Marshals, Coping With Business Crime Wave, Sell Fund Portfolios

Date: Wednesday, July 30, 2008
Author: Robert Schmidt, Bloomberg

Samuel Israel, convicted of fraud in the collapse of his Bayou Group LLC hedge fund, had the U.S. Marshals on his tail long before he faked his own suicide last month to avoid a 20-year sentence.

In one of its lesser-known roles, the Marshals Service helped recover $115 million by selling Bayou's failed investments. That is almost all that was left from the hedge fund turned Ponzi scheme.

``You can't believe some of the stupid investments these people made,'' said Leonard Briskman, the Marshals' deputy chief for business management who is supervising Bayou's liquidation sale. ``The Bayou guys lost money during the late '90s when almost everybody was making money in the market without even trying.''

The Marshals Service, formed in the early days of the Republic as the U.S.'s first federal law-enforcement agency, is best known for guarding the courts, running the federal witness- protection program and catching escaped felons like Israel, who surrendered on July 2. Now its role of disposing of seized property, with the proceeds going to crime victims or law- enforcement agencies, is becoming more prominent.

It's a job that has also become more complicated as corporate crime has escalated and prosecutors are grabbing spoils like hedge-fund portfolios, rare artwork and apartment buildings. It is no longer just a matter of disposing of drug dealers' gold chains, Cadillacs and power boats.

Selling Jewelry

Last month, the Marshals auctioned off an 11.88 carat Graff diamond ring seized from ex-KeyCorp executive David Verhotz for $1.7 million, the agency's biggest jewelry sale. The 22-piece collection brought in a total of $2.6 million. The senior vice president at KeyBank NA in Cleveland pleaded guilty in 2007 to embezzling $41 million from the bank.

``As the criminals become more sophisticated, we've had to become more sophisticated,'' said Briskman's boss, Eben Morales, chief of the asset-forfeiture program.

Morales has moved some of the assets sales out of hotel ballrooms and onto the Internet, cutting costs and increasing the market of potential buyers. He has studied corporate models used by Fannie Mae to manage real estate, and looked at how Sotheby's and Christie's International auction jewels and fine art.

``We've taken our guns and badges and set them down and said, `let us be the business managers,''' Morales said.

He relies on Briskman, who is responsible for managing and selling businesses, financial instruments and commercial real estate.

Alexander's Investments

Along with Bayou, Briskman is watching over investments seized from Jacob ``Kobi'' Alexander, the indicted former chief executive officer at Comverse Technology Inc. who fled the U.S. before being charged in a stock-option backdating scheme and is now fighting extradition in Namibia.

Briskman is running about 30 businesses for the government, including grocery-store chains, a 1,000-acre banana plantation in Puerto Rico and a trash company in Connecticut caught up in an organized-crime racketeering case.

The Marshals were given responsibility for forfeiture sales in 1984 after Congress passed a law that increased prosecutors' power to wrest assets from convicted criminals. Working with the Federal Bureau of Investigation and other federal law-enforcement agencies, the Marshals oversee about 17,000 different assets worth about $1.7 billion.

Briskman, 70, came to the Marshals in 1998 after selling his athletic shoe company, Diversified Retail Group Inc. Briskman said his experience taking the company public and then enduring a Chapter 11 bankruptcy taught him valuable lessons about how to run a business and manage its dissolution.

Time Warner Liquidation

Last year, he liquidated $400 million of Time Warner Cable Inc. stock as part of a settlement in the Adelphia Communications Corp. accounting fraud case. The stock and $200 million in cash were turned over to the government from Adelphia's sale and will be returned to investors bilked by company founder John Rigas and his son, Timothy.

The portfolio Briskman supervises while cases go through the court system holds about $80 million in seized stock and bonds. The Marshals use Wachovia Securities in Washington as their broker.

In the Alexander case, the Marshals seized almost $50 million in securities from two Citigroup Smith Barney accounts. Still, Alexander was able to ship $57 million out of the country, wiring the money to accounts in Israel while he was under investigation in July 2006, prosecutors have said.

Briskman is holding onto the investments until the legal wrangling plays out, though he has closed out Alexander's margin accounts and shed some risky investments like options.

Timing `Good'

``The timing was probably good for him, in light of what has happened in the market,'' Briskman said.

It probably will take another year to fully liquidate Bayou as the government sells pieces of more than 40 private companies the firm invested in, Briskman said. He hired Kroll, a unit of insurance broker Marsh & McLennan Cos., as the outside receiver to manage the sales.

``It's a long, drawn-out process,'' said Briskman, who has been working on Bayou since November 2005. ``This is a very complicated case.''

To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net.