Up to $50 Million Lost in Housing Scheme, U.S. Says : Crime: Southland businessman accused of diverting funds from investors, federal treasury. He pleads not guilty.

Developer John Goodin hoped the rushed real estate deal he made on New Year’s Eve 1990 would straighten out his shaky business affairs.

Instead, it became a legal quagmire that soon pushed Goodin--and several partners--close to financial ruin.

A year and a half later, the 47-year-old father of three found a way out. On the afternoon of June 10, 1992, Goodin walked into the bathroom of his Columbus home, put a 12-gauge shotgun to his face and pulled the trigger.

Goodin’s wife blames his suicide on distress over the ill-fated sale of two low-income apartment complexes in Ohio to Gary W. Lefkowitz, a mercurial Southern Californian who sold limited partnerships in low-income housing funded by federal tax credits.

“It put a lot of pressure on him,” said Judy Goodin. “He felt guilty having got his friends involved.”

In May, a federal grand jury in Minneapolis indicted Lefkowitz, a lawyer who lives in Beverly Hills, on 45 counts of fraud, embezzlement, obstruction of justice and filing false tax returns.

Federal authorities allege that Lefkowitz, owner of Citi Equity Group in Culver City, masterminded a sophisticated scheme to divert up to $50 million from dozens of developers, thousands of investors and the federal treasury to support his extravagant lifestyle.

He has pleaded not guilty and is free on $1-million bail. With his company in Chapter 11 bankruptcy, Lefkowitz is being represented by a public defender and has told the court that he is contemplating insanity as a defense.

Lefkowitz, 41, declined several requests for interviews. But a review of court records involving Lefkowitz and interviews with former employees and associates lay out a story that reads like a portrait of a con artist as a young man.

Even in Southern California’s caldron of white-collar crime, the Lefkowitz saga--as set forth in the federal indictment--stands out as a tale of extraordinary greed.

While presenting himself as a do-gooder providing shelter for the nation’s poor, Lefkowitz lived a high life with mansions in Beverly Hills and Colorado and a stable of luxury cars and corporate jets at his call. For his 40th birthday, he threw himself a $500,000 bash on the ski slopes of Vail, Colo. Lefkowitz and his wife spent up to $48,000 a month on artwork; meanwhile, he lavished gifts on a girlfriend.

Along the way, developers insist that he pushed them to the edge of bankruptcy, investors say he bilked them out of retirement nest eggs, and government officials claim that he deprived hundreds of poor people of the chance to live in affordable housing.

Said one federal investigator: “This guy’s a made-for-TV movie.”

*

Gary Wayne Lefkowitz is a product of the San Fernando Valley, where his Midwestern-bred parents migrated to raise their son and three daughters.

As Lefkowitz described it to associates, his was not a happy childhood. Money came and went from the family’s Granada Hills home with the swiftness of a Santa Ana wind. In 1979, his father, Albert Lefkowitz, was convicted of income tax evasion and served a year in federal prison.

Young Gary rarely looked back. But one bitter story that Lefkowitz repeatedly shared with friends was that he was given a new car by his father only to have it repossessed a few months later. Albert Lefkowitz could not be located for comment.

A graduate of Granada Hills High School, Gary entered the University of Southern California in 1970, earning a degree in business administration. In 1974, he went on to Loyola University law school.

After graduating, Lefkowitz opened a public interest law clinic in West Hollywood and had some success representing elderly tenants fighting evictions as their apartments were being converted to condominiums. He raised money for then-Gov. Edmund G. (Jerry) Brown Jr., creating ties to the liberal Democrat that earned Lefkowitz a two-year appointment in 1980 as a member of the California Department of Real Estate’s advisory commission.

Despite the professional success, his personal life was a mess. By his early 30s, Lefkowitz had been married four times. His third marriage lasted just nine months.

Business partnerships also were short-lived. When a former law partner sued him in 1985, an employee testified that Lefkowitz habitually avoided process servers and “doesn’t like to pay bills unless he absolutely, positively has to.”

Richard Chier, a Los Angeles criminal defense attorney who shared an office with Lefkowitz in the early ‘80s, recalls him as “the crudest, rudest man I ever met.” Adds Chier: “He was always beating people out of things.”

*

Just ask Edith Beck and her son Donald.

In 1981, the Becks hired Lefkowitz, a family friend, to represent them in a real estate lawsuit. He advised Donald to turn over four properties to his mother in case of an adverse court decision. Lefkowitz prepared and held onto four quitclaim deeds. When the deeds later were recorded, Edith’s name had been replaced with that of another Lefkowitz client.

He also brought the Becks into a deal with several other investors, who together purchased a City of Commerce property for $800,000--most of it provided by the Becks. When the partners had a falling out, the property was sold in early 1982 without the Becks’ knowledge. Edith held a $150,000 deed of trust on the property. But she was never paid, because someone had forged her name on a request for reconveyance held for her by Lefkowitz.

A complaint was lodged against Lefkowitz with the State Bar of California. After prolonged proceedings, the State Bar Court ruled that it “was not proved by clear and convincing evidence” that Lefkowitz forged the documents. But the court recommended that he be suspended for a year for acts of “moral turpitude and dishonesty.”

The Supreme Court approved the suspension in 1989, with one justice dissenting that “a more severe discipline” should have been imposed.

“It was sad to me how he had conned these people,” said Erica Tabachnick, the State Bar examiner in the case. “He destroyed them, but was cavalier about it.”

*

In 1984, Lefkowitz opened an office in Beverly Hills and through a law partner met several successful syndicators--individuals who form partnerships to raise money for real estate projects.

One of them was A. Bruce Rozet of Brentwood. By the late ‘80s, Rozet was the nation’s largest operator of subsidized low-income housing, controlling 350 projects with 45,000 units in 40 states. A major contributor to California Democratic politicians, he often testified in Congress about low-income housing issues.

Rozet became wealthy buying and managing projects subsidized by the U.S. Department of Housing and Urban Development. But in 1990, HUD accused him of operating slum properties and charging excessive fees. He was barred from doing business with the department for a year, though Rozet denied any wrongdoing.

Lefkowitz was awed by the real estate empire that Rozet commanded and often sought his counsel. “Rozet was Gary’s mentor,” said Paul Schwartz, a former Citi Equity property manager who for a time was a close friend of Lefkowitz and later testified against him before the federal grand jury in Minneapolis.

Rozet, however, said his relationship with Lefkowitz was never intimate. “A lot of people claim they have learned something from me,” he said.

The first successful syndications that Lefkowitz performed in 1985 were of properties owned by Rozet affiliates. But problems arose; New Mexico regulators issued a cease-and-desist order against Lefkowitz, Citi Equity, Rozet and others for selling unregistered securities. The order was in place until 1987.

*

As Lefkowitz was struggling to build Citi Equity, the bottom fell out of the real estate syndication business. The reason: the Tax Reform Act of 1986, which eliminated most tax shelters, sharply curtailing investor interest in real estate partnerships.

But Congress approved one new tax shelter to encourage the development of affordable housing. Instead of providing budget-busting direct subsidies, the Low-Income Housing Tax Credit grants credits to developers of affordable housing projects. The developers sell the tax credits to investors, who use them to offset federal income tax liability on a dollar-for-dollar basis.

Individual investors can claim tax credits of $3,750 to $9,900 annually--depending on their tax bracket--for 10 years. For instance, a high-income investor in the 31% tax bracket who makes a $45,000 investment in a qualifying low-income housing project can claim tax credits of $7,750 yearly for a decade.

Seeing an opportunity, Lefkowitz moved quickly. Initially, he scoured the country for apartment complexes to purchase and convert into low-income housing. He soon was one of the nation’s most active low-income housing syndicators.

Lefkowitz’s enthusiasm could be contagious, his spiel convincing. Former employees say his eyes would fill with tears as he sought to convince developers and others of the need for affordable housing.

“He would tell them that they would be providing housing to people who otherwise might not have any,” said Schwartz. “They could make money and also do some good.” Citi Equity adopted the slogan “Good Happens.”

The company focused its early activity on the Midwest, particularly Minnesota and Ohio, where higher allowable monthly rents and low building costs made projects most feasible.

Lefkowitz cut an impressive figure to many small-town developers. Arriving in a Learjet and wearing expensive suits, he could dazzle with his photographic memory and knowledge of real estate, housing and finance.

“He was a very personable, persuasive guy,” said Ohio developer Paul Bouman. “He was confident, a very good salesman.”

Mostly he promised what builders badly needed--financing.

Lefkowitz said he had money--a 1990 financial statement put his net worth at $18 million--and lived like he did.

He and his fourth wife, Frann, moved to Beverly Hills in the mid-’80s, living in a home tastefully decorated with Alex Katz paintings. They soon relocated to a mansion with marble floors in the city’s older, more exclusive section.

Regular patrons of Rodeo Drive, Lefkowitz and his wife spent more than $2 million on clothing, jewelry and art at Fred Hayman, Hermes, Maxfield, Merletto and other exclusive stores, according to the federal indictment. In 1993 alone, the couple was spending as much as $48,000 a month on various art objects, according to bankruptcy court filings. Among their prized possessions was a large collection of antique kaleidoscopes.

“Spending money was an obsession with him,” said Wayne Laner, a former Citi Equity pilot.

The company’s fleet of aircraft grew to three, and Lefkowitz used the planes for vacations in France or skiing weekends in Colorado, where he acquired a $2-million mountainside home with a five-story elevator.

He gave a girlfriend a $17,000 Jeep and a fur coat, according to prosecution filings in the criminal case. And Citi Equity acquired more than 20 cars, many of which were kept at Lefkowitz’s disposal. He often drove a Porsche or Jaguar, his wife a Mercedes. For his 40th birthday, Frann gave him a custom-built 1993 Morgan.

But the indictment alleges that Lefkowitz’s lavish lifestyle was paid for with funds embezzled from Citi Equity. He is accused of commingling funds of various partnerships and taking out loans that he never intended to repay.

In one civil case, Schwartz testified that Lefkowitz had boasted about having two checking accounts. “He had one called OPM, which stood for ‘other people’s money’ and one called TMR, for ‘take the money and run,’ ” Schwartz recounted in an interview.

Citi Equity employees describe Lefkowitz as a manipulator who insisted on total control. With an explosive temper, he could be verbally and physically intimidating.

He surrounded himself with employees with questionable backgrounds who asked few questions. Schwartz once was charged with forgery, though the case was dropped when he made restitution. Lefkowitz’s most trusted aide, Laurie Egan, served jail time for heroin possession. The head of his mortgage unit was fired by a Texas thrift for fraud.

Only Lefkowitz, though, had a full picture of Citi Equity’s operations, employees said. The company’s offices were spread over three buildings, and there was little interaction among Citi Equity’s small staff.

“Forget the right hand not knowing what the left was doing,” said one employee. “The index finger didn’t know what the pinky was doing.”

*

Lefkowitz built in a decade what appeared to be an impressive real estate empire. He was the general partner in more than 300 limited partnerships and an officer of more than 50 companies.

He obtained tax credits in 22 states for 100 low-income housing projects and syndicated 80 limited partnerships for those projects, raising $100 million from investors. Citi Equity raised an additional $30 million in mortgage pools that provided short-term construction financing.

But federal authorities allege that the firm was built on a mountain of deceit. Central to the scam, they allege, was Lefkowitz’s claim that he could offer developers permanent financing.

To obtain property, Lefkowitz had to convince builders that Citi Equity had permanent, or “take out,” financing. Such funds are used to take builders out of projects by repaying their construction loans.

Lefkowitz showed developers what purported to be financing commitment letters, primarily from Axon Associates and Jericho State Capital Corp. The two New York firms arrange financing for investments in real estate limited partnerships.

But the indictment alleges that Axon and Jericho had an agreement with Lefkowitz that the commitments never would be exercised. The letters’ purpose, prosecutors charge, was solely to induce builders to turn their projects over to Citi Equity.

An Axon official said the firm, which does not face any charges in the case, is cooperating with authorities. Officials of Jericho could not be reached for comment.

The commitment letters also were used to convince brokers to sell the limited partnerships and mortgage pool units to investors, prosecutors say. Prospectuses, however, failed to disclose information about Lefkowitz’s background, including his Bar suspension.

Lefkowitz also used deception to delay closings on properties, the indictment charges, filing numerous frivolous lawsuits against developers that alleged construction defects that did not exist.

*

In March, 1989, John Goodin and several partners bought 24 acres on the western edge of Sandusky, a small Ohio town on the shores of Lake Erie. They planned to build 200 units of luxury apartments.

The group originally intended to keep and operate the project. But with permanent financing difficult to find and Goodin facing other financial pressures, the partners agreed to sell in 1990.

They decided that the project would be more attractive if converted to low-income housing. Goodin applied for tax credits from the Ohio Housing Finance Agency and went looking for a buyer.

Two Southern California syndicators surfaced. First, Goodin negotiated with Michael Leone of San Diego, but their deal was never finalized. With time running out late in 1990--the tax credits would expire by year’s end--he turned to Lefkowitz.

On Dec. 30, Lefkowitz flew to Columbus. He quickly agreed to buy the project and another in Delaware, Ohio. But Goodin’s partners, Les Compson and Paul and Ray Bouman, soon learned of one peculiarity of the sale: Citi Equity would take over the project and collect $80,000 a month in rent for several months before the closing.

They had good reason to worry. The sale was not closed on schedule, and Leone filed suit alleging that he had a valid contract on the property.

The suit, though later dismissed, clouded the property’s title. Meanwhile, Goodin and his partners were personally on the hook for $5.8 million in loans. But with no access to the property and its cash flow, they could not pay the bank and their subcontractors.

Unable to raise capital, the Boumans were forced to sell a Chevrolet dealership that they had owned for 20 years. They also were forced to sell another property and fight off foreclosure on their homes.

“This put a big, black cloud over our lives,” said Paul Bouman.

The partners sued Lefkowitz; in early 1992, an Ohio judge gave Citi Equity 120 days to complete the sale. The afternoon before the deadline, Goodin killed himself.

The sale did not close as scheduled, and the Bouman group later filed another suit. Although the property had been occupied by tenants for two years, Lefkowitz replied that he did not complete the purchase because the property was shoddy.

“What they built is a piece of junk and that’s the problem,” Lefkowitz testified in a deposition in January.

But in his deposition, Schwartz said that claim was just a ruse by Lefkowitz to delay closing because he lacked financing. “Mr. Lefkowitz was proud of the property,” Schwartz testified. “He kept referring to it as a brochure property--to take a picture of it, put it on a brochure.”

In March, an Erie County jury ruled in favor of the Boumans, awarding them a $7.2-million judgment against Citi Equity and Lefkowitz. They still are trying to collect; Citi Equity was forced into bankruptcy reorganization the day after Lefkowitz’s indictment.

*

When an FBI agent contacted Paul Bouman in May, 1993, the developer learned that he was not alone in fighting Lefkowitz. According to Bouman, the agent told him that Citi Equity had left a trail of ruined developers across the country.

Roger Johnson, owner of Citadel Construction of Spokane, Wash., was not paid for work on projects in Spokane and Boise, Idaho. The company recently won a $2-million award from Citi Equity in arbitration hearings--an award that the firm hopes to collect by foreclosing on the projects.

“Lefkowitz came close to driving Citadel out of business,” said the firm’s attorney, Lyn Rassmussen.

In Elk River, Minn., developer John Welcht built and sold the 51-unit Park Pointe Apartments to Citi Equity, but despite a court judgment, he never collected the $1.3 million that he was owed on the sale. Citi Equity avoided foreclosure on the project by putting its operating limited partnership in bankruptcy reorganization. In all, 21 Citi Equity projects have filed for Chapter 11 bankruptcy.

All together, about 25 properties that Lefkowitz syndicated were not completed, according to bankruptcy court records.

In Maumee, Ohio, a suburb of Toledo, developer Ken Minichiello said he boarded up a project that was 80% complete because Citi Equity owed him $3 million.

“We are in a very tenuous situation,” said Minichiello, owner of Commonwealth Construction. “I could be forced into bankruptcy.”

The stalled project means that 160 needy Toledo-area families are being denied affordable housing in an area where several thousand are on waiting lists for public housing or subsidized rental units.

“The demand for low-income housing is overwhelming,” said Donald Troendle, executive director of the Lucas (Co.) Metropolitan Housing Authority.

Investors in the Maumee project also are in jeopardy. The indictment alleges that Lefkowitz improperly dispensed tax credits before the project was finished. An Internal Revenue Service spokesman said investors could be forced to repay any credits taken, along with interest and penalties.

Barbara Batman, a retired piano teacher from Hudson, Ohio, invested $60,000 in three Citi Equity projects. Interest payments on all three projects stopped in March.

While Batman’s financial security is not dependent on these investments, their loss would be painful. “I’m hoping it will work out all right,” she said. “I don’t like to give my money away.”

The First Presbyterian Church in Mankato, Minn., invested $78,000 from the sale of a parsonage in three Lefkowitz developments. A church member who was a broker for a Minneapolis securities firm recommended the investment.

Pastor Steve Minnema fears that a $50,000 investment in a part-finished project is lost because Citi Equity never filed the mortgage deed securing the investment.

“We were assured it was a safe investment,” said Minnema. “We felt we were doing some good, putting it in low-income housing.”

The Alleged Lefkowitz Scheme

The 45-count federal indictment against Gary W. Lefkowitz, owner and president of Citi Equity Group, alleges that he used a complex scheme to illegally divert up to $50 million from developers, investors and the U.S. government for his own personal and business use. Here is how the scheme allegedly worked:

THE DEVELOPERS

* Lefkowitz entered agreements to acquire apartment complexes or to have developers build projects that were converted to low-income housing. The projects would be partly financed using federal tax credits obtained from state housing agencies.

* The sales contracts called for closings six months or more from the date of the purchase agreements. Contracts typically included “benefit and burden” clauses that allowed Citi Equity to take over management and collect rents before the closings.

* Lefkowitz induced developers to sell projects by fraudulently representing that the permanent financing was in place. He produced bogus commitment letters for permanent financing.

* Closings were often delayed because of a lack of financing. Lefkowitz filed “frivolous lawsuits” against developers that said construction defects existed that prevented completion of the sales. He presented phony letters saying financing was being withdrawn because of shoddy construction.

* When judgments were issued against him or foreclosure actions begun, he placed projects in bankruptcy, further frustrating developers’ efforts to collect debts. Twenty-one projects are in bankruptcy.

* Lefkowitz improperly transferred funds from profitable to unprofitable projects, and diverted money to pay for personal expenses. The diversions meant that some developers were not paid and projects not completed.

THE INVESTORS

* Citi Equity raised about $100 million from investors in more than 80 limited partnerships to purchase and develop more than 100 low-income housing projects. Lefkowitz also obtained $30 million from investors in mortgage pools that provided short-term construction financing for the projects. About 7,000 individuals nationwide invested money in Citi Equity properties.

* Lefkowitz recruited about 100 securities brokers and dealers nationwide to sell his limited partnerships and mortgage investments. He misrepresented to the brokers how the partnership and mortgage funds would be used.

* He violated his fiduciary duty as general partner by embezzling partnership funds and diverting them for personal use. From 1989 to 1993, Lefkowitz spent $4.2 million in partnership and mortgage funds on clothes, jewelry and his homes. He misrepresented the diverted funds as loans.

* Funds were transferred from profitable partnerships to unprofitable ones at Lefkowitz’s direction. As a result, some projects were not built and tax credits sold to investors rescinded.

* Lefkowitz violated mortgage loan agreements by using investor funds to pay for personal and business expenses. In some cases, he failed to record mortgage deeds, providing investors no security in case of default.

* In disclosure statements to investors, he failed to provide vital information, including his 1989 Bar suspension. He also misrepresented his background to brokers and financiers.

THE GOVERNMENT

* Lefkowitz filed tax credit applications in at least five states that falsely said a New York nonprofit group was a general partner in Citi Equity-sponsored partnerships. States set aside certain tax credits for nonprofit groups. As a result, $8 million in tax credits were improperly reserved for Citi Equity.

* Lefkowitz falsely presented dates that properties were placed in service to claim tax credits not awarded. He directed false partnership tax returns to be prepared. City Equity thus obtained $5 million in tax credits in at least eight states.

* Lefkowitz improperly claimed $3 million in tax credits that Citi Equity did not own.

* He fraudulently classified as loans millions of dollars in compensation not reported as income on his federal personal income tax returns.

Sources: Filings in U.S. District Court and U.S. Bankruptcy Court.