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DISTRICT ATTORNEY - NEW YORK COUNTY | ||
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News Release |
Contact: Barbara Thompson | |
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Manhattan District Attorney Robert M. Morgenthau announced today the indictment and arrest of nine individuals and four companies on racketeering charges in the theft of $27.7 million from distressed businesses that were either being liquidated in bankruptcy or otherwise restructured.
Joined by New York City Police Commissioner Raymond Kelly, Mr. Morgenthau announced the unsealing of the 82-count indictment that charges the defendants with Enterprise Corruption, grand larceny, possession of stolen property, falsifying business records, commercial bribery, insurance fraud, false filings, antitrust violations and perjury. Enterprise Corruption is a class B felony which is punishable by up to 25 years in prison.
Charged in the indictment are MICHAEL J. SHERMAN and his associate, OLEG OSTROFSKY, and FRANK CARONE a/k/a FRANKI BARI and his associates, RICHARD CIAPPINA, ANTON MAYER, JEFFREY KUNKLE, NICHOLAS CARONE, FRANK CARONE, JR., and MICHAEL YANCOFSKI. Also charged are SHERMAN’S company, MJS ASSOCIATES, and CARONE’S companies, CONSOLIDATED AUCTIONEERS & LIQUIDATORS, INC. (“C.A.L.I.”), PRINCE MARKETING & MANAGEMENT GROUP, LTD., and BARI RESTAURANT & PIZZERIA EQUIPMENT CORP.
Mr. Morgenthau said that the investigation leading to today’s indictments resulted from a three-and-one-half year joint investigation by the Special Prosecutions Bureau of the District Attorney’s Office and the District Attorney’s Office Detective Squad (DAOS), a unit of the New York City Police Department.
Mr. Morgenthau said that the investigation revealed massive fraud and thefts from companies least able to afford it -- distressed companies facing financial hardship, restructuring and bankruptcy. The indictment charges that the defendants systematically looted these companies by taking assets that should have gone to the businesses or to their creditors. The defendants did this in a number of ways. First, they simply stole cash that belonged to the businesses. Second, the defendants lied to the companies and creditors about the proceeds of auctions conducted to sell inventory and equipment. Third, the defendants failed to disclose to creditors assets discovered by the defendants that the creditors were unaware of and then pocketed the proceeds of the sales of these assets. Fourth, the defendants wrote checks to “secured creditors” (who have priority in bankruptcies) who turned out to be companies previously liquidated by defendants and whose bank accounts the defendants controlled.
All of the defendants are engaged in the “workout” segment of the business community. They are retained to wind-down, and in some cases, dissolve, financially troubled companies either informally, through a voluntary dissolution, or formally, through bankruptcy proceedings brought in United States Bankruptcy Court.
The indictment charges that the defendants formed a criminal enterprise denominated the CALIBSO group, to facilitate the enterprise’s crimes. The group was composed of two parts: MJS ASSOCIATES and C.A.L.I. and its related entities, PRINCE MARKETING & MANAGEMENT GROUP, LTD., and BARI RESTAURANT & PIZZERIA EQUIPMENT CORP.
MJS ASSOCIATES was controlled by its principal and president, MICHAEL J. SHERMAN, who was assisted by MJS’ vice president, OLEG OSTROFSKY. The C.A.L.I. group was controlled by its president, FRANK CARONE, a/k/a FRANK BARI, who was assisted by vice presidents RICHARD CIAPPINA and ANTON MAYER. Defendant JEFFREY KUNKLE was CIAPPINA’s assistant. Defendant FRANK CARONE, JR., assisted KUNKLE at auctions, as did defendant MICHAEL YANKOFSKI.
The role of MJS and SHERMAN was to obtain workout business because of SHERMAN’s experience and reputation in the field. Once MJS obtained the workout assignment, the C.A.L.I. group was brought in, largely through bidrigging schemes and other collusive arrangements, to serve as the liquidating agent. As the liquidating agent, the C.A.L.I. group arranged and conducted auctions that took place to raise money for the benefit of the companies and creditors.
The indictment charges the criminal enterprise’s members with stealing more than $2 million in the workout of Ed’s West, Inc., a hat and apparel manufacturer. In 1994, Ed’s West was unable to repay a $24 million loan from the Bank of New York and Chase Manhattan Bank. SHERMAN obtained the workout assignment from the creditor’s committee and the sought a liquidator through what appeared to be competitive bidding. Instead, SHERMAN rigged the bids by providing FRANK CARONE with information that allowed C.A.L.I. to be the low bidder. Once the C.A.L.I. group got the liquidation work, they arranged for and conducted auctions of inventory and equipment in Miami, St. Louis and Conroe, Texas. After taking an inventory of the assets to be auctioned, the C.A.L.I. group simply underreported the assets by ten percent. As a result, C.A.L.I. was able to steal all of the proceeds of the unreported assets. In addition, the group’s members stole all cash payments made at the auctions.
An even larger theft was orchestrated in the bankruptcy action involving the Jamesway Corporation, a retail and general merchandise chain headquartered in Secaucus, New Jersey. Jamesway petitioned under Chapter 11 of the U.S. Bankruptcy Code for reorganization in 1993. By 1995, Jamesway filed a second bankruptcy and SHERMAN was hired to dissolve the company, which at that time has assets of approximately $100 million, but debts of more than $200 million. Early on, SHERMAN fired all of Jamesway’s employees leaving himself as the sole employee and trustee of the dissolving company. Again, SHERMAN rigged the bid to ensure that a portion of the liquidation of Jamesway’s furniture, fixtures and accessories went to C.A.L.I. The auction conducted by C.A.L.I. netted more than $5 million. However, C.A.L.I. reported only $865,000 as the auction’s proceeds and only turned over that amount; members of the criminal enterprise shared the rest.
In addition to stealing the bulk of the Jamesway auction proceeds, SHERMAN siphoned off more than $12 million by posing as secured creditors. Since he was the sole employee and trustee, SHERMAN’s job included using Jamesway’s assets to pay the debts owed to secured creditors. SHERMAN wrote checks to companies he had earlier dissolved and that no longer existed except for bank accounts that SHERMAN controlled. SHERMAN fraudulently marked these as payments to secured creditors. In total, the thefts resulting from criminal schemes involving Jamesway totaled $16 million.
In another case, SHERMAN was retained in early 1996 to recover a multi-million dollar debt that was owed by the owners of a chain of 22 fast-food restaurants. Once again, SHERMAN brought C.A.L.I. in to conduct the liquidation. C.A.L.I. proposed that the restaurants would draw higher prices if they were sold as going concerns rather than liquidated after closing their doors. As a result, C.A.L.I. formed a separate company, PRINCE MARKETING & MANAGEMENT GROUP, LTD., to run the restaurants until they could be sold.
Between July 1996, and March 1999, SHERMAN, FRANK CARONE and other members of the criminal enterprise stole $3.5 million from the restaurants employing four schemes. First, they simply skimmed approximately $1 million from the cash registers before the money was reported as sales proceeds. Second, FRANK CARONE paid $1 million to no-show employees who were either his relatives or employees of C.A.L.I rather than of PRINCE MARKETING. For example, when it appeared that the Bank of New York was going to order the restaurants to be sold, FRANK CARONE had checks issued to each of the no-show employees for ten weeks of “severance” pay; in fact, the restaurants were not sold at that time and the “severance” pay was never recovered.
Third, CARONE, who was the president of PRINCE MANAGEMENT, charged exorbitant rents to the creditor bank for PRINCE MANAGEMENT’s headquarters. Although the lease arrangement called for payments of rent to PRINCE MANAGEMENT of $5,500 per month, FRANK CARONE actually charged the bank rent of $11,000 per week.
Finally, more than $400,000 was stolen through a fraudulent insurance claim. One of the restaurants, a Tad’s Steakhouse, located at 34th Street and 6th Avenue, had a fire in May 1998. In fact, the business was not badly damaged and FRANK CARONE sold the restaurant’s ovens and other equipment to another one of his companies, BARI RESTAURANT & PIZZERIA EQUIPMENT CORP. at a steep discount. He then refurbished the restaurant by purchasing brand new equipment from BARI, padded the purchase price of the equipment and phonied up restaurant’s insurance claim to show more than $400,000 in damages, which the insurance company paid. At the same time, FRANK CARONE told the creditor bank that he had not recovered anything from the insurance company. As a result, the bank allowed CARONE to draw down his credit line netting more than $400,000 to “refurnish” the restaurant. CARONE never told the bank about the insurance proceeds he had actually obtained. In addition, when PRINCE’s president, ANTON MAYER and vice president RICHARD CIAPPINA were deposed about the insurance claim, they lied about these transactions. Each has been charged with Perjury in the First Degree for lying during their depositions.
In another case, SHERMAN was retained in March 1999, to assist in the restructuring of a clothing manufacturer, Oneita, Inc. Within weeks of being hired, SHERMAN laid off most of its staff. This time, instead of just rigging the bid in C.A.L.I’s favor, SHERMAN actually wrote C.A.L.I.’s bid for them and submitted it after obtaining CIAPPINA’s signature as vice president of C.A.L.I. Not surprisingly, C.A.L.I. was chosen by Oneita to auction its inventory. First though, C.A.L.I. was hired to provide security for Oneita’s warehouse, even though the company already had security from another vendor. C.A.L.I., with SHERMAN’s approval, charged $15,000 per week for security, even though the prior vendor had charged one-tenth of that amount. In addition, C.A.L.I. bid for Oneita’s remaining stock, which included 3 million tee shirts. C.A.L.I. purchased the tee shirts and other items for $2.5 million; they resold it for $7.7 million less than six months later. C.A.L.I. then bid on Oneita’s remaining furniture, fixtures and apparel at a time when one last remaining Oneita executive was still employed by the company. C.A.L.I. paid that executive a $195,000 “commission” on the sale to insure that he had no objection to any of C.A.L.I.’s conduct. In total, the criminal enterprise netted $6 million from its looting of Oneita.
Finally, in some instances, C.A.L.I. used SHERMAN as a reference, but otherwise secured liquidations and auctions on its own. The indictment names 13 companies as victims. The companies tended to be start-ups, internet companies and small neighborhood stores, including B & J Ironworks (a Manhattan scrap metal and wrought iron dealer), Balducci.com (a Manhattan based specialty foods web site), Jenncraft Corp.(a New Jersey and Texas based miniblinds manufacturer), Ames Department Stores (a Connecticut based general retailer), HotSocket.com (a Manhattan based internet consulting firm), Universal Sample Card (a Queens swatch manufacturer), Magnolia’s Restaurant (a Connecticut restaurant and cigar bar). Once an auction was secured, C.A.L.I. employees worked to rig the auctions or simply stole items outright. After these auctions, FRANK CARONE or CIAPPINA would take the actual auction lot sheets, which described each item sold at auction, the quantity sold, and the sales price, and cross out the actual sale prices and insert a far lower figure, thereby creating a falsified auction lot sheet. The lower figure, in most cases, was communicated to the failing companies or their creditors, and C.A.L.I. pocketed the difference. Additionally, Carone directed his accomplice employees to steal valuable items before the auctions took place. After the auctions, CIAPPINA prepared true auction reports for CARONE’s eyes only, while submitting a doctored report that vastly understated the true monetary results of the auction to the company or creditors. In a series of auctions of companies both large and small from 1996 through November of 2001, Consolidated stole at least $469,000 in this manner.
The investigation revealed that, in total, the CALIBSO criminal enterprise stole approximately $27.7 million from January 1, 1994 until the execution of search warrants on November 28, 2001. During the execution of the search warrants, more than $800,000 in cash was recovered from a safe in C.A.L.I.’s headquarters.
The defendants will be arraigned this afternoon in Part 81 before Acting State Supreme Justice Micki Scherer.
The case was presented to the Grand Jury and will be prosecuted by Special Prosecutions Burea Assistant District Attorneys Rahul Kale and Louis O’Neill under the supervision of Bureau Chief Leroy Frazer.
The District Attorney thanked NYPD Commissioner Raymond Kelly and Capt. Sean Crowley of the District Attorney’s NYPD Squad, as well as the members of the Squad who assisted in the investigation.
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Defendant Information 1. FRANK CARONE - (3/25/34)
103 BRECKENRIDGE
2. RICHARD CIAPPINA - (7/30/58)
3. ANTON F. MAYER - (3/16/60)
4. JEFFREY KUNKLE - (10/30/46)
5. FRANK CARONE, JR. - (2/10/62)
6. MICHAEL YANCOFSKI - (11/20/53)
7. NICHOLAS CARONE - (8/2/59)
8. MICHAEL J SHERMAN – (3/30/47)
9. OLEG OSTROFSKY – (9/30/66)
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