Situation
The former chief investment officer of a northern New Jersey regional medical practice pled guilty to one count of conspiracy to commit bank fraud. The defendant and the business’s former CEO conspired to defraud mortgage lenders of mortgage loans on 13 rental properties in three states. We see here how two executives’ greed and criminal misconduct can affect the business and the lives of their employees.
Learning Objectives
Upon completion of this Case Study, participants should:
- Understand how to protect a business from decisions that can lead to investigations by federal authorities;
- Describe how conspiracy charges can affect a business;
- Identify how training employees to comply with federal laws can help one’s business; and
- Explain differences between criminal indictment and criminal information.
State of the Industry
All businesses are susceptible to fraud. Whether the threat of fraud comes from inside or outside the business, fraudulent business practices can result in businesses going defunct, increased regulations, and even prison for executives. Banking regulations in the United States exist to protect both banks and their customers from thieves. Unscrupulous and criminal business activities involve and victimize numerous innocent individuals: unwitting business partners, employees, and families can all be harmed when crimes like bank fraud are uncovered.
Background and Analysis
This case study profiles Barton Schack (Schack), the former chief investment officer of a medical practice in Northern New Jersey. Federal prosecutors charged Schack with conspiracy to commit bank fraud when he worked with Regent Medical Properties (Regent) and Sovereign Medical Service (Sovereign).
All information in this case study comes from three sources: one Department of Justice (DOJ) press release, one criminal information charging document, and one newspaper article.
Federal prosecutors filed a criminal information against Schack.
- An information is a formal charging document describing charges against an individual. It provides the factual basis for the criminal charge.
The information charged Schack with one count of conspiracy to commit bank fraud related to his employment with Regent and Sovereign.
- Conspiracy is generally defined as an agreement between two or more people to commit an unlawful act. To prove guilt of a conspiracy, prosecutors must show that the defendants committed at least one act to further the goal of the conspiracy. For example, if two people have a conversation about embezzling funds from a bank, that is not a conspiracy. But if one of the people commits an act in furtherance of the embezzlement, such as he creates a fraudulent invoice, then prosecutors may succeed in the convicting the defendants of conspiracy.
Regent and Sovereign constituted a network of out-patient medical practices with multiple specialties, operating various practice locations across three states. Regent and Sovereign also owned 13 pieces of real estate in New Jersey, New York, and Florida.
Schack’s unnamed co-conspirator was the founder and chief executive officer of both Regent and Sovereign. In April 2016, Schack and the CEO used fraudulent misrepresentations to obtain a $91.5 million mortgage loan (Loan) from an unnamed bank, using the 13 medical office buildings as collateral. According to federal investigators, Schack and the CEO fabricated 13 separate special purpose entities owned by the CEO, one for each collateral location.
Initially, Schack and the CEO falsified physical occupancy rates of certain tenants and their real income from rentals to defraud the bank. After the mortgage loans closed, Schack and the CEO continued their scheme to conceal their medical practice’s actual financial status by submitting fraudulent monthly financial statements to a loan-servicing company retained by the bank.
Relying upon those misrepresentations to the bank, Schack and the CEO avoided accelerated payments on the loan. Additionally, Schack and the CEO stole rent payments after the loans closed. They used these stolen funds to pay for both Regent’s operating expenses and the CEO’s personal expenses. Through this conspiracy, the CEO stole millions of dollars in rental payments from tenants at the 13 property locations over the course of the mortgage loans from the bank.
The conspirators later sold their interests to two of the commercial mortgage-backed security loans issued by the victimized bank without informing the bank. Approximately three years after the mortgage loans closed, the conspirators fell behind on loan payments. By the time authorities discovered the fraud, the company lacked resources to make payments to the bank. By February 2020, the loan debtors filed for bankruptcy protection.
Facing criminal charges, Schack agreed to plead guilty to one count of conspiracy to commit bank fraud. The agreement required Schack to cooperate with federal authorities investigating the case. By offering to cooperate, Schack advanced possibilities for a lower prison sentence than what the Federal Sentencing Guidelines recommended.
According to the Justice Department, a charge of conspiracy to commit bank fraud carries a maximum penalty of 30 years in prison. Schack could also face a $1 million fine. Schack’s sentencing hearing will take place in June 2021.
Since he already pleaded guilty and agreed to cooperate with authorities, Schack should craft an effective sentence mitigation strategy if he wants to improve his situation. With this strategy, Shack should show the judge that he has a full grasp of the crime he committed. He should also use his mitigation strategy to show empathy for the victims of his crime, to show what he learned from the experience, and to help the judge understand what steps he has taken to make things right.
Recommendation
We recommend that business owners and team members do a better job of training white-collar crime. People like Schack likely succumb to pressure on the job. They may not know how prosecutors will interpret their actions. When people learn more about white-collar crime, they learn about concepts like complicity, deception by omission, and willful blindness. Prosecutors will seek convictions when the suspect crime, and business professionals how easily their decisions can lead to problems with the government.
For these reasons, we recommend a thorough commitment to compliance programs.
Business owners in the US should strive to comply with federal laws and consider this as their top priority. For businesses, federal investigations following its employees’ unlawful acts can be costly and time consuming. In this case, Schack and the CEO conspired in an illegal scheme to deceive the bank.
Schack and the former CEO conspired to commit bank fraud. They damaged their reputations, ruined their relationship with the employees, and they caused millions of dollars in losses. They also had to defend against criminal and civil penalties.
Sources
- https://www.justice.gov/usao-nj/pr/former-chief-investment-officer-admits-bank-fraud-relating-915-million-commercial-loan-0
- https://www.justice.gov/usao-nj/press-release/file/1376776/download
- https://www.msn.com/en-us/money/realestate/glen-rock-company-executive-admits-he-fraudulently-secured-dollar91-million-mortgage-loan/ar-BB1eENFH