The Case of the Reckless Russians

This is a story about a Russian gang that couldn’t borrow straight. The gang was made up of dozens of people – a lawyer, an accountant, mortgage brokers, real estate appraisers, loan officers, and straw buyers – who put together about 1,000 fraudulent subprime mortgages and home equity loans in New York and New Jersey totaling some $200 million. They raked in millions from those mortgages and commission fees. Some gang members liked to play high-stakes dice in Atlantic City and roar around New York City in Bentleys. They had nicknames like “Lyosha,” “Masha,” “Buddha,” and “Danik.” They are now either behind bars, awaiting sentencing or awaiting trial.

Among the gang’s many victims was an elegant late-19th century condominium building on the Upper West Side of Manhattan. The gang pushed this 33-unit building to the brink of financial ruin, but the building was saved by a savvy lawyer and by residents who banded together and decided they were not going to be victimized by guys named “Buddha” and “Danik” who gambled away hundreds of thousands of somebody else’s dollars at the craps tables in Atlantic City.

This, then, is a story about a condo board that went straight for the Russian gang’s jugular – and lived to tell the tale.

Suspicious Minds

When 10 of the building’s rent-controlled and rent-stabilized apartments were bought in quick succession in 2006, alarm bells started ringing immediately.

“From day one we were suspicious because many of the 10 buyers used the same accountant,” says the board’s attorney, Steven Shore, a partner in Ganfer & Shore. “The condo has the right of first refusal on any sale, if it can match the contracts. But they couldn’t match the contracts so there wasn’t anything they could do to stop the sale.”

The contracts themselves were another red flag. The buyers were paying wildly inflated prices for the 10 rent-controlled and rent-stabilized apartments, which had been owned by a single investor. “It was pretty clear from the get-go that something was rotten in Denmark,” says Eleanor Lawson (not her real name), who has served on the condo’s board of directors since 2004 and is now president. “We involved our lawyer right away.”

Although no one in the building knew it at the time, they were already victims of an elaborate scam orchestrated by a Brooklyn-based brokerage firm called AGA Capital. The firm was run by a Russian-born mortgage broker named Galina Zhigun, her son Garri Zhigun, and the office manager Maryann Furman.

The gang’s appraisers inflated the value of its 10 “target” apartments, then AGA Capital applied for subprime loans in the names of the gang’s straw buyers, claiming that seven of the apartments were going to be used as a “primary residence” and three as “investment property” that would generate a total of $6,500 a month in rent. What AGA Capital failed to mention in the loan applications was that the apartments were occupied, they were either rent-controlled or rent-stabilized, and there was no way they could become the buyers’ primary residences or generate anywhere close to $6,500 in rent. Soon after the loans were approved and the sales went through, the straw buyers stopped paying monthly maintenance charges.

“When you stop getting maintenance payments for approximately one-third of the units in your building, that’s a big problem,” says Shore.

The condo building’s board is a mixture of professionals – Lawson, plus two doctors, an attorney, an interior designer, a union negotiator, and an entertainer. They realized they needed to act quickly, so they appointed a three-member legal subcommittee to work with Shore and his team.

“There were two questions,” says Lawson. “What do we need to do from a legal perspective to protect the building? And what can we do to go after the lost maintenance money?”

When indictments against AGA Capital and its web of co-conspirators began to come in the spring of 2007, the board realized it was the victim of a vast, sophisticated criminal scheme. It was a “jaw-dropping” moment, according to Lawson. By now, the board realized that the lost income from maintenance was going to necessitate a special assessment, and it approved a 40 percent maintenance increase.

Shore suggested the board had two options. It could pursue millions of dollars in damages in federal court, a slow process that might result in a judgment that was substantial but uncorrectable. Or it could go to civil court and try to win a quick judgment that would funnel rent on the 10 apartments away from the owners and directly into the building’s coffers. At the legal subcommittee’s suggestion, the board opted to follow Shore’s advice and pursue the latter course.

It worked. The building ended up collecting about $130,000 in rent, which covered a portion of the lost maintenance. It also covered legal fees. “It’s not like the building is flush with cash because of the money we’ve collected,” says Lawson. “But it’s better than nothing.”

The principals of AGA Capital pleaded guilty to fraud charges in federal court in October 2008. Since then, one of the ten apartments has been sold, banks have foreclosed on three others (and will begin paying maintenance), and foreclosure proceedings are under way on the other six apartments.

It Could Happen to You

While this story has its sensational elements – Russian mobsters in Brooklyn! High rollers in Atlantic City! Speeding blue Bentleys on the Staten Island Expressway! – Shore believes that similar scenarios could befall other condo buildings in the city.

“This was fraud,” says Shore, “but with the current economic slowdown, I believe you’re going to see more and more people foreclosing on condos and just walking away. It’s already happening in other parts of the country. What this shows is what could happen with this type of economy. Instead of being Russian mobsters, it could have been guys who lost their jobs. That’s why this story is so germane.”

Lawson agrees. “There was a significant increase in foreclosures even before the subprime crisis,” she says. “So, I do think we’re going to see more people having trouble making maintenance payments. My recommendation is for condo boards to be on top of those who are paying slower or who are unable to pay – on a monthly basis – and then make changes almost immediately. Levy a special assessment or take a portion of the reserve fund in order to keep the building sound. Quick, decisive discussion and action are vital.”

At Shore’s suggestion, the board is now debating whether the condo should act more like a co-op in the future. Specifically, it is considering a more rigorous application procedure, requiring board approval of new apartment buyers, and demanding a security deposit. “We feel very victimized,” Lawson says. “Clearly, a top priority for 2009 is making sure this doesn’t happen again.”