Crime Forfeiture Pays for U.S. Attorney\'s Office (Sometimes in Dinosaur Bones)

The federal government runs a multibillion-dollar business in Lower Manhattan with an unusual and diverse revenue stream.

In the last year, the government's prosecutorial branch in Manhattan has taken in about $160 million from an online poker operation and more than $2 billion from a failed Ponzi scheme. Last week, it even secured a Tyrannosaurus skeleton from Mongolia (worth more than $1 million).

This business is the asset forfeiture unit of the United States attorney's office in Manhattan. In 2012, the unit recovered about $3 billion in crime proceeds - the largest amount ever recovered by a single United States attorney's office since the Justice Department established the asset forfeiture program four decades ago. It also accounts for 68 percent of the national total last year from the country's 93 United States attorney's offices, according to government figures.

“Asset forfeiture is an important part of the culture here and an example of the government being efficient and bringing home the bacon,” Preet Bharara, the United States attorney in Manhattan, said in a recent interview.

The aggressive use of forfeiture as a legal mechanism to seize and freeze criminal proceeds has long been a hallmark of Manhattan's federal prosecutors. Securing forfeited assets is a priority of the office in part because many of the largest financial fraud cases are centered in New York.

“To put someone in jail is very important, but equally important is to provide the crime victims with some type of compensation,” said Sharon Cohen Levin, an assistant United States attorney who has run the office's forfeiture unit for 16 years.

The Justice Department's program has plenty of critics. Many judges and defense lawyers say that the policies can be arbitrary and harsh. In recent decades, forfeiture powers have greatly expanded, leading to overzealous and mean-spirited conduct by prosecutors, critics say. In 2000, Congress reined in prosecutors with the Civil Asset Forfeiture Reform Act, which instituted a number of changes.

“Congress needs to revisit the forfeiture laws to curb continuing abuses,” said David B. Smith, a defense lawyer in Alexandria, Va., and the author of a leading treatise on forfeiture. “The procedures need to be made more fair, particularly for innocent third parties whose property rights can be easily destroyed without even having an opportunity to challenge the basis for the forfeiture.”

The seized money ends up in different places. Where there are not identifiable victi ms, as in drug crimes, proceeds are placed in two asset forfeiture funds: one controlled by the Justice Department and the other by the Treasury Department. Most of that money is used to bolster various law enforcement initiatives.

But the majority of the seized money and assets ends up back in the hands of defrauded victims.

In March 2012, for instance, as part of a settlement, the publicly held Science Applications International Corporation, the primary contractor on New York's scandal-ridden CityTime payroll project, forfeited about $500 million in connection with its role in a fraud and kickback scheme.

More than 90 percent of that amount was given back to the city as compensation for its losses on the CityTime project. That money allowed New York to fill more than 2,500 teaching positions that would otherwise have been eliminated in the budget for the coming fiscal year, according to the city.

In certain cases, the forfeiture process can be painstaking and take years to resolve, as in the Adelphia Communications accounting fraud, which led to the largest single distribution of forfeited assets to victims in the Justice Department's history.

Last spring, a decade after the office began its investigation of the Adelphia fraud, about $730 million was distributed to victims. Adelphia's former chief executive, John Rigas, and his son Timothy Rigas, who was chief financial officer, are both serving prison time after their conv ictions and agreed along with other family members to forfeit more than 95 percent of the family's assets to the government.

The complicated process, overseen by a court-appointed special master, Richard C. Breeden, involved setting up a victim fund and then processing more than 13,000 petitions and verifying monetary losses of the company's shareholders.

The Adelphia distribution, though, is likely to be dwarfed by the amount of money that the government returns to defrauded investors in the Ponzi scheme orchestrated by Bernard L. Madoff. Mr. Bharara's office has worked alongside Irving H. Picard, the trustee in the Madoff case, to secure compensation for the victims.

Virtually all of the government's recovery for Mr. Madoff's victims comes from the settlement of claims against the estate of Jeffry M. Picower, who died in 2009 and was one of Mr. Madoff's original and largest investors. Of the $7.2 billion that Mr. Picower's widow agreed to return to victims, $2.2 billion went to the Justice Department, with the rest going to Mr. Picard for eventual distribution.

Last month, the government named Mr. Breeden, the supervisor of the Adelphia case, to serve as special master to administer the forfeiture proceeds in the Madoff case.

Of the $17.3 billion of actual cash losses in Mr. Madoff's fraud, the trustee has recovered about $9.3 billion and distributed about $3.7 billion of that to eligible victims. The $2.35 billion seized by prosecutors under forfeiture laws will be doled out separately by the Justice Department, which has said it expects the victim claims process to begin shortly.

Another substantial forfeiture case last year involved Full Tilt Poker and PokerStars, two large online poker Web sites. To settle a lawsuit against the companies, Full Tilt agreed to forfeit essentially all of its assets and PokerStars agreed to forfeit $547 million - representing revenue from illegal gambling and proceeds from money laundering - that will be paid out in several installments. To date, about $160 million has been forfeited.

But last year's most exotic forfeiture action involved the Mongolian dinosaur case. Last week, a paleontologist admitted to illegally shipping dinosaur fossils to the United States from Asia. As part of a plea agreement, the paleontologist, Eric Prokopi, agreed to forfeit a Tyrannosaurus skeleton that had been put up for auction for more than $1 million, along with five other dinosaur skeletons.

The fossils will be returned to the Mongolian government; Mr. Prokopi faces a possible prison sentence.

The reptile remnants represent just a fraction of the 2012 forfeiture proceeds secured by Mr. Bharara and his colleagues - proceeds that amounted to more than 60 times the office's annual budget.

“As I like to joke,” Mr. Bharara said, “that's a lot better than the investment return of any hedge fund.”

Ackman, Herbalife and Celebrity Short-Sellers

It's good to be a rock star investor these days, particularly if you are betting against a company.

Celebrity investors like William A. Ackman of Pershing Square Capital Management and David Einhorn of Greenlight Capital can move a stock by the billions of dollars simply by disclosing their bet. It's something ordinary investors can't do, which gives these star investors a tremendous advantage. But it also makes the truth about a company harder to discern.

Take the case of Herbalife. About two weeks ago, Mr. Ackman gave an impressively lengthy, 343-slide presentation on Herbalife at an event sponsored by the Sohn Conference Foundation in Manhattan.

Herbalife sells nutritional supplements through its own network of recruited sales representatives (think of Avon or Amway). Mr. Ackman's fundamental thesis is that Herbalife is a pyramid scheme. He asserts that the company relies primarily on pushing products to its recruited sales staff for its profits, rather than sales to retail customers and outlets.

Herbalife has heatedly criticized Mr. Ackman's assessment. After his conference appearance, the company said in a brief statement that Mr. Ackman's presentation was “a malicious attack on Herbalife's business model based largely on outdated, distorted and inaccurate information.” The company has scheduled an analyst day for Jan. 10 to try to rebut Mr. Ackman's arguments.

The presentation appeared to set off panic among Herbalife shareholders, and the stock tumbled 38 percent that week. The presentation and the stock's decline were widely covered in the financial media. Mr. Ackman's presentation was posted to Henry Blodget's Business Insider Web site, where it has been downloaded more than 2.8 million times.

As for Mr. Ackman, he is not required by securities laws to disclose his position in shorting, or betting against, a company's stock. But based on his own disclosure in the media, it appears he has shorted well over $1 billion in Herbalife stock and is already up hundreds of millions of dollars on his bet. (In the spirit of the Sohn Conference Foundation, which supports the treatment and cure of pediatric cancer and other childhood diseases, Mr. Ackman has promised to donate his personal profits to charity.)

There is a culture of worship around Mr. Ackman and a small circle of hedge fund deities like Mr. Einhorn, John A. Paulson of Paulson & Company and even Steven A. Cohen at a somewhat tarnished SAC Capital Advisors. When one of them says or does something, it quickly reverberates in the market.

We have seen this before with Warren E. Buffett, when a new investment by him pushes the stock of the company up instantly. But more often these days, it is the bets of hedge fund managers that a stock will go down that move share prices.

You can tick off the list: Mr. Einhorn and St. Joe Company; Steve Eisman and the profit-making education sector; Carson Block of the investment firm Muddy W aters Research and Olam International.

These managers are able to make their mere presence - and the whiff of a short position - move stocks down. If you need evidence, Mr. Einhorn asked just a few questions on a conference call with Herbalife's management in May and the stock immediately plunged.

Of course, these stocks may be falling because these investors are right. Muddy Waters, for example, made its name by exposing what regulators have since said was outright fraud at the Sino-Forest Corporation, a Chinese company. And shorting is an important part of the market, helping ensure that stocks are priced correctly.

There can also be a more sinister dynamic at work. Wall Street loathes uncertainty. So when investment celebrities disclose their bets against companies, particularly in very public places like a Sohn Foundation event, they create momentum, pushing investors to make decisions based not on the information but on fear.

In the wake of Mr. Ackman's presentation, an analyst with B. Riley & Company stopped coverage of Herbalife for the reason that trading was now no longer based on fundamentals but the pressure from short-sellers. And if you were a mutual fund manager right now, you would probably much rather be seen as not owning Herbalife; after all, why take the risk when you can just invest in other stocks to try to beat the market to earn your bonus?

Mr. Ackman's accusations may very well justify the sell-off, but that remains to be seen. (Herbalife's stock has been rising of late, although it is still below where it was before M r. Ackman intervened.)

But in these celebrity short bets, the truth often seems beside the point to the market. The question of what the facts are gets overtaken by the spectacle of a titanic struggle between company and hedge fund operator. John Hempton of Bronte Capital, who owns Herbalife stock, calls this “hedge-fund porn” and has characterized the struggle over Herbalife as “the hedge-fund equivalent of Stalingrad. Someone is going to lose big. And the victor will be so bloodied that the word victory will sound hollow.”

Yet the battle over Herbalife is not really Stalingrad. Rather, it is more like the United States invading Grenada.

Mr. Ackman, a brilliant investor by any measure, is already up a couple of hundred million dollars, and because securities regulations do not require him to disclose his position, he may already have taken money off the table. In all probability, he is at least adjusting his position. So he is likely to break even at worst. And even if he loses, he survived a big loss in Target and made billions in other investments. It's just another day at the office.

But Herbalife is mired in a public relations drama when it just wants to get back to normal. It is doing the customary things in a war against a short-seller: trying to depict the investor as misguided while correcting the facts - or putting its own spin on them.

Herbalife has also accelerated a stock buyback, almost Step 1 in any such campaign, and it has hired the investment bank Moelis & Company to represent it. In the end, though, Herbalife will be lucky if it gets back to where it was before Mr. Ackman's presentation, and it will be a struggle to do so.

Herbalife, to be sure, has been in the cross hairs of short-sellers for a while. It would be nice if instead of a panicked reac tion when a celebrity investor steps in, Wall Street kept its head and coldly assessed the facts. It certainly had the time to do so.

It is hard to stop shareholders from acting out of fear, but perhaps it is time for the Securities and Exchange Commission to require short-sellers with significant positions to disclose them as they are required to do for long positions, or those bets that a company's stock will go up. It would help for the market to at least know what the positions are when large short bets are announced, which might help limit panicked reactions.

To be fair, in response to S.E.C. regulatory proposals on the issue, Pershing Square has supported a requirement for additional disclosure on short-sale positions.

At Herbalife's conference next week, and in the days to come, there will be more information and no doubt more spin. Investors may even give Herbalife the thoughtful and rational scrutiny it deserves. But I doubt it.