FBI Probe Snares Another Firm for Rigging Tax-Lien Auctions

For at least 11 years, bidders on tax-sale certificates in New Jersey systematically rigged municipal auctions, defrauding thousands of already hard-pressed homeowners or businesses.

First revealed in August 2011 as the result of anongoing FBI investigation, the extent of the conspiracy grows with every new guilty plea. The latest admission came just before Christmas from Mercer S.M.E. Inc. of Burlington, the 11th company or individual to plead guilty.

Tax-lien certificates provide a lifeline for municipalities, which often need outside help to collect back taxes. They sell these rights to bidders by auctioning certificates on delinquent properties.

As described by federal authorities, the conspirators distorted this market, piling exorbitant surcharges on property owners who might otherwise have paid quickly.

One result is that some New Jerseyans unfairly lost property or overpaid to keep it, said Michael Perle, one of the attorneys coordinating a federal class-action suit naming four dozen individuals or companies as conspirators. Although local tax collectors run the auctions, they are not targeted in the suit, he said.

“We see the municipalities as victims here, too,” Perle said.

While collecting interest and fees from delinquent taxpayers, holders of the tax certificates also pay municipalities a share of the proceeds, he said. But those amounts also are part of the bidding process, so collusion among bidders probably cost towns money, Perle said.

While obtaining admissions of violations of the Sherman Antitrust Act, the U.S. Department of Justice has left it to the victims to pursue civil claims for restitution. Each new plea announcement has forced a rewrite of the lawsuit to include the latest revelations about participants and their actions.

Both the federal investigation and the civil suit present straightforward allegations.

Conspirators agreed among themselves to charge the highest possible interest rates to people already having trouble paying their taxes. In the words of the suit, this “harmed thousands of distressed homeowners throughout the state of New Jersey.”

Because the Justice Department does not reveal details of ongoing investigations, attorneys in the civil suit have been negotiating settlements with some conspirators who already have pleaded guilty, trying to learn more details. Already, the plaintiffs contend that some of the conspirators’ discussions took place at meetings of the National Tax Lien Association, based in Washington, D.C.

One of the lawsuit defendants, John Garzone, is a past president of both that association and Plymouth Park Tax Services, also known as Xspand,. No one from that company has pleaded guilty, but it has acknowledged being under investigation.

Now a subsidiary of JP Morgan Chase, Plymouth Park was previously owned by former New Jersey Gov. Jim Florio. Its board included a former Pennsylvania governor, Mark Schweiker. Florio sold the company in 2006 to Bear Stearns, a giant investment bank that soon collapsed in the Wall Street meltdown and was acquired by Morgan.

In 2011, Morgan announced it would “begin exiting” the New Jersey tax-lien business because it “wasn’t central” to its operations. But that was just weeks before the Justice Department announced the first guilty plea from the ongoing investigation.

Bradley Westover, who took over as the NTLA’s executive director in October 2011, said the group itself promotes proper bidding practices and was not involved in any of the irregularities.

“If some very foolish people had conversations over cocktails or whatever, that’s something they did on their own,” Westover said.

New Jersey is not the only place where the tax-lien market was compromised. In the past three years, other guilty pleas have resulted from investigations of rigging of tax-lien bids in Illinois, Maryland and San Joaquin County, Calif.

“The thing that distinguishes New Jersey is that these are municipal auctions, often very small, not county level or larger,” Westover said. “When Palm Beach County, Fla., holds an auction, there are hundreds of bidders and maybe 20,000 liens, not six liens and six bidders.”

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