintiffs’ allegations of wrongdoing are entirely false," said Carlos F. Concepción, Bellido’s co-lead attorney on the case, in an e-mail to BusinessWeek. "The Elliotts will continue to fight vigorously in the Dominican Republic to protect the interests of its investors against the dissident group that is attempting improperly to seize control of the Elliott properties."


Despite his progress so far, Diaz is unabashedly eager to get back to defense work. Sitting inside his sleek Miami office, he leans back in his chair and asks how the recent asset-forfeiture conference went. "Hey, good luck to those guys," he says with a sly smile. "They’re good for business."


BusinessWeek Senior Writer Farzad covers Wall Street and international finance.



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