Back to Background Reviews in a Sort of “I told You So” Way: Developments With Respect to Prokhorov

This is sort of an “I told you so” update on the background check that public agencies didn’t do on Forest City Ratner’s new business partner, Mikhail Prokhorov.

Previous Perspective on Desirability of a Responsible Background Review

We previously wrote on the subject of public agency background checks with respect to approving project principals and whether the public agencies bringing us the Atlantic Yards mega-boondoggle (the Empire State Development Corporation and the Metropolitan Transportation Agency with the assistance of the City of New York) would try to sidestep a background review and approval for:

Russian oligarch Mikhail Prokhorov as a new proposed owner of the Nets basketball team, the heavily subsidized arena the team is supposed to play in, as well as the rest of the Atlantic Yards project which right now is nothing more than a multi-decade option to monopolize the development potential of 22 acres of valuable Brooklyn real estate. . .

(Friday, September 25, 2009, Should Public Agencies Approve Prokhorov as New Nets, Arena and Atlantic Yards Owner?)

Predicting a (Now Regretted?) Rush Past Review of the Russian

We pretty much predicted that the agencies would engage in such sidestepping, given the hellbent determination of those agencies to continue with Atlantic Yards no matter how many project negatives emerge and accumulate. Sidestep they did! That was even though we noted that on the Brian Lehrer Show Rep. Bill Pascrell (D-NJ), assessed (we thought quite accurately), “I don’t believe this project would’ve been approved by the taxpayers of New York City and New York State if Mr. Prokhorov… was in this from the very beginning. . .”

Now we are wondering whether those public agencies are regretting the reviews they sidestepped. If you refer to our earlier post you will see that back when we last wrote about how the agencies might want to make sure they had looked deeply into Mr. Prokhorov’s background before doing business with him, the allegations about what should be looked into were much simpler. There were the questions raised about Mr. Prokhorov’s alleged importation of a planeload of prostitutes into France and Develop Don’t Destroy Brooklyn was citing accusations raised about Prokhorov’s “asset stripping, abuse of corporate governance and violations of minority shareholder rights” and “the reported link of the Russian aluminum giant, UC Rusal, with organized crime.”

There are times when you are at a public agency doing background checks that you want to hire investigative (detective) agency with international capabilities and then you do so. Business in Russia is tough. We have some (non-wealthy) Russian acquaintances who tell us that they are always suspicious of anyone in Russia with money because they do not believe that in Russia people become wealthy by doing nice things. (For some brand new Wall Street Journal background on Russian wealth that doesn’t mention Prokhorov specifically by name except in the chart showing the owners of Rusal, see: New Détente: Putin, Tycoons Rescue Each Other in Crisis, by Gregory L. White and Alexander Kolyandr, January 6, 2010. And here is a brand new story in the Post, having nothing to do with Prokhorov particularly, about Russian rough play business practices and “misplaced” billions going uninvestigated: Russia scandal looms over top city socialite's storybook rise, by Brad Hamilton, January 10, 2010.)

Chilling New Charge

Why might our ask-no-questions Atlantic Yards-loving public agencies now be regretting their decision not to do a Prokhorov background check? The latest news surfacing that an investigator doing a background review on Mr. Prokhorov would want to look into is this as phrased by Atlantic Yards Report:

a chilling charge surfacing in Moscow raises questions about Prokhorov's business interests and an alleged effort to silence a journalist.

(See: Sunday, January 10, 2010, Russian intrigue; company partly-owned by Prokhorov said to be implicated in plot to kill journalist)

“Silence” in that sentence is a euphemism for “assassinate.” The allegation is that three armed men, reportedly arrested in Russia outside the home of the Australian reporter, John Helmer, were hired to kill Mr. Helmer. The arrested men reportedly had a dossier on Mr. Helmer including a map of his apartment and a special kind of gun that had been used in at least one other similar style killing. Mr. Helmer is saying that he had been tipped off ahead of time by the Australian Department of Foreign Affairs that he would be the target of an assassination attempt. The reason this has raised “questions about Prokhorov's business interests” is because the three men “said they worked for a private security company that had been acting on behalf of Rusal” an aluminum company which is 18.5% owned by Prokhorov (a rounder 19% figure is given in a new Wall Street Journal chart). The reason words like “implicated” are being used is because, as Dave D'Alessandro writes in The Star-Ledger, Helmer is:

. . . the journalist residing in Moscow who has been a pebble in Mikhail Prokhorov’s shoe since oligarchs have been collecting their billions under the protection of a corrupt, Fascist state.

In other words, he’s the kind of journalist who turns up dead once a month or so inside Putin’s Russia.

(See: Weekend Reading Assignment: A Russian Tale January 10, 2010.)

DDDB republished Australian news coverage (Tip-off saves Australian journalist from Moscow plot, the Weekend Australian, Jan. 9, 2010) reporting that Helmer says he “might have been targeted because of his aggressive reporting on powerful Russian businessmen” mentioning specifically as one possibility the name of “42-year-old billionaire Oleg Deripaska” but not Prokhorov. (A Bigger Gun Problem for NBA Commish Stern? Alleged Plot To Kill Moscow Journalist, 1.10.10.)

The Number of Assassination Plots Rises. . .

As we said, business is tough in Russia. And apparently sports ownership too. Mentioning assassinations, Russians and Prohorov all in the same article had us remembering back to a No Land Grab November 6, 2009 post regarding two other stories appearing in the press more than a month after we has suggested that public agencies ought not to be sidestepping the responsibility of doing background checks.

Here from Deadspin, a sports blog:

. . . Shabtai Kalmanovich, one of Prokhorov's partners in post-Soviet billionaire sports owner crime, was murdered on Monday. Kalmanovich is the owner of the Spartak Moscow women's basketball team that is famous for shelling out big bucks to sign WNBA stars like Lauren Jackson, Sue Bird, and Diana Taurasi. He was also gunned down on the streets of Moscow when another car pulled up alongside his and opened fire. Yeah, not exactly a random act of violence.

Police say they believe that the murder could be linked to Kalmanovich's business activities, and maybe even "his prominent role in Russian basketball."

(See: Owning A Russian Basketball Team Can Be Hazardous To Your Health.)

The other article in the New American (The official publication of the John Birch Society- quoting, in part, the New York Times!) argues against the National Basketball Association giving Prokhorov a clean bill of health in its own background vetting process now going on. (More on this later.) Here are quotes from that article:

Prokhorov is now going through the NBA's vetting process. "Like any prospective owner, Prokhorov will be investigated by the N.B.A. and a security firm that specializes in risk management," reported the New York Times. "They will try to ascertain his net worth, debts, character, associates, personal history and integrity. The process is designed to rule out inappropriate buyers who lack financial clout or present public-relations risks* to the league."

[* Just to emphasize again, this process was something not done by our public agencies.]

Looking into Prokhorov's past is not going to be an easy matter. "Russian oligarchs are an unusual group of capitalists by Western standards," noted Times writer Richard Sandomir. "David E. Hoffman, the author of The Oligarchs: Wealth and Power in the New Russia, said that men like Prokhorov emerged from a business climate that had 'no rule of law, a lot of shadiness, a lot of violence and coercion.'"

* * * *
There are other colors also associated with Russian joint ventures: green, for huge sums of laundered money, used for bribes and corruption; and red, for lots and lots of spilt blood. Some of the most recent blood comes from Prokhorov's old business partner, Shabtai Kalmanovich, owner of Spartak, the professional Russian women's basketball team. He was slain on November 2 in classic gangland style. Kalmanovich's black Mercedes-Benz was sprayed with submachine-gun and shotgun blasts from a passing vehicle.

* * * *
The identity of the perpetrators of the Kalmanovich hit and their motive have been open to speculation. Various news accounts suggested it could be attributed to revenge by former business associates or a move by Russian mafia figures to take over his operations. More likely, Kalmanovich's demise was part of the reconsolidation of "The Party's Gold," as reflected in the Putin regime's ongoing renationalizing of business assets of Russian oligarchs.

* * * *
Prokhorov, the charming, brilliant wunderkind is the front man for a ruthless underworld run by the KGB-FSB and its minions in the Russian mafia. Russian oligarchs like Prokhorov, Kalmanovich, Boris Berezovsky, Roman Abramovich, Alexander Lebedev, and Mikhail Khodorkovsky did not become billionaires virtually overnight because of their business acumen and financial genius. They were provided with special privileges and massive state assets to serve a strategic political agenda.

(See: Dangerous Connections: NBA and the KGB, by William F. Jasper, Friday, 06 November 2009 10:06.)

As we have pretty much said already, our public agencies (ESDC, the MTA and good ol’ NYC) were either exhibiting phenomenally bad judgement in sidestepping a background review for Prokhorov or they were truly politically hellbent to have Atlantic Yards go forward no matter what and were not inclined to expose themselves to adding still more to the list of negatives known about the mega-project.

Does Mr. Helmer Indeed Speak Critically of Mr. Prokhorov?

Back to Mr. Helmer: Is the supposedly assassination-targeted reporter “a pebble in Mikhail Prokhorov’s shoe” as the Star-Ledger reports? We think so, but we found something in Wikipedia that seems to say the opposite. Under “Career” subheading “Controversies” it says:

However, other Russian controversial businessmen such as Norilsk Nickel owner Vladimir Potanin or his former business partner Mikhail Prokhorov are never negatively portrayed in Helmer’s blog.

(See: John Helmer (journalist).)

Judging for ourselves that Wikipedia assessment doesn’t seem to be very accurate at all. We went looking for the kinds of things Mr. Helmer has written about Mr. Prokorov. (Atlantic Yards Report in its story about the attempted Helmer assassination has also provided links to look at.) We provide you, for your own assessment, some of what we found. While we think that what appears below is unquestionably negative about Mr. Prokhorov the Star-Ledger offers that Mr. Helmer is possibly “a fair bit over the top in his pursuit of truths” though “a fascinating and talented fellow.” That being said we won’t try to sort out the accuracy of what Mr. Helmer is saying but just observe that it is negative in tone. In other words, he does sound like the Prokhorov “pebble” described. As indicated, some of the below is written by Mr. Helmer himself and some of it is written by others about what Mr. Helmer has said or reported.

This supports the New American’s notion that the Putin-powers-that-be may not be happy with Prokhorov taking capital out of Russia:

. . Prokhorov has been acutely sensitive to the coverage he has been getting in the American media for some time, . .

* * * *

New York and New Jersey media coverage of the deal [becoming the part-owner of the New Jersey Nets] casts doubt, not on the reported details, but on Prokhorov’s acumen. New York sources say that opposition to the building of the stadium is popular and powerful. “If Prokhorov thought the Red Directors were a drag, wait till he meets the Brooklyn Brownstoners,” says one.

An analyst for an American sports internet publication commented on September 17: “if he were actually so shrewd, why invest in any franchise, much less a money pit like the Nets? The Brooklyn stadium has been a boondoggle to say the least, and there’s no history of this franchise grabbing a hold of that crucial NYC market.

* * *

Putin and Sechin can read enough English to appreciate the punchline: “his decision to pursue the Nets means that his wealth may be a stroke of luck, not good judgment.”

* * *

Is Medvedev seriously contemplating carte-blanche for Prokhorov to invest in American basketball?

Even a champion brown-noser among Canadian sports reporters, Eric Reguly, couldn’t find in Prokhorov’s basketball and business strategy the hint that he might invest in US sports losers.

* * * *

Sources who have followed Prokhorov for a long time, including those who have worked for him, suggest that his deals can be the predictable result of his suffering what he imagines to be a personal insult. The sources suggest that whenever Prokhorov thinks his amour-propre has been injured, he spends money on schemes of revenge.

* * *

But times change, and buying into the Nets appears to be a different story. If Prokhorov hasn’t applied for, and received Kremlin permission; and if he goes ahead with the deal, then he may be signaling that his pride has been hurt. Buying an American asset for half a billion dollars is his way of showing sangfroid.

(See: Watch Micky Dribble the Ball – Prokhorov's American Move Is a Buzzer Beater Before Kremlin Disqualifier, By John Helmer in Moscow, Friday, September 18th, 2009.)

From the New Yorker site this about Helmer:

This week's news about Prokhorov and the Nets began circulating as a rumor in Russia in July. How he managed to clear the proposed deal with Putin is unknown. The Moscow-based business journalist John Helmer has somewhat ingeniously speculated that an earlier rumor from the summer, about Prokhorov buying the Italian soccer team Roma, is connected to this: that Silvio Berlusconi* asked his friend Putin to find someone to bail out Roma, and that Prokhorov is in fact buying Roma as a condition for being allowed to buy the Nets. Helmer counts up the damage: (Click to read more.)

[* FYI: In the small world of power players, Berlusconi is Michael Bloomberg's neighbor in Bermuda.]

$330 million in cash down and pledged money—more than twice what a reasonable man would pay for a football club in a faraway place—in exchange for a permit to spend $700 million on a loss-making basketball team in another faraway place.

Well, perhaps. The ordinarily hyper-sarcastic Russian press, for its part, has been unnervingly straitlaced about the news.

(See: September 23, 2009, New Yorker blogs, Keith Gessen: Meet Mikhail Prokhorov.)

Here is Helmer’s speculation about how a RICO lawsuit (a civil racketeering lawsuit) could be brought against Mr. Prokhorov:

So here we are now in New York, where the mayor, a 5 foot-6 inch fellow named Michael Bloomberg, has spent $85 million to make sure noone has a chance of contesting the mayoral election against him on November 3; actually, by then he will have spent between $110 million and $140 million. With money like that, you might say the racket is already in power in New York City, and RICO is Mayor. So, you might also ask – how is it possible to file a lawsuit in a town whose mayor is Bloomberg against a Russian bad guy, whose legal exposure is that he conspired to make a lot of money, and got rid of any competition that stood in the way, mostly by paying for it to go away.

Hey Rico! Meet Micky Prokhorov – a man whose record for violating US-type stock manipulation and asset stripping regulations was allegedly so bad, an Englishman with an inherited title made the allegation in public. That man, Patrick Gillford (Lord Gillford, son and heir of the 7th Earl of Clanwilliam) made a lot of money himself working on projects which, according to Prokhorov, were paid for by Vladimir Potanin, Prokhorov’s original business partner in Moscow. Because Prokhorov was fighting Potanin for control of Polyus Gold, the listed goldmining company, whose stock they shared in roughly equal blocs, and because Gillford occupied a seat on the board as a purported independent, Prokhorov retorted in public that Gillford was toeing Potanin’s line, because he was being rewarded, and so wasn’t independent at all.

* * * *

A year on, and now that Mayor Bloomberg is backing Prokhorov to buy with some of his own, but mostly borrowed money, the Nets basketball franchise and a control stake in a Brooklyn real estate development, investigators from New York have been asking Gillford and Ryan to repeat what they said about Prokhorov’s business practices in 2008. But they refuse. Gillford is still sitting on the board of Polyus Gold; Potanin has cut his losses and sold out; and Prokhorov controls the company without challenge. Recently Ryan let slip: “In the end he didn’t have to steal the company’s assets, so what’s the point of repeating last year’s complaints that he might?”

* * * *

If Bloomberg’s New York doesn’t have civilization, it’s unreasonable to expect it of Putin’s Russia. So it ought to be understandable that Russians are only too glad to see more of fraud and subversion, in order to feel less compelled by force. They feel sorry for New Yorkers who think the only racketeers they will ever see perform are between the advertisements in replays of The Sopranos.

For Russians, the difference between Prokhorov and a civilized New Yorker like Bloomberg or Bernard Madoff is that there isn’t a difference; and that the only people who don’t realize this, and buy their promissory notes, are fools who ought to know better. And if they don’t, it’s a mitzvah to relieve them of the money they hardly deserve to keep. Madoff doesn’t count now, so you might ask Mayor Bloomberg whether he thinks Micky Prokhorov is that kind of mark.

(See: Hey Rico! Hey Micky! Hey Vova! Whaddya Say? by John Helmer - Tuesday, October 27th, 2009.)

“The question arises, at least from here in Moscow: Does the NBA commissioner think it’s his duty to do what it considered due diligence?” asked John Helmer, a former Carter Administration official who has run an acclaimed business news service in Russia since 1989. “And in the United States — particularly in New York State — you have to believe that an oligarch is open to investigation.”

The investigation will be conducted by NBA commissioner David Stern’s own legal team, but given the league’s desperate need for investors with deep pockets who can also expand their fan base into new markets, cynics would suggest that Prokhorov will get the feather-duster treatment.

(See: Questions still remain about prospective NJ Nets owner Mikhail Prokhorov
By Dave D'Alessandro, The Star-Ledger, September 27, 2009, 12:08AM.)

Public Treatment on Prostitute Planeload Possibly Different

As we said, our state agencies decided to let the accusations with respect to the planeload of prostitutes pass without provoking any kind of background investigation. We find out from the same article above (quoting Helmer again) that in Russia that incident had far greater consequences with respect to public reaction and what Prokhorov was allowed to own.

On the night of Jan. 9, 2007, Prokhorov was vacationing with friends at Courchevel, a ski resort in the French Alps, when he was arrested on suspicion of providing prostitutes for his guests. He was jailed in Lyon and released without being charged four days later, but his partner used the incident to denounce Prokhorov on state television and force him to give up his 26-percent stake in Norilsk Nickel.

The settlement was complicated: Prokhorov agreed to sell his Norilsk stake for a combination of cash and shares in Rusal, the billionaire Oleg Deripaska’s aluminum monopoly. That went into bankruptcy last year, leaving Prokhorov with several billions in cash, worthless shares, and a substantial IOU — “owed to him by people who can’t pay,” as Helmer put it.

Counting the Many Ways to Regret

We wonder not only how much the agencies that bypassed doing a background review on Prokhorov are regretting but also the reasons they may be regretting it now. Certainly, the assassination talk and being in the dark about where it might lead should be uncomfortable but, ironically enough, things are now shaping up to the point where we may be about to discover that Forest City Ratner itself wouldn’t be able pass an initial agency background check. That is because of the way that things are developing with respect to a federal investigation into the Forest City Ratner’s bribing of public officials with respect to their Ridge Hill project in Yonkers. For more nuance about how that investigation might unfold,* including how the New York Times went incredibly out of its way to characterize Forest City Ratner’s payments to public officials as not likely to be illegal, see our last post: Got “Bilked?” The New York Times Biased Report on Federal Investigation Involving Forest City Ratner (Thursday, January 7, 2010). Remember that the Times has its own business relationship with FCR: Their joint venture used eminent domain to acquire the site for new New York Times building at a low cost.

(* We read about how: Daniel Goldstein, who Bruce Ratner is trying to remove from his apartment at the site via politically connected eminent domain recently commented that he decided to pick out new colors for his baby’s room after reading a federal indictment of Yonkers officials. “I’m certainly not preparing to find somewhere else to live when he (Bruce Ratner) potentially…has a new place to live behind bars”.)

Getting Out of Contracts When There Are Background Problems

So if the public agencies had done a background check on Prokhorov they might not now be having to think about the ugly position that an unfolding of the Ridge Hill investigation could put them in. There may come a point where the public agencies are going to need to look at unwinding transactions with Forest City Ratner. What has already been reported about Forest City Ratner’s payments to public officials in connection with the Ridge Hill project would certainly have posed a threshold problem at the agencies where I used to work and would have required quite a lot of explaining if a clearance to proceed was going to be given. In this case, ESDC (and its Byzantine cohort of sister agencies) have actually proceeded to issue bonds for the proposed basketball arena. It is of course messy to have contracts to unwind, but perhaps compounding the situation even further is the fact that because the bonds were closed with many aspects of the of the real estate side deal in escrow or to be performed in futuro, the contracts are in many respects executory in nature (characterized by unperformed obligations) and it is therefore hard to make excuses not to terminate them.

No NBA Approval

One example that highlights this takes us back to the NBA’s vetting of Mr. Prokhorov. It still hasn’t been completed. The Official Statement for the transaction documents and FCR’s SEC filings indicate that even though tax-exempt bonds have been issued for the basketball arena the Atlantic Yards deal is expected to fall apart if NBA approval for Mr. Prokhorov is not furnished. (See: Thursday, December 31, 2009, So, where's the $324.8 million more for the arena going to come from?, Tuesday, December 08, 2009, FCE anticipates "groundbreaking in the fourth quarter" (could be January); AY mortgage delayed (hard bargain or cash-flow problem?, and Tuesday, December 15, 2009, "Junkyard Bonds" get tossed in garbage truck, but are state officials listening? What about the "loophole" allowing the BALDC to avoid scrutiny?)

That then is another headache for public officials who now ought to wish they had done a background check since it now could become more likely that Prokhorov won’t be approved by the NBA.

Here is an interesting turnaround thought: Could the NBA become more concerned about approving Prokhorov because events with respect to Ridge Hill now make them more concerned about the ownership approval they previously gave Forest City Ratner. Since FCR would probably sell the team if Prokhorov is not approved, such a non-approval could garner the NBA a two-for-one housecleaning (and some better press).

Races To Clean Up?

Why might the NBA want a clean house? Because you never know who is going to be investigating these things or how deep they will go. For instance we now know that Assembly Member Richard Brodsky is collecting a sizable $1.3 million war chest to run for state attorney general to replace Andrew Cuomo. Brodksy has laid claim to the mantle of an investigator of public authorities and stadium finance abuse so he really can’t afford to be shown up by not pursuing and vowing to pursue these and the many related juicy opportunities for investigation. By the same token other candidates looking to get ahead of Brodsky may want to show that they can beat him at what he has declared to be his own game.

If the multiple candidates competing for the office of attorney general are all clued in to the fact this is where the action is, can Cuomo, who is expected to run for governor against incumbent David Paterson, afford to let the grass grow under his investigative feet, especially when he has already been asked to investigate Atlantic Yards and is already investigating some interrelated abuses with respect to Willets Point? If Cuomo pursues the Atlantic Yards and related boondoggles as he should (and that would also be a sweet strategy for challenging David Paterson), can Paterson afford not to finally start addressing these matters he has neglected?

There is enough brewing here that, if it explodes, would seriously hamper Cuomo’s or anyone else’s run at the governorship. It is possible to think of it in even bigger terms: An explosion of these matters would be national news. . . You know, the kind Jon Stewart covers on The Daily Show? Forget the governorship: Politicians caught napping when these matters blow up would hardly be able to set foot on the national stage afterwards.

Asked About Taking a Promised Hard Look at Atlantic Yards Before Issuing Arena Bonds Does Paterson Understand AY?

(Image above from Atlantic Yards Report video of press conference.)

Governor Paterson was asked questions today about the hard look his administration said it would take at Atlantic Yards. Questions came from Norman Oder of Atlantic Yards Report (see, Saturday, December 19, 2009, Hail Mary or silver bullet: Perkins, raising questions of fraud in arena bond sale, asks Paterson to put Atlantic Yards on hold) and Noticing New York was able to ask our own question at the same brief press conference.

At a critical time the governor probably still needs to get up to speed on Atlantic Yards.

Our question to the governor and his response were as follows:

NNY: Governor, you are trying to close a budget gap and the MTA is trying to close a budget gap. You said that you will take a serious, hard look at the Atlantic Yards project. That project is perhaps $2-3 billion in public subsidies and it’s calculated by the city Independent Budget Office to be a $220 million net loss to the public, that’s the net loss not te cost. Don’t you think that perhaps taking that serious look should happen before bonds are issued for the arena?

Paterson: The bonds were issued for the arena. There are a number of projects that probably add up to tens of billions of dollars that we could take off the table if we were trying to save cash. The whole premise of these sort of public-private arrangements is to create jobs and bring revenues back into the state. So, if you take a snapshot in time it is a loss. If you take a snapshot in time funding the educational system is a loss, but the revenues that you generate from the workforce in the years to come far outweigh the investment that you make.

Note that our question relates to our criticism this week about how the MTA is wasting its resources by giving them away without bid to the Atlantic Yards mega-project. (For more analysis of the numbers see: Friday, December 18, 2009, Big Picture Questions: Does MTA Chairman Jay Walder Comprehend Atlantic Yards Link to MTA Cutbacks.)

Bonds Not Issued

The governor’s statement that the bonds have been issued is not correct. Goldman Sachs has found buyers for the bonds but the bonds are not currently scheduled to be “issued” until this Wednesday, December 23rd, and that date could be postponed if the governor and his counsel decide they need time to think about whether they should be issued at all. This is a very important distinction for the governor to understand since he had just finished answering questions from Mr. Oder about the serious likelihood that the bonds, if issued, would be illegal.

If the bonds were unwisely issued it would involve a much messier unwinding of the transaction. When he initiated his answer by stating that the bonds “were issued” for the arena the governor might have meant to communicate that an issuance might foreclose some of his options. We can’t say whether this is what he meant because he flew off before there was time for follow-up. What is important is that it is critical for the governor to act before any issuance precludes his best options.

Can the Public Snap Out of $220 Million Net Loss?

The governor’s belief that the $220 million net loss calculated by the NYC Independent Budget Office could be erased with the passage of time ignores how that net loss was calculated. The loss to the public is permanent since it was calculated with the passage of time taken into account. In fact, as we commented recently, given the loss to the public that the arena would represent if it is ever built, the next step that could readily make sense is to consider benefitting the public by immediately tearing it down.

Capital Projects to Which the Governor Should Have Been Comparing Atlantic Yards

We thought it was interesting that the governor compared Atlantic Yards to "the education system" rather than to another comparable capital spending project when he was looking for a comparable expense. It was a strange reach. There are plenty of other projects that could be built that would not be a net loss. Why not let those projects generate jobs and revenues “in the years to come” that “far outweigh the investment that you make.” In terms of possible comparisons, the real question is whether anyone can think of a project worse for the public than Atlantic Yards? We think not. We are having an open competition on this, we keep asking, and so far no one has identified even a close second for the title of worst New York boondoggle.

Questions About Whether BALDC Arena Bonds Would Be Legal

The questions being raised about whether the BALDC bonds would be legal are related to the fact that the Empire State Development Corporation (ESDC) is trying to sidestep requirements like Public Authority Review Board approval and review by the state comptroller Thomas DiNapoli. Its sidestepping involves using the ghostly “co-administered" Job Development Authority (JDA) to do something the legislature never granted authority for it or JDA to do. To this end, JDA is being asked to create still another entity, a local development corporation, the Brooklyn Arena Local Development Corporation, that would somehow be able to do what neither ESDC nor JDA have authority to do. We have previously criticized the hellbent and desperate sloppiness with which the issuance of these bonds has been pursued.

We also note how JDA barely seems to exist at all. Several days ago we called the only telephone number we could obtain for JDA, which is ESDC’s telephone number, and asked for a JDA press representative. It took some time before it was acknowledged that we had reached the right number for that purpose but they could not identify a representative. They informed us they would have to call back with that information, something which has never happened. We think there are basic questions about whether JDA is doing the essential things a corporation would need to be doing in order to truly exist and conduct business. Those questions are not easy to address without an available press representative. Further, Atlantic Yards Report did an excellent article about how there is none of the normal basic transparency you ought to expect from a New York public authority to indicate that JDA is conducting business properly. (See: Thursday, December 17, 2009, Due diligence on the BALDC leads down a rabbit hole, while other state agencies are more transparent than ESDC/JDA/BALDC.)

For more analysis of the legal questions being raised by with respect to the issuance see: Perkins Pounces on PILOT Problem, Sees "Spectre of Fraud" With Atlantic Yards Arena Bonds, 12.19.09.

No Authority to Create Local Development Corporation (Like BALDC) to Fund Arena

Having looked at JDA’s statutory authority, which is something of an unattended relic, it seems clear to us that JDA was created for entirely different purposes and programs and that JDA has no authority create an entity like BALDC for the purposes of the proposed arena bond issuance. In fact, it seems quite the opposite: such actions are proscribed. Further, it looks to us as if the actions now being undertaken are potentially likely to put some of the public officials involved, including the governor's counsel, Peter Kiernan, in some serious legal jeopardy.

JDA has the power to create local development corporations (LDCs) but only for very specific limited purposes. Under Article 14 of the Not-For-Profit Corporation, pertaining to “Special Not-for-profit Corporations” JDA is authorized to create LDCs that construct, acquire, rehabilitate and improve for use by others “industrial or manufacturing plants,” and the statute says “but not for any other purposes.” Since an arena can’t be considered an industrial or manufacturing plant, that sounds like a pretty clear instruction not to do an arena. Furthermore, the way in which the statute is written clearly recognizes that without the specific finding it includes that “public officers” (like the governor’s counsel) forming an LDC for other purposes would not be performing a governmental function consistent with their duties as public officers. Normally, there are significant problems when public officials are involved with private corporations as these LDCs are. So JDA (and public officers) can create and LDC for the purpose of promoting “industrial or manufacturing plants” but not an arena. We add this to the other legal problems identified with respect to the BALDC arena bonds.

Addendum: (Posted December 21, 2009) Here from Atlantic Yards Report coverage of this post is video of our exchange with Governor Paterson.

Big Picture Questions: Does MTA Chairman Jay Walder Comprehend Atlantic Yards Link to MTA Cutbacks?

Wednesday morning we were among those who addressed the Metropolitan Transportation Authority meeting just before its board approved, in the words of the New York Times, “a punishing slate of service cuts on Wednesday that would amount to the most significant erosion of New York City’s transit system since its recovery from the ruinous days of the 1980s.” (See: M.T.A. Approves Big Service Cuts in Mass Transit, by Michael M. Grynbaum, December 16, 2009.)

Were We Really Heard by the MTA’s Chair?

Our message was that the MTA’s giveaways to the proposed Atlantic Yards Forest City Ratner mega-monopoly are probably the most prominent example of why the MTA is was having to vote to implement these cutbacks. After we and the rest of the public spoke, MTA Chairman and Chief Executive Jay Walder made a statement that sounded uncannily as if he had listened to and taken to heart what we and others said that morning about the drain on the budget due to Atlantic Yards. Maybe it sounded that way until you remember how politicians and political appointees with an idée fixe about the Transaction Fixée (The Wired Deal) can mouth all the words of good, responsible government without meaning any of them.

Reasons MTA Deficit Is Attributable to and More than Covered by Public Expenditures on Atlantic Yards

Diverting financial resources into Atlantic Yards is making the MTA budget cuts necessary in a number of ways.

1. Wasteful Mind Set. First, the support for Atlantic Yards establishes a strange mind set for wasting public dollars. As we pointed out, the arena for which state agencies now propose to issue bonds will be a net loss to the public. The NYC Independent Budget Office has conservatively calculated that net loss at $220 million dollars. With changing events the exact figure for the public’s net loss could be tweaked a little bit but is apparently growing. The portion of the taxpayer-supported bonds that were initially supposed to be issued to finance the arena are in a slightly lower amount than originally projected, which will reduce the figure somewhat, but New York City is mysteriously suddenly ponying up another $31 million dollars which increases the net loss. Further, it turns out that an additional $400 million in tax-exempt bonds were secretly authorized in violation of the state’s open meeting law. Unless that issuance is prevented it will really drive up the net loss to the public, to about $620 million. We are not talking about how much the project will cost the public; we are only talking about the net loss it will be after much greater public expenditures that will, all told, come to $2-$3 billion. That the arena will be a net loss to the public is not the same thing as saying that, once built it would be profitable for the public to tear it down again but it is pretty close to that. In this case the arena is likely to be such a drain that it might well be worthwhile to do so.

2. Hundreds of Millions Lost to MTA. Atlantic Yards represents the MTA disposing of assets and opportunities worth hundreds of millions of dollars that could be used to close its budget gap.

3. State Budget Cuts to the MTA. The emergence of the MTA’s deficit in recent weeks is partly because of $143 million in state cuts. The state (in addition to what the MTA is spending on Atlantic Yards) is misdirecting far more than this $143 million state cutback amount into Atlantic Yards.

4. City Funds Not Available. The MTA is making the argument that part of what it is cutting back, free Metrocards for New York City highschool students, are expenses that the MTA should not bear and that others should bear instead. The city (which mysteriously just came up with another $31 million for Atlantic Yards) easily has more than enough money that it is misapplying to Atlantic Yards to make this debate academic if those funds were properly redirected. Among other things, the city is forgoing a huge amount in real property taxes on the arena and is putting in more than a hundred million additional dollars into the project in direct expenditures.

Others Making the Same Point About Atlantic Yards

We were not alone in pointing out that the MTA’s deficit could not be looked at without looking at Atlantic Yards as a cause. Lucy Koteen made similar point and many signs were being held in the audience of attendees saying things like: “To the MTA: Ratner’s Got Your Money.” City Council Member Tish James spoke, making much the same point and issued a press release to this effect as well (See: December 16, 2009, Tish James Press Release: Save student Metrocard program, crucial service, and MTA jobs — Cancel the Atlantic Yards sweetheart deal for Forest City Ratner!) From that press release:

"Cancel the sweetheart deal for Forest City Ratner," said Council Member James. "Forest City Ratner should pay the $100 million owed now for the purchase of the Vanderbilt Yards. I also question why Forest City Ratner is not being made to pay the millions of dollars owed for the naming-rights deal upfront? And, had the MTA accepted a higher bidder, they would have received their funds upfront and their current budgetary gap could have been cut almost in half."

Noticing New York’s Big Picture Points on Wednesday

Wednesday morning we only had two minutes to speak. We did our best to make some of our above stated points succinctly and so say a bit more in addition.

We started out by telling the MTA board that they didn’t “get the big picture” and to assist them in getting that big picture we brought some BIG posters which we held up as we spoke. See the picture below (click to enlarge).
MTA’s Sidestepping of Bids (One Story for the Press with Another for the Courts)

We also focused on the way that the MTA didn’t obtain bids from Forest City Ratner before it gave away its property. It didn’t obtain a meaningful bid in the very first instance and this summer when presented with another meaningful opportunity and every reason to do so the MTA again sidestepped getting any bid.

We pointed out that the last time we had been in the room the MTA had made a point of having its representatives tell the waiting press outside that it was not getting bids to compete with Ratner because there were no other potential bidders. We pointed out that it was clear from the record of its own board meeting that it had not even considered doing so.

They really couldn’t get any other bids?, we asked. We pointed out that Willets Point just got 29 responses to its Request for Qualifications from developers and that Coney Island just attracted 50 interested bidders. We told the board that members it was clear that the reason they didn’t even try to get other bids was that they were treating Atlantic Yards as rigged deal, the point of which was to give a handout out to FRC.

What were MTA representatives telling the press last June about how they couldn’t find other bidders to compete against Ratner? Here is a WNYC radio report from Monday June 22, 2009 after the MTA’s Finance Committee meeting:

The developer for the Atlantic Yards project has scaled back its offer for an MTA rail yard in Brooklyn. Instead of paying 100 million dollars at closing, Forest City Ratner would give the MTA just 20 million dollars up front, then pay the rest in installments, with interest, over the next 22 years. MTA chief financial officer Gary Dellaverson says the MTA should take the offer because it would be risky to find a new buyer.

DELLAVERSON: I have no idea when it would be more propitious than now to engage in a second transaction on this property.

The replacement rail yard that Forest City Ratner would build for the MTA would also cost less, with 25 percent less capacity than the original design. The full MTA board could vote on the new offer when it meets this Wednesday.

Here, two days later is another WNYC report (available on line) where Mayor Bloomberg’s representative on the board. Jeff Kay, makes essentially the same misrepresentation that there were no other bidders available. The report also notes that the MTA rejected a better offer it unexpectedly received from Develop Don’t Destroy Brooklyn:

The MTA board overwhelmingly approved a new deal for the Atlantic Yards development in Brooklyn by a 10 to 2 vote.

REPORTER: Some board members expressed regret that they were accepting less cash up front and a less valuable rail yard than originally proposed in 2005. But Jeff Kay, who represents Mayor Bloomberg on the board, said it was better than nothing.

KAY: There is no other market, no one else has come forward with a credible proposal at this time.

REPORTER: At the last minute, opponents of the Atlantic Yards project offered to pay $120 million over a period of 12 years for the rail yards. Developer Bruce Ratner is paying $100 million over 21 years under the new deal.

Board members did not appear to take the counter-offer seriously and the board chairman refused to comment when asked about it.

(See: News: MTA Approves New Deal for Atlantic Yards, WNYC Newsroom, June 24, 2009.)

The MTA couldn’t find interested bidders to bid against Ratner? The developers we know are interested.

The MTA was subsequently sued by community groups and elected representatives for not seeking other bids in violation of the Public Authorities Accountability Act. Interestingly, when the MTA went to court to defend themselves, being unable to find other bidders for the site was not exactly the story they told to the court. The story they told they told the court was more about how the MTA, the city and the state had gotten so deeply involved in pushing subsidies to Forest City Ratner without a contract that bidding the property out to other bidders would put the public in jeopardy (rather than, as would more truthfully be the case, putting the financially weak Forest City Ratner in jeopardy). From Atlantic Yards Report:

Forest City Ratner had begun significant work on the Vanderbilt Yard under a license agreement. The city and state had contributed well over $200 million in subsidies, part of a $305 million direct allotment. And FCR had bought most but not all of the land needed for the project.

The MTA said that a new appraisal would not only have "seriously jeopardized" its efforts to maximize its return regarding the disposition of Vanderbilt Yard property rights, but also the costs associated with track relocation and platform construction.

But the latter is because FCR was already working on it.

As Forest City said in legal papers, "ESDC and FCRC already have achieved substantial progress in implementing the Project, and the public would not be served by opening the Project to new bidding."

(See: Wednesday, December 09, 2009, As challenge to MTA deal awaits a judge, did Forest City Ratner really have the MTA over a barrel, or was it the other way around?)

Forest City Ratner’s rights have now been restructured to give it an option to do only as much of the megadevelopment as it ultimately decides it wants to. That restructuring is, of course, absolutely inconsistent with the idea that other developers can’t replace Ratner.

So there’s one story for the public and the press, another for the courts. Finally there is real story that is really true and the real story is that it is a rigged deal. Nevertheless, in the first legal go ‘round on the litigation about the bidding, the court (sort of) bought the MTA’s version of events. (See: Thursday, December 17, 2009, Judge, deferring to MTA version of the case, dismisses lawsuit challenging revision of Vanderbilt Yard deal.) That is because whatever stories public officials tell, courts have been deferring to them and thereby promoting rigged deals and government misconduct.

The same thing was true in the eminent domain abuse case brought against the Atlantic Yards project. The public authorities involved told the public one story (Atlantic Yards was an “economic development” project) and told the courts another (that it was ostensibly to remove “blight”) while the real truth was again something quite different, that a wired no-bid deal was being handed to Ratner to eliminating the competition from other developers in his back yard.

MTA Can Stop the Atlantic Yards Deal and Get Back on Track

We told the MTA that this was a deal that they could easily stop and that they could thereby recoup for proper use the hundreds of millions of dollars in misdirected moneys. All it would take is for the MTA to settle the lawsuit brought against it by the coalition of community groups and elected representatives and then properly bid out its property to multiple developers.

Investigation Needed

We told the MTA that this matter needs to be investigated and told them we were asking Attorney General Andrew Cuomo and State Comptroller Thomas DiNapoli to do so. (See: Sunday, December 13, 2009, To Attorney General Andrew Cuomo and State Comptroller Thomas DiNapoli: Investigate and Halt Issuance of Arena Bonds.)

More of the Big Picture

We said more, which we will get back to. Had we had more time we also would have said that the MTA cutbacks must be looked at in terms of big-picture city development policy.

These cutbacks to lower income neighborhoods are equivalent to a form of affordable housing cutback. Here we are cutting back on transportation to areas where there is affordable housing (and where perhaps more could be built). At the same time we are diverting MTA revenues into the net-loss-to the-public Nets arena and luxury housing developments like Hudson Yards and Atlantic Yards. Atlantic Yards represents an unfair transfer of wealth to an already wealthy developer at the expense of those less privileged. (See: Tuesday, December 15, 2009, Russianoff on MTA land sales: "they decided that it was a higher value to help the mayor and the governor".)

MTA Chairman Walder’s Statement: Uncannily As If He Heard Us
Here is what Chairman Walder said after listening to what the public speakers had to say. See if it doesn’t sound exactly like the ideas we have been expressing. (We were able to compile what Chairman Walder said from several NY1 reports and the New York Times. Eventually his entire statement should be available when the MTA posts its video archive of the meeting on its site.)

Can we really say that the money that is sent to the MTA, all the taxpayer money that comes to the MTA is well spent? Are we in a position to be able to say that? Because if we are going to be in an environment where we are talking about truly painful things, in which we are doing things that hurt people’s lives and well-being then we need to be able to say that and, unfortunately, I’m not sure that we can.

* *

In the two months that I’ve been here, it’s apparent to me that we don’t operate in a way that ensures that every taxpayer dollar that we receive is being used as effectively as possible . . .

We need to rethink every aspect of our operation. We need to permanently reduce the cost of what we are doing. In short, we need to take the place apart. Now I know that this is hard, but in the economic time this is what businesses all across the state are doing. They can’t afford to fail when they do and I don’t think we can afford to fail when we do it.

Why We Fear Chairman Walder Wasn’t Really Listening: Dysfunctional New York

As we said, Chairman Walder’s remarks sound like a heartening recognition of what we were saying. The reason why we fear it means nothing more than political theater is because our politicians are very adept at mouthing the right words about good government while doing exactly the opposite. And in fact, this is one of the points we made Wednesday morning at the MTA board meeting, holding up our poster with the heading “Dysfunctional New York.” (We have made this point before in more detail):

• May 20th: Bloomberg said he was turning off the spigot for Atlantic Yards. May 27th: It was revealed that Bloomberg and his representatives on the MTA board were giving Forest City Ratner an Atlantic Yards package worth more than $180 million in additional no-bid subsidies from the MTA. Last Week: Bloomberg was saying to the press, "I don't know why anybody is surprised at what is happening to the MTA," . . . "It's a piggy bank that keeps getting raided.”

• Last week Governor Paterson was telling us that the state had only $3 million in cash on hand and that the legislature needed to act because dire, drastic cuts were in store. How can Governor Paterson expect legislators to take him seriously about legislative branch-controlled spending when he has refused to do anything about Atlantic Yards, which is the premier example of executive branch-controlled pork barrel spending.

Therefore, why shouldn’t we expect the same thing from Chairman Walder, the saying of one thing while meaning something else entirely.

In Dysfunctional New York Others Also Ignore the Obvious Facts
In dysfunctional New York, Chairman Walder is not the only one with deceptive rhetoric we need to navigate around to make sense of the world. City Council Speaker Christine Quinn was present at the MTA board meeting to speak out against the cuts. Unfortunately Speaker Quinn was not present this summer to protest the MTA’s giveaways to Forest City Ratner. It was to be expected: She rarely challenges Bloomberg or his giveaways to the real estate industry. Ms. Quinn has never taken the opportunity to criticize Atlantic Yards and she has frequently supported the kind of eminent domain abuse occurring in connection with the Atlantic Yards mega-monopoly, the Columbia expansion taking over West Harlem and the wholesale eviction of the Willets Point neighborhood.

Similarly, the Working Families Party, closely connected* with ACORN, has been sending out e-mails urging protest of the MTA cuts. (Sample quote: “Even Ebenezer Scrooge would cringe. But the real problem isn't just the MTA - it's Albany.”) But the WFP hasn’t taken a position against Atlantic Yards despite its drain on the city, state and MTA budgets. Everyone believes the reason that WPF hasn’t is that the perpetually self-interested ACORN has essentially been bought and paid for by Forest City Ratner.

(*See the multi-part City Hall “All in the Family” series: Part 1, Part2, Part3, Part 4. and Part 5.)

Of course, we can always hope Chairman Walder will live up to his words to “rethink every aspect” of the MTA’s “operation” “take the place apart” and make sure that “that the money that is sent to the MTA, all the taxpayer money that comes to the MTA is well spent” so that “every taxpayer dollar that we receive is being used as effectively as possible.”

Mr. Walder is yet another of the public officials who have the power and responsibility to kill Atlantic Yards. Let’s see if one of those public officials takes that responsibility seriously and acts accordingly.

ADDENDUM: (Added December 19, 2009) We can’t resist adding this one new link to our post. The MTA says it couldn’t get any other bids? And the economic downturn was a factor? Here via Atlantic Yards Report by way of City Hall News are hot-off-the-presses quotes from City Hall News Seth Pinsky, president of the New York City Economic Development Corporation (NYC EDC) (emphasis supplied):

. . . in recent months, we at the New York City Economic Development Corporation have become aware of a secondary benefit of our new-found market position. Specifically, we have begun to see a rise in the number of bids—and bidders—chasing the $2.5 billion in capital projects that we plan to manage over the next five years. . . . . this is also great news for taxpayers, because increased competition for bids almost always means better rates for the public. Over the long run this will result in projects completed more quickly and more efficiently.

(For more, see: Saturday, December 19, 2009, NYC EDC's Pinsky: "increased competition for bids almost always means better rates for the public".)

One more thing about Mr. Pinsky’s insights: We told the MTA board exactly that back in June reprising of our comments before ESDC.

To Attorney General Andrew Cuomo and State Comptroller Thomas DiNapoli: Investigate and Halt Issuance of Arena Bonds

The following an open letter from Noticing New York to Attorney General Andrew Cuomo and State Comptroller Thomas DiNapoli calling for an investigation and halt to the proposed issuance of ESDC’s Brooklyn Local Development Corporation PILOT Revenue Bonds for Forest City Ratner’s proposed Nets basketball arena.

* * * *
December 13, 2009

Hon. Andrew M. Cuomo
Attorney General
Office of the Attorney General
of the State of New of New York
120 Broadway
New York, New York 10271-0002

Hon. Thomas P. DiNapoli
New York State Comptroller
New York State Office of the Comptroller
633 Third Avenue
New York, NY 10017


Re: New York State Public Authority Bonds Being Rushed to Market Without Proper, Adequate and Required Assessment, Disclosure and Approval of Risks (Empire State Development Corporation’s Proposed Financing of Nets Arena Via the Issuance of Its Subsidiary Corporation’s “Brooklyn Local Development Corporation PILOT Revenue Bonds, Barclay’s Center Project”)

Dear Attorney General Cuomo and Comptroller DiNapoli:

As you each have jurisdiction, capacity and, we respectfully submit, the duty to act in this area, we are writing to bring to your attention the fact that New York State public authority bonds are being rushed into the tax-exempt bond market without the required assessment, disclosure and approval of the risks associated with their issuance which in this case is substantial. The sale is being rushed to market (while a number of lawsuits are pending that ought to affect the issuance) in order to benefit Forest City Ratner hoping to meet a December 31, 2009 IRS deadline to obtain a tax-exempt status for which that private developer’s project would otherwise not qualify. (The goal is to avoid the provision of the IRS code enacted by Senator Moynihan that prohibits tax-exempt financing of private sports arenas and stadiums.) The risks being ignored in the process put the public, the state and the investors potentially buying these bonds in significant jeopardy.

We ask that you use your powers to investigate this issuance and, in the meantime, to order it halted as not being in compliance with minimum state requirements.

Here are just some of the things you need to know and about which you can readily learn more when you investigate:

1. Bonds Issued by Subsidiary Public Authority: (More than One Tranche). More than one series of bonds are being issued by the Brooklyn Arena Local Development Corp. a subsidiary public authority created by the Empire State Development Corporation as an instrument to bring this financing to market. The issuance of different series of bonds is being used in order to stratify the unacceptable risks of the transaction. The tax-exempt bonds would be paid with “PILOTS” diverting taxpayer revenues for the developer’s benefit.

2. Inadequate Assessment of Risk by the Rating Agencies. More than one series of bonds are being issued. Moody’s Investors Service and Standard & Poor’s (December 1, 2009) gave the senior bonds (i.e. the most credit worthy of the bonds being issued) respectively Baa3 and BBB-minus which means that these best-of-the-lot bonds being issued were given the very lowest investment-grade ratings possible, ratings just a notch above junk. However, the evidence is that these ratings do not reflect a proper assessment of actual risk. (Fitch did not rate these bonds.) Among other things:

a. Moody’s Cash Flow Review Mistake: Starting With 225 Annual Arena Events vs. 200. The Moody's review on the bonds was based upon a supposition that there would be 225 arena events per year while the evidence is that to assume even 200 arena events would be aggressive and inconsistent with the information that the developer itself has been able to promulgate. (There is no evidence of an independent market study or realistic recognition of the arena's competition with three or perhaps four regional arenas. - The consultant hired to do a market analysis made clear that “information provided to us by others was not audited or verified, and was assumed to be correct.” The “others” would be FCR.) When asked to address the significant 11% error in assessing the cash flow Moody’s was unable to respond.

b. Arena Completion Date Unrealistic. It is unrealistic to project that the arena will be completed by April or even June 2012, thus prolonging the duration of bond payments without any projected revenues.

c. Bonds Involve Provisions For Junior Bonds to Default: Atypical Absence of Cross-Default and Redemption. The bonds include provisions where the junior bonds can default, in which case a Russian billionaire, Mikhail Prokhorov, will be in litigation to take over the arena from the developer. The junior bonds are junk bonds quite likely to default. Mr. Prokohrov’s involvement in this transaction is as yet apparently unapproved by any public agency involved. In other words a background check and review have not been done. There is no provision for cross-default, acceleration or redemption in such an event. Given this atypical provision for a litigious transfer of the project we are at a loss to explain why the ratings for these bonds have not, accordingly, been reduced several notches. We do not believe these kinds of litigious difficulties were envisioned or similarly foreshadowed when bonds were issued for the new Yankees and Mets stadiums. The bonds for those baseball stadiums also deserve a respectively higher rating than these new proposed arena bonds given the proven track records of those teams in New York City. The New Jersey Nets have absolutely no track record. Forbes is reporting that the Nets are distributing 5200 free tickets a game, which is more than one-quarter of the house. Additionally, ratings for the Yankees and Mets stadium bonds were given before the national fiscal crisis. We understand that attendance for those teams has not been as good as was projected.

d. Risk of State Agency Non-Compliance With Public Authorities Accountability Act. One Significant risk to the transaction is that the half of the land required for the transaction (the half the developer is not attempting to take through eminent domain) will not be obtainable because of a violation of the Public Authorities Accountability Act. Despite the fact that these bonds are being issued by a state public authority and that this will pose a significant risk to any buyers of these bonds the assessment of the question of whether there was a state agency violation of this law is not being offered by state officials but by the developer. The Preliminary Offering Statement seeks to assure the buyers of the bonds with the private developer’s self-interested assessment that the developer: “believes that the MTA complied with all applicable legal requirements and expects that the [defendants] will prevail in this proceeding.” We also note that this assessment is not in the form of a legal opinion.

e. Errors in Offering Statement. The Preliminary Official Statement Being used to market the bonds contains other inconsistencies and inaccuracies that go to the question of how many arena events will be generating cash flow for the bonds and the basis for ratings. (See next section.)

In assessing the reliability of the ratings agencies we point out that in a front page story the New York Times offered this assessment of the current state of affairs: “. . for now, and for the foreseeable future, the market for ratings is sure to look uncannily similar to the one that helped usher in the crisis: three rivals, all of them paid by issuers, bestriding the market.” (See: Debt Raters Avoid Overhaul After Crisis, By David Segal, December 08, 2009.)

3. Inaccuracies in the Preliminary Official Statement (POS) relating to number of possible events in the arena.

a. Non-Profit Arena Events for Community Go Missing. The Preliminary Official Statement (POS) being used to sell the bonds says that each year NO MORE THAN TEN EVENTS (“not to exceed ten (10) events”) shall be held in the arena for the public and community groups at the FULL COST of normal events in the arena (“which access shall be on the same terms, including cost, as the Arena is generally made available to other Persons for use”). Inconsistently, the developer has already promised the public that there will be AT LEAST TEN EVENTS which will be at a LOWER COST to the public with the developer forgoing profit on the minimum ten events. (Alternately: “a minimum of 10 events would be made available for use by community groups at a reasonable cost (generally the cost of operation) with any net proceeds to the sponsor from these events to be donated to not-for-profit organizations” and “at least ten (10) events per year, at a reasonable rate, with net proceeds from such events to be used to support non-profit community organizations.”) In other words, that subtracts out a minimum of at least another ten events a year from the 220 projected profit-making events.

b. Misrepresentation on Possible Hockey Team. The POS claims that simply by retrofitting the arena with “ice-making abilities” the arena can house a NHL hockey team and thus bring it the revenue associated with that team. This representation offers absurd hope for mitigating risk because the evidence clearly shows that the arena is physically too small to include a hockey rink. This is highly material because if a hockey team plays in an arena, the team plays a minimum of 43 home games per year and as many as 55.

4. Bonds Far Riskier than Transaction Approved by the State Public Authorities Control Board (PACB). (As furnished to and consented to by the State Comptroller’s Office.) The bonds being issued are far riskier and for a very different transaction than was approved by the State Public Authorities Control Board (PACB). As required by the governing state legislation that original transaction was also sent to, commented upon and the approval determination was consented to by the State Comptroller’s Office. The new transaction which has not been approved by the PACB also lacks that statutorily required comptroller review, input and consent. The new transaction is much riskier and different from what was approved because:

a. The arena (supposed to generate income) is 20% smaller. The PACB (and the ESDC board) approved a transaction that involved the financing of an 850,000 square foot arena, not the 20% smaller 675,000 square foot arena that developer Forest City Ratner currently plans to build.

b. The arena (needing to be paid for with generated income) is substantially more costly. At the time the PACB issued an approval, the arena was projected to cost $637.2 million, only a fraction of the $1.1 billion (including infrastructure) it is currently projected to cost according to the recent disclosures of the Preliminary Offering Statement. $1.1 billion represents an increase of 73% over $637.2 million.

c. The arena is less functional. The smaller arena will be less functional. The diminished functionality means among other things that, as noted above, the arena will not (as would previously have been possible) be able to host an NHL hockey team with 43-55 arena events per year.

d. Larger Atlantic Yards financing now a decades-long option for the developer. The larger Atlantic Yards megadevelopment as part of which the arena financing was approved has also changed very substantially (and is much more undefined than ever). It is now a muti-decade option on multi-acre mega-monopoly on the part of the developer that will involve subjecting the community to years of unnecessary developer-created blight as parts of the community are torn down and once-thriving alternative development is stymied.

5. No ESDC Board Approval for Smaller Arena. Not only has the PACB not approved the far riskier and different transaction being brought to the bond market; the ESDC board members have also not acted to approve the financing of the new smaller arena that Forest City Ratner proposes to build.

6. PACB Approval (and Comptroller Review and Consent) and Public Policy of Requiring Public Benefit: $220 Million Net Loss. While it may be argued whether the PACB and the Comptroller take into account the generation of public benefit and public policy issues when they conduct their review of proposed project financings, it should be noted that the transaction now getting underway involves no benefit to the public, whereas the transaction that was previously brought to the PACB and the Comptroller’s office for approval did. The New York City Independent Budget Office has reviewed the new arena financing transaction being brought to market and concluded that it will represent a $220 million net loss to the public ($39.5 million in direct losses and $180.5 million in opportunity losses). That is not the total cost to the public: That is the current project net loss; the project will cost much more.

7. Secret Approval of Additional $400 million in Bonds For Arena That Will Substantivally Increase Total Net Loss to the Public. On September 17th the public authorities issuing these bonds secretively and in violation of the New York State open meetings and sunshine laws approved the groundwork to issue another $400 million in tax-exempt infrastructure bonds, the proceeds of which can be turned over to the developer to reimburse it for its costs of building the arena, thus significantly boosting the net loss to the public of this transaction. Those additional bonds have also not been approved by the PACB or the comptroller. Absent a recission of these actions by the public authorities there can be no assurance that the public is not about to be saddled with these extra undisclosed costs.

8. Bonds Negative Effect on Credit of the State. Though the taxpayer-backed bonds are technically non-recourse to the state for additional funds in the event of a default, the state is still in jeopardy due to their riskiness. Though there is no state guarantee of the bonds, state public authority officials have not ruled out the possibility that the state would rescue the bonds in the event of their default. One possible backdoor method being set up to effect such rescue is the secretly approved issuance (at taxpayer expense) of the additional $400 million in bonds described in the above paragraph. Even if the state were not to rescue the bonds, the PACB was created to review and approve the issuance of all bonds, including such non-recourse or limited-recourse bonds issued by state authorities because the negative effect of default on the state and all other state issuers is recognized.

9. Public Authorities Out of Control? We believe that you each independently have authority to step in to halt these transactions and investigate them. To say that such is not the case would be to say that our public authorities are extraordinarily out of control.

It is not the purpose of this letter to criticize your fellow politicians and public officials, but it is important to note that the issuance of these bonds is being played out against an Alice-in-Wonderland denial to the public of realities, fiscal and others, by holders of public office who should be exercising their oversight to restrain the abuses in these transactions:

1. Denial of Responsibility by Mayor Bloomberg. Bloomberg has denied the financial facts of excessive subsidy for Ratner Atlantic Yards mega-monology with incredible assertions both preceding and following his actions. On Wednesday, May 20th Bloomberg publicly said that the Atlantic Yards project would receive no more subsidy. On May 29th it was revealed that a deal was in the works to give millions more, what turned out to be a package worth more than $180 million in additional no-bid subsidies to Ratner. These subsidies facilitated by the mayor (which can still be halted) are being given to Ratner via handouts from the MTA’s board, approved by the mayor’s representatives. Just this week, commenting on the MTA’s lack of funds (the $200 million shortfall in its 2009 budget), Bloomberg, as if he himself was not responsible, said: "I don't know why anybody is surprised at what is happening to the MTA," . . . "It's a piggy bank that keeps getting raided.”

2. Denial by Governor Paterson. As of last Wednesday, Governor Paterson announced that New York State, with only $3 million of cash on hand, is running out of money. He has been urging legislators to find ways to cut back on state spending and speaking about the dire cutbacks that he will be forced to make without the legislature taking action. Yet how can Governor Paterson expect legislators to take him seriously about legislative branch-controlled spending when he has refused to do anything about Atlantic Yards, which is the premier example of executive branch-controlled pork barrel spending. Upon her recent departure from the state housing finance agencies, Housing Finance Agency CEO Priscilla Almodovar commented caustically about the cronyism of housing approved by the Pataki administration. There can be no better example of such Pataki administration cronyism than its attempted no-bid award of a huge mega-monoply on Brooklyn development to Forest City Ratner.

Necessary Investigation of Eminent Domain Abuses. Finally we must also raise with you the background of eminent domain abuse by state and city officials about which the state Attorney General’s office has initiated investigations respecting conduct relating to Willets Point. The situation with respect to Willets Point involving misconduct by city officials is not an isolated incident. (We are aware of news reports that the Bloomberg administration has been resisting subpoenas from the Attorney General’s office by countering with political threats.) It is tip of a much larger iceberg. As you found, your investigation into Willets Point quickly expanded into investigating activities of the Brooklyn Downtown Partnership, which brings it very close to Atlantic Yards itself. (You should probably also be looking at Coney Island as well.)

The recent decision in the Kaur case respecting the abuse of eminent domain by Columbia University makes this clear how far the abuse of eminent domain by government officials extends. We borrow the language of lawyer, legal scholar, and eminent domain expert Gideon Kanner summarizing his assessment of what happened in Kaur:

. . . in the Kaur case, the New York Appellate Division did examine the unseemly facts underlying the decision to condemn and found them to give rise to a miasma of favoritism, conflict of interest, procedural mistreatment of the condemnees, and deliberate blighting of the area.

The cast of characters in the Kaur case (substituting Forest City Ratner for Columbia University) is virtually identical. The facts of abuse are very much the same, in some respects even worse. They need to be investigated. Senator Perkins has written a letter to Governor Paterson asking for a state moratorium on the use of eminent domain in which he offers his opinion that the “actions on the part of the ESDC are part of an insidious form of discrimination and civil rights violations that must not stand.”

We suggest that investigation needs to start now, not in six months or a year from now. We suggest that your investigation should also extend to how in the case of Atlantic Yards public officials have coordinated such abuses of eminent domain with other illegal acts such as the non-compliance of the MTA with the Public Authorities Accountability Act. The investigation should commence before New York is subjected to a wasteland such as was left in New London, Connecticut in the aftermath of the Kelo decision and before these rushed-to-market bonds default.

From this brief list of problems it should be evident that the skimping on due diligence and normal procedures in service of the private developer's deadline poses great risk to the State, the public and the potential buyers of these bonds. Once again, we believe investigation by each of your offices will find serious problems and wrongdoing in the financing process such that an immediate halt to this unapproved financing transaction is warranted.


Sincerely,


Michael D. D. White

July 1, Wed, 10 am: City Council Hearing on Coney Island Rezoning

(The City has a plan to fade Coney Island out of existence. Click to enlarge.)

Just up on Amusing the Zillion: There will be City Council hearing on the proposed shrinking of Coney Island next Wednesday. It’s been confirmed by “staffers in both Councilmember Avella’s and Katz’s offices.” Comments Amusing the Zillion:

. . . . the wording on the City Council website is incredibly opaque. It’s as if the powers that be would like to keep the public hearing an insider’s secret so that fewer people will show up. This calendar listing must have gone up today [June 24, 2009], because when I looked last night nothing was listed yet for July 1.

Sort of like the way that $180 million+ of additional one-way giveaways for Forest City Ratner (absolutely no quid pro quo give-backs by Ratner) were just approved by ESDC and the MTA with less than 48 hours prior disclosure about what the new terms were.

The Bloombergian machine (assisted on Atlantic Yards by the increasingly confused and foundering Governor Paterson) is certainly revved up to shove things down the public’s throat. Recently when writing about the machinations that pushed through the rigged Dock Street deal we put together a short list of just some of the things that were in the offing concerning Bloomberg’s sell-offs of the public realm. To wit, the now already outdated list we provided just weeks ago:

In the next couple of weeks the city will be making major decisions ranging from:

1. Selling off a portion of the Greenwich Village Historic District (to subsidize St. Vincent’s)- Tuesday at the Landmark’s Preservation Commission.

2. Selling off most of the Coney Island amusement district- City Planning Commission- June 17th. (A Don't Shrink Coney! Rally will be held in the City Hall Steps Wednesday June 10, 1 p.m.- Show up 12:30 p.m. to allow time to go through security.- A parade will follw.)

3. The City Economic Development Corporation has announced condemnation proceedings against Willets Point business and property owners while Article 78 challenge is still pending in court. (This is from a media advisory from Councilman Tony Avella.) EDC has also decided to do this before negotiating with property owners and after telling many of them that negotiations will not start for more than a year.- There will be a press conference and rally in opposition Monday, June 8th at 1:30pm at the Shea Gas Station 127-48 Northern Blvd, Willets Point, Queens.

4. Giving additional substantial additional benefits to Forest City Ratner for the degenerating Atlantic Yards, including giving it more of the MTA’s assets without a proper quid pro quo.- June 24 at both the MTA and the ESDC in synchronized meetings. (Does that sound like the fix is in?)- There will be a Community meeting on Atlantic Yards, June 9- 7 PM at Lafayette Avenue Church. 85 South Oxford Street, Ft. Greene

5. Sacrificing the iconocism of the Brooklyn Bridge for Dock Street- Next Wednesday, June 10th at the City Council.

(See: Sunday, June 7, 2009, A Lambda Night: City Political Candidates and Development (Focusing on Atlantic Yards and Dock Street).)

We figure it is meant to be too much to keep up with.

Enjoy the summer. The Bloomberg administration no doubt hopes the public will be spending its time on vacation or at the movies seeing action film summer blockbusters. We suggest that next Wednesday, rather than going to the beach, everyone show up to save that great seaside amusement community, historic Coney Island.

Five Noticing New York Posts As Background

Here are five recent Noticing New York Posts (which will in turn link to more) about how the City’s plan for Coney makes no sense if you are looking for inspiration for what you might want to say at the hearing:

Tuesday, May 12, 2009, The City to the Public: “We’ve Got Your Coney Island: If You Want It Back, Better Do Exactly As We Say. . ”

Saturday, May 16, 2009, City Is Rezoning So Coney Island’s Lower-Income Residents Will Have Place to Buy Back-to-School Shoes, Clothing and Stationery? Right. Sure Thing!

Tuesday, May 19, 2009, City Officials in Their Own Words on “Creating” a Coney Island Amusement Area: We Will Do Again What Hasn’t Worked Before

Tuesday, May 26, 2009, Who Took My 27 Acres? City Officials Confuse the Dialogue

Thursday, May 28, 2009, A Second, But Not Seconding, Opinion: A Stolerian Eyebrow Raised, Real Estate Professionals Say Coney Island Development Will Take “Generations”