The Man And Citigroup Loan Behind New York's Corruption Scandal

In 2007, a 34-year-old Argentinian-born man living in Monsey, N.Y., with a sketchy business background and little experience in commercial real estate, managed to get Citigroup to lend his company $126 million to purchase 11 shopping malls in the southeast. The shopping mall venture quickly blew up and federal prosecutors working for the U.S. Attorney in Manhattan started investigating the man behind the deal, Moses “Mark” Stern, who eventually started cooperating with federal prosecutors. This week Stern’s work resulted in the arrest of Malcolm Smith and other New York political figures, who are accused of bribery, extortion, and fraud.

The unforeseen consequences and ramifications of the mortgage boom and Citigroup’s loose lending standards during that era never cease, extending now six years into the future to help produce the biggest New York corruption scandal in years involving Smith’s twisted effort to bribe his way onto the New York City mayoral ballot. Forbes originally reported in 2010 about Stern and the federal investigation that netted him.

As part of his cooperation as a government witness, Stern extracted commitments from Noramie Jasmin, the mayor of Spring Valley, N.Y., to provide Stern with a development property in return for bribing officials as part of Smith’s scheme. Stern also recorded months of conversations, wearing a secret device when talking to Smith about getting taxpayer funds for the real estate deal, which was a bogus concoction of the Federal Bureau of Investigation.

Stern originally came to the attention of the feds because of how his company, First Republic Group Realty, managed to get Citigroup to extend $126 million of credit. It was an absurd amount of money for the bank to lend Stern, whose business history included operating clothing distribution companies that imported clothes from Mexico and two contentious corporate bankruptcies. He had never done a major real estate deal in his life. Somehow Stern played some music that got Citigroup to stand up and dance.

I sat down with Stern at the offices of his Manhattan lawyer in 2010 and asked him how he managed to pull it off. “Several banks were pitching me at the same time,” Stern told me. “Every bank including JPMorgan Chase and Deutsche Bank wanted product.” Stern also signed “bad boy” guarantees, making him personally liable for the Citigroup loans if First Republic Group filed for bankruptcy protection.

But, as Forbes reported in 2010, Citigroup appeared to have been induced to go forward with the loan after being given false information. Ephraim Frenkel, who was Stern’s escrow agent in the deal, had told Citigroup he was holding $26.5 million in escrow for the purchase of the malls, even though it later became clear to federal prosecutors that the escrow account never held the $26.5 million. Frenkel’s escrow account did have $13 million wired into it for a while from a Long Beach, Calif., real estate company, a financing connected to Stephen Freidman, a lawyer working for Stern who was also the rabbi heading Manhattan’s Ramath Ora synagogue. Stern, an orthodox Jew, was sued by the Long Beach company, which accused him of using some of the $13 million to pay personal debts. Stern told me he used the funds appropriately, but the feds ended up criminally charging Frenkel for providing Citigroup with bogus information as part of their investigation into the Stern loan debacle. As if this case is not incredible enough, Stern in 2009 inexplicably pushed his First Republic into bankruptcy, triggering the $126 million of personal guarantees, one of the largest bad boy liabilities ever. Stern, of course, didn’t have the money and could hardly explain why he voluntarily put his company in bankruptcy court. “I did it anyway because it was the right thing to do for the assets and the creditors and I frankly never imagined it would get to this ridiculous point,” Stern said in an interview.

But then again, most of the events surrounding Stern seem outrageous. He claimed his mentor was the late Mexican billionaire Isaac Saba Raffoul. The signature of a New York real estate developer who worked with Stern, Joshua Safrin, was also on the Citigroup bad boy guarantees, but Safrin claimed his signature had been forged and Citigroup seemed to believe him, stopping its lawsuit against Safrin.

It’s also bizarre that this is the second time in recent years that a real estate scamster from an orthodox Jewish community has cooperated with federal prosecutors to bring down local-level politicians in the New York area. In 2009 Solomon Dwek, who had been indicted for bank fraud, was the main cooperating witness in a sting that resulted in 44 arrests, including prominent politicians and mayors in New Jersey. Stern pleaded guilty last month to charges that remain sealed by federal prosecutors.