14. The Godfather in the Boardroom
Who can forget the chilling scene in the first installment of the famed Godfather movies when the audacious Hollywood producer, Jack Woltz, is sleeping in his gold pajamas in his similarly colored satin sheets on his king-size bed and awakes slipping around in the blood of his beloved, now decapitated, horse. The horse head was sent as a message: Do not mess with Don Corleone. Some of you can probably quote the entire movie trilogy and frequently use the term “going to the mattresses” to refer to getting ready for a fight. Others may have only heard the folklore about the Godfather films. No matter what your exposure has been, you certainly know the Godfather stories focused on organized crime. The perspective was not that organized crime exists but that it is an intricate, complex business that thrives on profit and power, like any other business. But how much of what is portrayed in movies really happens? And if it does happen, what does organized crime have to do with legitimate business operations?
While sparing you an entire lesson on how organized crime came to be and what different factions exist, it is important to distinguish the different types of organized crime. The criminal Italian families from Sicily are known as the “Cosa Nostra,” and they operate differently than the Russian organized crime families, who play with a different set of rules than the Albanians, the Mexicans, and so on. The origins of these varying mafias dictate their rules and goals. And for the purposes of this book, we focus on their goals in the corporate community.
In the 1980s, E.F. Hutton, the respectable brokerage firm with the popular slogan, “When E.F. Hutton talks, people listen,” had its reputation tainted when a branch of the firm became ensnared in a money laundering scam with the Italian Mafia. Known as “the Pizza Connection,” the Mafia discreetly sold heroin at a small pizza place in New York. With the cash earned from selling obscene amounts of heroin, Mafia representatives would carry the cash in luggage and deposit the money into accounts with E.F. Hutton. E.F. Hutton dutifully filled out the requisite banking forms, deposited the money, and put it into the commodities market, as it would have done for any other customer. Now that the money was laundered, it was then transferred to bank accounts in Switzerland that belonged to the Mafia. Theoretically, because the bank was unaware of the origin of the money, E.F. Hutton had not committed any crimes. The problem came when the FBI began to investigate the money transfers and E.F. Hutton told its Swiss clients that the FBI had begun digging. This tipped off the Mafia men, who quickly closed their accounts with the brokerage firm, thus stymying the FBI’s efforts to crack down on the drug trade and money laundering efforts of the Mafia.
When organized crime invades the business community, it is not always focused on laundering the money it has earned from the drug trade. For those of you who missed HBO’s The Sopranos series, the construction industry is a popular field for organized crime. There have been many instances of organized crime families infiltrating construction trades and waste-hauling companies. Some of these individuals have been federally prosecuted, and others remain in the marketplace, actively exerting influence. Because not all associates of organized crime families go by the name Soprano, it is often difficult for hard-working and earnest construction companies to know when they are being swindled by organized crime.
The Situation: Crime in Construction
BlindBuilders, a general contractor in New York, was completing work on the renovation of a large commercial space. BlindBuilders was coordinating with its subcontractors and running through the last-minute change orders and finishing touches. BlindBuilders needed to get OC & Company, one of its subcontractors, back on the job site to finish the work, as per the original contract between the two. BlindBuilders called both officers of OC & Company repeatedly. The voicemails went from mild-mannered requests about finishing the job to screaming rants to get the friggin’ job done. Neither approach was met with a response. BlindBuilders was under the gun to complete the job in its entirety as per the schedule with the client. One day, the head of BlindBuilders was at the jobsite and had just hung up the phone and left yet another message for OC & Company. Another subcontractor on the job made an off-hand and quiet remark that caught the attention of the CEO. “Good luck with that,” the subcontractor said. “Those guys are so connected, you will have better luck getting the President of the United States to finish the job.” And with that comment, BlindBuilders called us.
The only information BlindBuilders had about OC & Company were the names of the two owners of the company and a cell phone number. Through reverse phone searches (when you search by a telephone number and find who is listed to that number) and reviewing corporate records, we were able to locate the two individuals and identify them as owners of numerous other construction-related firms in the New York and New Jersey area.
We also ran a search of “Vendex,” the questionnaires submitted to the City of New York by all construction firms and other vendors who seek to perform jobs for the city. We found that it was the wives of the owners, and not the owners themselves, who were listed in the Vendex database. Realizing the owners of OC & Company were smart enough to keep their names out of necessary documents, we then ran media searches on all of the companies we found to be affiliated with the owners of OC & Company. We found some articles from the early 1990s that stated these affiliates of OC & Company had employed a known “kingpin” of a Mafia family. Through our review of federal-level criminal records, we found these affiliates had also been criminally indicted for racketeering. The case was brought under the Racketeer Influenced and Corrupt Organizations Act, known as RICO, a common cause of action used when prosecuting members of organized crime. In order to charge someone under RICO, there must be predicate violations; RICO charges must show a pattern of bad behavior.
The problem with all of this information was that none of it directly implicated the two owners of OC & Company, and we found no information that definitively stated the owners were involved with organized crime. We knew the only way to get the answers we needed was to reach out to my (Ken’s) network. We met with some friends who are former federal and state investigators, and others who have worked in the construction industry for more than 20 years. There was a consensus among their statements: The owners of OC & Company were, indeed, connected to organized crime but had successfully and craftily avoided prosecution for many years. Understanding the gravity of the situation, BlindBuilders decided to walk away from the $75,000 of work owed to them by OC & Company and hired another subcontractor to complete the job.
The Tactic: The RICO Reason
Media articles helped guide us in the investigation. It was the articles about OC & Company’s connections to organized crime that played a part in our research. Because statements made in media articles need to be independently confirmed, we use the information we find in media and go to another concrete, primary source to either confirm or deny what we found. In the case for BlindBuilders, we luckily confirmed that OC & Company was run by organized crime and saved our client the insurmountable troubles associated with dealing with or being infiltrated by organized crime.
Also we discussed RICO cases and the origin of these types of cases. RICO cases have historically been criminal cases but are now also often used in civil matters. Both the criminal and civil cases are filed on the federal level and can be searched through PACER.
Crime Beyond Construction
It is more than just an ethical issue that forces companies to shy away from dealing with organized crime. It is also the fact that organized crime families have killed or physically injured those who have impeded their efforts. Not every interaction with organized crime ends with a slain horse head in the bed or other gory recapitulations seen in movies and television shows and written about in books. But the reality that members of organized crime do not value life the same way we do is certainly reason enough to walk away from a deal. Shying away from working with companies connected to organized crime is another way of evaluating the cost of doing business.
In the mid- to late 1990s, organized crime infiltrated the stock markets by engaging in what became known as “pump and dump” scams. In these frauds, the price of microcap stocks (penny stocks) are artificially inflated (“pumped”) using misleading statements. The pumpers buy a significant amount of shares in these artificially inflated stocks and then sell them to the public at the higher price. Once the perpetrators sell their shares in these stocks (“dump” them), the public is left with almost valueless stocks.
Organized crime played a role in the pump and dump scams by controlling brokerage firms that would buy large blocks of stock in penny stocks, convince (or orchestrate) appropriate marketers and others that the stocks had value, sell the stocks to the public at the inflated price, and then the brokerage firms would dump their shares in the stocks. In many cases, organized crime successfully defrauded investors of millions of dollars. Over the years, the FBI arrested many members of organized crime families for engaging in this type of fraud.
The Situation: The Russian Racket
We have witnessed organized crime manifest itself in the business community, too. An old-school financial institution hired us to run background checks on the Russian owners of a biotech firm who sought a bridge loan from our client. During the course of our background checks, we found very little information on any of the owners. In fact, other than renting property in Brooklyn, New York, we did not find any data to even suggest the owners were involved in the biotech industry or any business at all in the United States. Our client was surprised with our findings and told us the Russian owners had presented themselves as entrepreneurs who had been engaged in businesses of all kinds for many years.
As a former Special Agent with the FBI, I (Ken) have access to a network of thousands of former FBI agents and other investegators across the globe. I made a few calls within this network and explained the situation. One of my former associates at the FBI recalled the names of the Russian owners and informed me that all of the individuals were connected to a known Russian organized crime family. Within seconds, I called my client, who needed no further explanation on why the deal was not worth pursuing. Because of the precarious nature of the situation, I assisted our client in devising a strategy to delicately and diplomatically inform the Russians that the bridge loan did not meet their current lending guidelines.
The Situation: Connected
We were working for a broker/dealer who was looking to establish a relationship with a clearing firm (a company that ensures trades and securities are completed within regulatory guidelines) that could generate a lot of money. The broker/dealer hired us to do some basic background checks on the clearing firm and its executives, per the “Know Your Customer” (KYC) guidelines. The U.S. Patriot Act requires financial institutions to do some research on their customers, both existing and potential, to prevent fraud, money laundering, and other white-collar crimes. It was in this vein that the broker/dealer retained us.
The minute we saw the name of the executive of the clearing firm, we knew it sounded familiar. We checked our proprietary internal database and found there were rumors the executive had close ties to organized crime. Because there is no searchable website called Iamamobster.com, the way to substantiate that someone is connected to the mob is through a variety of independent sources.
At first, we reached out to a former agent friend who told us he knew the executive was somehow involved in a criminal lawsuit, but the agent could not remember the details. He told us to contact the prosecutor in the case. The prosecutor was reluctant to speak with us. We explained our objective, told him that, in abidance with Grand Jury Rule 6E, we were not asking for anything other than public record information. The prosecutor finally agreed to help us and sent us on a scavenger hunt. He said, “Go to the courthouse basement, case no. 8712345, box no. 123, find the wiretap transcripts, turn to page 635.” In there was a line that said the executive in question was a “made” member of an organized crime family. Suspicion confirmed. Our client decided to find another clearinghouse to do its business.
All of these stories illustrate the same point: organized crime is still present and threatens the sanctity of businesses that seek to operate ethically and successfully.