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Fraud Cases Show Gaps
In Bankruptcy System

By JOHN R. EMSHWILLER
Staff Reporter of THE WALL STREET JOURNAL

NEW YORK -- Frank Carone found a lucrative supplement to his work as an auctioneer and seller of pizza ovens: stealing from the federal bankruptcy system.

In connection with the latter pursuit, the 69-year-old Mr. Carone pleaded guilty in November to five counts of grand larceny in a New York state court. He had been the lead defendant in an 82-count indictment filed in 2002 that charged him and eight others with misusing their positions as corporate "workout" specialists and asset auctioneers to steal more than $27 million from more than a dozen troubled companies.

Over the course of nearly eight years, prosecutors allege, Mr. Carone and his colleagues pillaged firms ranging from a cigar bar and a miniblinds maker to publicly traded companies such as Jamesway Corp. and Oneita Industries Inc. Unknown to creditors or bankruptcy-court officials, the defendants "systemically looted money and assets from the failing businesses" and covered up their thefts "by falsifying business records and, if needed, bribing employees," according to the indictment.

Mr. Carone's activities raise questions about oversight of the federal bankruptcy system, which handles billions of dollars of assets. Bankruptcy cases are heard by a separate branch of the federal-court system with its own judges and its own set of safeguards to protect against fraud. That system handles "more money ... than any court in America," says Samuel Gerdano, executive director of the American Bankruptcy Institute in Alexandria, Va.

In the Carone case, the system didn't work. Mr. Carone was caught almost by happenstance when he reported a separate crime to the Manhattan district attorney. The fact that it was state, and not federal, officials who charged Mr. Carone "has got to be treated as a shock to the bankruptcy-court system," says William A. Brandt, Jr., president of Development Specialists Inc., a Chicago firm that does corporate restructuring and liquidation work nationwide.

CORPORATE CRIMES

Some of the alleged pillaging done by Frank Carone, Michael Sherman and colleagues after they were hired to help financially troubled companies:

* At Jamesway, a discount retailer in Secaucus, N.J.. The Carone firm allegedly raised more than $5 million selling off the company's assets, but only reported taking in $860,000 for dispersal to creditors.

* At Oneita, a Charleston, S.C., apparel maker, Mr. Carone's auction firm was brought in and undervalued Oneita's inventory by $5 million, according to the bill of particulars.

* At a collection of New York-area fast-food restaurants, Messrs. Carone and Sherman were brought in to operate and eventually sell the eateries. The group stole about $3 million that should have gone to the bank, according to prosecutors.

Happenstance also helped nab Robert Pryce Jr. Mr. Pryce, a Southern California attorney, was one of several hundred court-appointed bankruptcy trustees who oversee corporate-liquidation cases. In August, he pleaded guilty to charges that he accepted $300,000 in kickbacks over four years to steer bankruptcy-related business, such as property repairs, to certain contractors. People familiar with that case say the fraud was discovered as a result of a municipal-corruption investigation in the small Southern California city of Carson. Mr. Pryce also pleaded guilty to charges in the corruption case. He awaits sentencing on both matters.

Punishing trustees and other professionals who commit fraud is particularly important because those people have "great power" to do mischief, said John Hueston, the lead federal prosecutor on the Pryce case. "And there are insufficient investigative resources to police such people."

Federal bankruptcy officials say their system is sufficiently rigorous and has kept the bankruptcy courts relatively free of fraud. "If you look at the billions of dollars that these professionals handle, there have only been a handful of problems," said Maureen Tighe in an interview while serving as the U.S. Trustee for Los Angeles, which helps oversee bankruptcy-court activities. (She recently became a federal bankruptcy judge.)

Ms. Tighe added in the interview that the detection system relies largely on accurate records of activities such as asset sales. While unfamiliar with the specifics of the New York case, she said the type of wrongdoing alleged there -- where the defendants are accused of filing false records with creditors and the court -- "probably wouldn't be caught by our current procedures, unless someone tipped us off."

If anyone provided a tip-off, it would logically be a creditor. Creditors generally have the biggest stake in the honest handling of cases and tend to pay close attention to the proceedings. But in many cases creditors don't actively monitor the sale of a debtor's assets because they expect only a small payment, says the American Bankruptcy Institute's Mr. Gerdano, whose organization does bankruptcy-related research and education.

According to the indictment, Mr. Carone worked closely from the mid-1990s with New York businessman Michael Sherman, now 56. A specialist in workouts, or fixing troubled companies, Mr. Sherman was often tapped by the Bank of New York Co. to work with companies that had loans with the bank, say Manhattan-district-attorney officials. The bank was a creditor in some of the companies allegedly looted by the scheme. A spokesman for the Bank of New York declined to comment, as did an attorney for Mr. Carone.

Mr. Sherman has pleaded not guilty. In a written statement, Laura Brevetti, an attorney for Mr. Sherman, declined to discuss the specific charges against him. "But I can tell you generally that in a bankruptcy, which is supervised by a federal bankruptcy judge, every party in interest has access to the bankrupt's financial records and account information," Ms. Brevetti wrote. "Michael Sherman was and is widely viewed as one of the best in the industry in making sure creditors receive the maximum recovery possible." In court filings, Mr. Sherman's attorneys have contended that the state has failed to meet basic minimum legal requirements for alleging criminal activities. The attorneys have moved to dismiss the indictment. Among other things, Mr. Sherman's attorneys argue that prosecutors haven't adequately identified any victims. The judge hasn't yet ruled.

According to court filings by the Manhattan district attorney's office, Mr. Sherman would be brought in to a company by its creditors or its board to help it sell off assets. He allegedly would bring in Mr. Carone and his team to do the liquidation work. Once the assets were sold, prosecutors claim, Mr. Carone's operation would under-report the proceeds and split the loot with Mr. Sherman.

The group's biggest alleged theft was at Jamesway, a discount retailer that was based in Secaucus, N.J., and had annual sales of more than $650 million. By the mid-1990s, it was in the process of liquidating. Jamesway hired Mr. Sherman and put him in charge of the company's bankruptcy proceeding. According to the state's criminal filings, he fired Jamesway's remaining executives and brought in Mr. Carone. The Carone firm allegedly raised more than $5 million selling assets but only reported taking in $860,000 for dispersal to creditors. "The defendants stole and possessed over $4 million," according to a bill of particulars filed by the district attorney's office.

Mr. Sherman allegedly siphoned off an additional $11 million partly by falsely treating defunct companies that he controlled as secured creditors of Jamesway. He and an assistant then "wrote large Jamesway checks to those companies as if they were secured creditors," asserts the bill of particulars.

In their court filings, Mr. Sherman's attorneys say that because he was handling large amounts of Jamesway business, "there could be any number of justifications for specific checks."

As part of his plea, Mr. Carone said Mr. Sherman helped one of his companies, Consolidated Auctioneers & Liquidators Inc., get auction work at Jamesway. Mr. Carone said he subsequently stole more than $1 million of the auction proceeds and never accurately reported the results to the bankruptcy court. Mr. Carone also said he gave part of the stolen money to a company controlled by Mr. Sherman and another defendant. The Carone plea didn't say whether Mr. Sherman knew the money was stolen.

Sometimes the defendants allegedly did more than just falsify records to hide purported crimes. In the bankruptcy case of Oneita, a Charleston, S.C., apparel maker, the creditors hired Mr. Sherman in 1999 to help reorganize the company. He dismissed all but one of Oneita's employees and again brought in Mr. Carone's auction firm, which proceeded to undervalue Oneita's inventory by $5 million, according to the bill of particulars. The defendants paid the only remaining Oneita executive $196,000 to "buy his silence," the filing said.

Mr. Sherman's attorneys, in a court filing, argue that others had the opportunity to submit a higher bid than Mr. Carone's firm on Oneita's inventory, but none did. The filing also said the prosecutors had failed to show that Mr. Sherman had any role in the alleged bribe.

When a collection of New York-area fast-food restaurants was unable to service loans to the Bank of New York, Messrs. Carone and Sherman were brought in by the bank to operate and eventually sell the eateries. The group stole about $3 million that should have gone to the bank, according to the district attorney's office.

The alleged tactics included skimming cash from the restaurants, paying members of the scheme salaries for "no-show" jobs and even running a $300,000 insurance scam after a fire at one of the restaurants. The alleged scam included the supposed purchase of replacement equipment from another Carone company, Bari Restaurant & Pizzeria Equipment Corp. Mr. Carone sometimes uses the name Frank Bari, authorities say.

In court papers, Mr. Sherman's attorneys argue that the alleged restaurant-related crimes were simply commercial disputes. They added that Mr. Sherman was merely a consultant on the restaurant matter and had no control of the eateries.

Bari Restaurant operates out of a large and gleaming store, full of cooking equipment on Manhattan's Lower East Side, at the same address as Consolidated Auctioneers. When investigators raided Mr. Carone's operation in late 2001, Dan Castleman, chief of the district attorney's investigations division, said they found a safe containing $820,000 cash "in neat white paper wrappers labeled for each bankruptcy case."

Under Mr. Carone's plea agreement, he will serve two to six years in prison and pay $5 million in penalties, though he hasn't yet been sentenced. The seized cash will go toward paying that tab.

Write to John R. Emshwiller at john.emshwiller@wsj.com

Updated January 20, 2004
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BOSTON SUNDAY HERALD, JUNE 24,1990
HUB HAILS MANDELA

BEACON OF HOPE: Mayor Ray Flynn presents a lantern to Nelson and Winnie Mandela at Airport yesterday as Gov. Michael Dukakis and Sen. Edward Kennedy join in welcoming the AND
Day of pride, hope for Boston's own Mandela movement

By GARY WITHERSPOON

Winnie Mandela delighted Roxbury residents yesterday when she pointed out the Man-dela housing complex as she stood before awed spectators at Roxbury's Madison Park High School. "I wonder if you come from there," she inquired of over 1.000 people who had spilled onto the football field outside the school, where the freedom-fighting duo. Nelson and Win-nie, appeared briefly.

Two thing's make the Boston stop special for the Mandela's: The 22-building Mandela complex named aftert the African National Congress leader, and the tact that a sector of the population has considered seceding from Boston and carving out a new city called Mandela.

Alphonse Mourad, owner of the complex, said the name was changed from West Minster Willard in 1986, during the de-bate over the proposed Incor-poration of Roxbury, Mattapan, as well as parts of Dorchester, the South End, Jamaica Plain and the Fenway into a 12.5-squarc-mile city. "The tenants decided we could no longer trust the city system, and we decided to reta-liate by naming it Mandela and supporting the incorporation," Mourad explained.

Changing the name was a blessing, Mourad asserted, because developers will not try to take over the property and displace its tenants because of the symbolism Mandela's name carries.

Andrew Jones, 38, an Inde-pendent documentary producer and photographer and also the man behind the secession movement, said he came up with the idea and founded the Greater Roxbury Incorporation Project (GRIP) in 1983 while working on a story on acid rain in New England for ABC News. Jones said he became fascinated by the "degree of control" of small town govern-ments' and asked himself, "If them, then why not us?"

After studying and meeting privately about the idea at the Harvard Faculty Club for two years, Jones and GRIP partner Curtis Davis, gathered 5,000 signatures,he couldn't see how anyone would oppose this. It represented a package of tools that we could use to solve our problems in this community, turn a ghetto into a city."
question on the November 1986 ballot -- although the word "Mandela" did not appear.

In 1986, voters In 142 of the city's 252 precincts were asked to consider seceding. The population of the affected area was about 160,000 -- 74 percent black, 10 percent Hispanic, and 16 percent other racial groups. But stiff opposition from City Hall and local church leaders made It a losing proposition. The question was defeated by a 3-1 margin.

"I was crushed," said Jones. "I put everything I had into it..." Now, both GRIP am are meeting to decide question should appear year's ballot. GRIP allowing to resolve a 5u against the state that w low the same question posed a third conscculi'
Whatever happens, said he is determined tinue the fight: "I'm di to my culture and my city. It's my civic duty liberate my community continue."

Following the loss, Sadiki Kambon formed Project FATE (Focusing Attitudes Towards Empowerment), for a more. grassroots approach to Independence.
In 1988, a similar referendum question lost by less than a 2-1 margin. But based on the decrease In the margin of...
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THE BOSTON HERALD, TUESDAY, SEPTEMBER 4,1990

Neighbors unite behind Roxbury's little city hall
by BEVERLY FORD
.
A plan to bring city government to the people it serves got a boost yesterday with the unveiling "little city hall" at Roxbury's Mandela housing complex.

"I'm hoping this will bring unity to the tenants" said complex owner Alphonsc Mourad, who organized the plan (or B and M Management, v, operates the low-income development on Washington Street.
Mourad said he hopes to see "Mandela Hall" act as a liaison between tenant volunteers and the city to provide residents with improved services and social programs.

The concept, explained Mourad, Is to get tenants involved in running the complex through volunteer day care, youth activity, drug awareness and other social programs while at the same time providing the city with ways to address the needs of its black residents.

"These people need programs, they need things for their youth," said the organizer. "It's time for tenants to unite right now behind a town hall.
Mourad said tenant involvement in "MANDELA City Hall" could create political leverage to fight the problems plaguing the black community.
"We've got to control our own lives, our own destiny," noted Mourad, who helped residents celebrate the facility's opening with a cookout. We want to bring respect to the black community
Mourad said he hopes "Mandela City Hall becomes a prototype for other housing projects.

"This will be the true test," said Mourad. if the city recognizes it, this will flourish. If not, it will separate the community."
Tenants praised the plan yesterday, saying it is needed to establish tenant unity.
"This will unite the tenants and give their grievances a higher priority," said tenant Amos Wolohab. "We need something like this In order to be heard by city hall."
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BAY STATE BANNER Thursday, May 16, 1991

Health check-ups in Mandela complex

"You can't be healthy if you don't have access to health. What we're doing is targeting the community for these specific silent killers diabetes and high blood pressure."

Dr. Peggy Brown

Nurse Paulette Hayes-Offley prepares Us Mikle for a blood test at the Health Spot while clinic founder Peggy Brown
(standing) watches volunteer Lisa Scales check Ramon Borges for his blood pressure. (Don West photo)
Judy Castillo

In a 1990 book, a University of Maryland cardiologist warned that hypertension is at near-epidemic proportions among blacks, putting the African-American population at high risk of suffering from heart and kidney diseases.
Meanwhile, according to a 1989 report from the U.S. Department of Health and Human Services, dia-betes is 33 percent higher in the black population than it is in the white prpjiation.
Facin'i hese grim statistics year after yea'. Peggy Brown decided to do something about them.
With the help of community agencies and volunteers, Brown opened Health Spot in the town hall of the Mandela housing complex in Roxbury.

The center, which offers free blood pressure and diabetes checks, operates every Saturday from 10 a.m. to 3 p.m.

"\bu can't be healthy if you don't have access to health. What we're doing is targeting the community for these specific silent killers -- dia-
tes and high blood pressure." said
Brown, a South Bronx native who teaches education at Northeastern University.

The center is staffed by volunteer health professionals, including phy-sicians, nurses and nurses assis-tants, Northeastern students and community residents, and sees an average of 40 people each Saturday.

"What we're trying to do is raise the awareness level of people in the community," said Brown, adding that many area residents, most poor and black, don't monitor their health as they should.

"When you're really consumed with trying to survive and protecting yourself and your family, you don't" worry about your health, said Brown, citing the example of a woman who lives in the Mandela complex.

Unaware that she had diabetes, she suffered an accidental cut on one of her feet. The cut became in-fected, and gangrene eventually set in.
As a result. Brown said the wom-an's toes had to be cut off, leaving her unable to walk.
Because diabetes inhibits blood circulation, individuals suffering from the disease run a high risk of infections from cuts.

Had the woman been aware of her condition, she might have been more careful. That's a tremendous burden and (an) unnecessary tragedy. It could have been prevented," said Brown.

Stressing the importance of pre-ventive medicine is exactly what Health Spot hopes to accomplish, said Brown.

"It's a combined effort of trying to bring these people together. We have to get to these people," said Abraham Bossman, an area resi-dent who does door-to-door out-reach for the agency.

"We've seen several hundreds of people who otherwise would not have been seen," said Brown, ad-ding that because the clinic is free-standing , meaning it is not affiliat-
ed with any particular organization, it is able to provide services free of charge.

Brown said the space for Health Spot is provided rent-free by V and M Management. \folunteers have also donated tables, chairs and equipment, she said.

"For me, this is a very sound, basic, unique model as an alterna-tive to accessing the health care system," said Brown.

Brown added that aside from providing .free blood pressure and diabetes checks, Health Spot, in conjuction with the American Can-cer Society, is now providing free mammograms for women.
Government figures show that in 1987 the rate for African-American. women who died of breast cancer was 26.5 per 100,000 deaths, while white women died of the same dis-ease at a rate of 22.8 per 100,000 deaths.

Barring education, housing and employment, "for us in the commu-nity, our most precious gift is health," said Brown.

However, because she feels health and education go hand in hand, Brown has incorporated free tutor-ing services at Health Spot.
The tutoring-services are provid-ed to all interested students by Da-ron Griffith, an engineering senior at Northeastern, and Erik Green-idge, a graduate of the school.
Although some skeptics have-doubted Health Spot's length of stay in Lower Roxbury, Brown said she is committed to the community and plans to stay for the long haul.

"We're going to be here as long as we need to be." she said.
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The new interest rate provisions apply to all interest accruing on or after January 1, 1993. interest accruing belore then is subject to the prior interest rate provisions.

DPU sets new limits to rates of interest on overdue bills By JEFFREY KRA.SNER - Boston Herals

Commercial customer! with overdue accounts at local utilities will *ee their total bills {TOW more slowly thanks to the effort* of the owner of a Roxbury apartment complex who has had a long battle with Boston Edison.

The Department of Public Utilities this week instituted new limits on the rate of interest gas, electric and phone companies can charge to their past due commercial accounts.
Instead of a Hat 18 percent Interest. the utilities' maximum interest will be aet at the two-year Treasury bill rate plus 10 percent. The new rate, which goes into effect Nov. 1. will drop to 14.05 percent.

The DPU's order comes in response to a request from Alphonse Mourad. owner of the Mandela Apartments in Roxbury. For years. Mourad has waged an angry battle against Boston Edison, alleging that the utility has overcharged the complex and generated excessive and inaccurate bills. He claimed that he had overpaid his bills by (29.000, but that Edison refused to disclose its accounting records.

In Its order, the three DPU commissioners argued that late payment interest charges should remain relatively high."While It is one of the Department's goals to make late payment charges more reflective of current Interest rates, It is also important to ensure that late payment charges remain high enough to deter delinquent payment of accounts."

They rejected a proposal to let rates float at 8 percentage points over the two-year Treasury bill. and instead adopted a 10 percent premium, to be computed Feb. 1 of each year.
The order does not affect overdue accounts for residential customers, on which utilities are prohibited from charging interest. But the commissioners warned utilities against harassing. customers, saying it "expects companies to suspend late payment charges where a customer has a good faith and reasonably grounded dispute on billed amounts, and abate late payment charges where the amount in dispute is determined to be erroneous.
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