Lennar Corporation And The Billion-Dollar Heist
Lennar Corporation is a NYSE-listed national homebuilder. But the company is controlled by one man – CEO Stuart Miller. In late 2006 Lennar Corporation was imploding. In addition to exposure to the rapidly-developing subprime mortgage crisis, Lennar – much like Enron – had huge undisclosed off-balance sheet obligations. And the company was running out of cash. Home sales plunged, and land values were plummeting.
This situation was quickly spinning out of control and was suddenly an existential crisis for Lennar and Miller. A bankruptcy filing would inevitably lead to exposure of Miller’s shady and dishonest business practices – including non-disclosure of Lennar’s true financial condition to shareholders, bond holders, banks, and counter-parties to numerous contracts.
Miller and his key lieutenants realized that Lennar needed to find a billion dollars immediately from somewhere to stave off collapse. Traditional sources of liquidity were unavailable to a home-building company like Lennar as the subprime crisis mushroomed into a national financial crisis.
Miller and two key Lennar executives – COO Jonathan Jaffe and land manager Emile Haddad – hit upon an ingenious scheme to defraud the California Public Employees Retirement System – CalPERS – out of a cool billion dollars. The scheme involved the use of a Lennar-controlled land-holding entity appropriately called LandSource.
The Lennar executives are equal-opportunity racketeers. They were quite willing to defraud CalPERS and hijack hard-earned pension funds to save Lennar – and themselves – from financial disaster. The scheme they designed and executed was a classic “old-school” financial institution swindle using a constellation of falsified documents and material misrepresentations to obtain money. Notably, a look-back on Lennar’s business practices at the same time as the CalPERS fraud revealed that the same Lennar executives had also implemented strikingly similar schemes involving other financial institutions across the country. For example, Lennar was sued by the FDIC for defrauding two federally-insured financial institutions, thereby contributing to the failure of these institutions.
CalPERS is the largest pension fund in America. And CalPERS was known for looking out for its interests and the interests of its members. After all, CalPERS management was fiduciarily responsible for the pensions and medical care for almost two million members. These members include firemen, police, the highway patrol, teachers, government employees, healthcare workers, and many others.
On the surface of things, swindling a pension fund like CalPERS was a very risky proposition for the Lennar executives no matter how desperate they were to obtain much-needed cash. Prison sentences and restitution orders are routinely meted out for those who cheat financial institutions like CalPERS. But it is clear that the Lennar executives knew – absolutely knew – they could get away with this risky scheme. Why was that?
It appears that there was a hidden back door into the fund. At the time Lennar successfully swindled the fund, the CEO of CalPERS was one Federico Buenrostro. One of the enduring mysteries surrounding this heist was why CalPERS did nothing about it – even when financial journalists posed this exact question to senior CalPERS management – and were stonewalled.
The most likely answer to this question came later – when Mr. Buenrostro was indicted for running a pay-to-play operation as CEO of CalPERS. He was photographed by the FBI taking bags and boxes of cash in a Sacramento hotel room. His tenure at the fund was from 2002 to 2008 and he was most assuredly in charge when the Lennar scheme was executed. Buenrostro pled guilty. In his plea agreement, Mr. Buenrostro stated that no transaction ever took place at the fund without his oversight and approval.
The Lennar executives have a proven history of bribing public officials in California. The cities of San Diego and Concord CA both discovered that Lennar had been bribing public officials to obtain valuable development rights.
Somehow the Lennar executives have managed to escape prosecution for the CalPERS heist – so far. But like Bernard Madoff, The Enron executives, and many other financial fraudsters – the truth will out. It always does.
But another key Lennar executive hasn’t been so lucky. On April 14, 2014 Lennar executive Keith Jackson was indicted on numerous counts. Keith Jackson was a long-time fixture on the Lennar payroll in the Bay Area. His job description was never exactly clear. But clarity came when he was indicted on 11 counts. These counts included felony bribery, money laundering, racketeering, campaign fraud, grand theft, and even murder for hire.
In addition, it was proven that Mr. Jackson was the key liason between Lennar and Raymond “Shrimp Boy” Chow – a notorious Bay Area gangster. Mr. Chow was also indicted for murder, racketeering, robbery, and money laundering. It was unclear what “services” Mr. Chow was providing to Lennar.
Both Mr. Jackson and Mr. Chow pled guilty and are serving lengthy prison sentences.
The California False Claims Act Lawsuit
A lawsuit has been filed on behalf of the People of California to recover funds stolen by the Lennar executives from CalPERS. Although the wheels of justice are turning slowly, the California Attorney General has a duty under the law to fully investigate the claim and seek restitution from Lennar and its executives responsible for the heist.
The lawsuit was filed in California under a special set of rules called the California False Claims Act. These rules make it very difficult for Lennar and its executives to evade liability for their criminal acts. This is because the threshold of proof is extremely low. But fortunately, we have in our possession the “Smoking Gun” documents that prove the case.
A prominent national law firm has reviewed the case along with these documents and opined that the California Attorney General could “win this case 10 times out of 10”. A number of onerous provisions apply under this special set of rules: treble damages, penalties, and a legal fee and cost shift to the defendant. As proof of the power of the statute, not one case filed under these rules has either been dismissed or gone to trial in over 18 years. All cases have been settled – some for very, very large numbers.
Lennar hired a high-priced defense team when served with this lawsuit. They made every effort to dislodge the suit, even making a forum-shopping trip out of state to a court in Delaware. But this strategy backfired when the California Attorney General appeared in the proceedings and insisted that the rights of The People of California be fully preserved. The judge agreed, and even the Lennar lawyers were forced to concede that the People’s rights had been and were fully preserved.
Lennar’s exposure in this lawsuit is in excess of three billion dollars – plus penalties and legal fees. Criminal charges and restitution orders lodged against the executives who executed this swindle are also quite possible.