The FDIC closed 7 more banks on Friday, bringing the 2010 total to 37.  On the Friday before last, the FDIC bagged 2 New York City banks, the first FDIC takeunders in New York City since 1999.  One of these was a small privately held firm named Park Avenue Bank, which had been operating under a cease and desist order since February 2009.   Park Avenue Bank had just four branches in Manhattan and Brooklyn.

Interestingly, one of Park Avenue Bank’s owners is David Lichtenstein, who became famous for orchestrating the disastrous acquisition of Extended Stay Hotels in 2007.  Lichtenstein agreed to buy the chain from Blackrock for $8 billion, layering on so much debt in the process that the company couldn’t even pay its phone bill.

Back In 2004, Lichtenstein acquired Park Avenue Bank with Charles Antonucci, who was appointed President.  With Lichtenstein’s help, Antonucci set about expanding the bank’s commercial real estate portfolio, and that ultimately became his undoing.  The New York Sate Bank Banking Superintendent slapped the bank with a Cease and Desist order, and two weeks ago the bank was shut down by the FDIC.  Last week, in connection with the failure, Antonucci was arrested and charged with criminal fraud for attempting to steal $11 million from the Troubled Asset Relief Program.

The FBI is accusing Antonucci, who was hauled out of bed with just enough time to don a red St. John’s sweatshirt, of self-dealing, bank bribery, embezzlement and fraud.  According to prosecutors, Antonucci created sham transactions in order to  be approved for TARP bailout money, but once it became clear that he was under scrutiny, he withdrew the bank’s application.  Shortly afterward, he resigned as President.

Prosecutors say Antonucci created the “functional equivalent of Monopoly money” in order to convince federal authorities he should qualify for TARP money.  But Federal authorities say Antonucci actually wanted to obtain millions of dollars in TARP funds for his own use, in part so he could obtain a controlling interest in the bank.

Why he would want control of a failing lender is beyond me, but it may be due to the fact that he was using it as his own personal piggy bank.  Earlier, a New York area car dealership sued Park Avenue Bank claiming that it was forced to pay off a loan by giving away Cadillacs to bank employees and their families, including Antonucci.  Antonucci got a $75,000 2008 Cadillac Escalade and his wife got a 2010 Cadillac SRX valued at $50,000, the lawsuit alleged. 

After his arrest, Antonucci was released on $2 million bail, but nobody seems to know whether she drove him home in her SRX, or his Escalade.

Federal prosecutors also accused him of approving approximately $8.5 million worth of overdrafts at the bank to companies controlled by a co-conspirator who was a close associate of his.  In return, the co-conspirator, whose identity was not released, allowed Antonucci to use his private plane at least 10 times for personal trips, including flights to Phoenix to attend the Super Bowl, to Augusta, Ga., to watch the Master’s golf tournament, and to Florida to see relatives.

Lichtenstein’s involvement in all of this not entirely clear, and he has not been accused of any wrong doing, but prosecutors hint there is more to come.   At the same time that the bank was under review by the state banking superintendent, Lichtenstein approved an $11 million infusion into Park Avenue Funding LLC, a company run by Lichtenstein and closely associated with Antonucci.  Among other endeavors, Park Avenue Funding makes loans to Park Avenue Bank and its customers. This included 10 loans to Solomon Dwek, the central figure in a $50 million bank fraud and New Jersey political corruption scandal.

If lending to a shaky bank such as this sounds a wee bit risky, it is. But it’s a lot less risky if you can do it with other people’s money.  Lichtenstein used shareholder money from a non-traded REIT he controls, Lightstone Value Plus I REIT, to make the 2008 investment, just one month after Bear Stearns collapsed.  Park Avenue Funding then used at least some of that money to take first loss positions in certain Park Avenue Bank loans, partially insulating the Bank from its loan losses.  As of the end of February, at least $4.75 million of Park Avenue Funding LLC’s positions had been wiped out by short sales, and the FDIC expects a tax payer loss of approximately $50 million from the takeover.  Stay tuned, because that’s a lot of Cadillacs for a bank with just $500 million in assets.

see: U.S. v. Antonucci, 10-cr-507, U.S. District Court, Southern District of New York (Manhattan)

Non-Traded REITs are a funny lot. They register with the SEC and comply with all public company filing requirements, yet their shares don’t trade on any public exchange. Most aspire publicly to achieve some sort of “liquidity event” for investors within 7-10 years of formation, either through a public listing or bulk asset sales. Last week, after more than 2 decades, numerous lawsuits and a complicated 3 for 1 reverse split that effectively locks up shareholders for another 12 months, one of the largest Non-Traded REITs in the business finally made the leap to a public listing.

Formerly known as Wells REIT until it was spun out into a new, self-managed entity and renamed in 2007, Piedmont (PDM) sold 12 million shares at $14.50 and began trading on the New York Stock Exchange on the morning of February 10th. The Company had planned to offer 18 million shares at a price of $16-$18.

Piedmont, which owns and manages a 73 property, $4 billion portfolio of office buildings across the country, including trophy properties like the Aon Center in downtown Chicago and the Nestle headquarters in Los Angeles, has a colorful history.

The company was founded in 1997 by Leo Wells and quickly became adept at raising money through a network of independent brokers, paying them commissions of 7% along the way. Wells also earned lucrative acquisition fees for buying property, as well as advisory fees for managing the portfolio. Allegedly, Wells also encouraged investor participation in prayer chains for favorable acquisitions.

This unconventional model attracted the attention of many skeptics, including David Swensen, Yale Endowment’s chief investment officer. Swensen accused Wells of turning a blind eye toward investors’ best interests while he raced to raise money and buy more property. In his book “Unconventional Success” (pages 70-75), Swenson said the high fees simply encouraged two things: the sale of still more shares and the purchase of property – any property – at almost any price:

No rational buyer can compete with the Wells acquisition machine’s willingness to overpay for product. As a consequence, investors suffer the double indignity of high fees and poor investment prospects.

Unfortunately, the Piedmont IPO is confirming Swensen’s claims. Prior to the public listing, Wells orchestrated a 3 for 1 reverse stock split that created four separate classes of shares. Only one class, the Class A shares, now trade on the NYSE, while the rest will convert over time. This effectively delays a full “liquidity event” for another 12 months. The Class A shares traded up to $16 on Friday, but that still translates into a pre-split loss of almost 40%, according to Green Street Advisors.

Even the Wall Street Journal pilloried the IPO. The Journal estimated that investors would have received a “paltry” 2.1% annual return including dividends, assuming the offering priced at the high end of the $18 range. According to an analysis by Green Street Advisors, had those investors simply bought shares in an index of publicly traded real-estate stocks, their total return over that time would have averaged about 8% a year.

Ironically, shareholders had the option of being cashed out in 2007 through a series of buyout offers from Lexington Realty Trust (LXP). Lexington offered to pay up to $9.25 per share (a post-split equivalent of more than $18 per share), but Wells never informed investors of the offers.

Sir Leo argued that the Lexington buyout offers were not material because they were merely tentative expressions of interest. Unfortunately, a federal district court disagreed, stating that “there can be no doubt that this information is material, as it would be considered important by a reasonable shareholder in deciding whether to vote for or against the [spin off].” The court also granted the plaintiff’s request for a class action, and discovery continues.

However, not only did Wells not inform shareholders of the LXP offer, he took the bulk of a $175 million stock payout as a result of the spin off to Piedmont. And when it came time to actually issue himself the stock grant, he lowered the official share price to $8.63, below the $9.25 per share offered by LXP, in order to increase the size of his award.

Certainly, public REITs are imperfect vehicles for a variety of reasons. They are highly correlated to equities, they can be much more volatile than the underlying real estate in which they invest, and they are not great as inflation hedges either. However, beginning at 9:30 every Monday through Friday, excluding holidays, investors in public REITs can vote with their feet and reclaim their money. Sadly, long-suffering Wells shareholders are stuck sucking swamp water for another 12 months before they finally get that freedom. (Update: here’s some information on how to sell non-traded REITs.)