April 28, 2011

Low-income housing developer at center of fraud probe is set to lose its court-appointed overseer

Couple call off divorce, forcing judge to end the receivership that uncovered alleged fraud, misuse of public funds and other problems in their company, ADI.

The couple whose low-income housing business is now at the center of a federal fraud investigation convinced a judge Tuesday that they no longer want a divorce, setting the stage for the removal of the independent receiver appointed to oversee the company.

Los Angeles County Superior Court Judge Scott M. Gordon said the apparent reconciliation of Salim Karimi and his wife, Jannki Mithaiwala, left him no choice but to terminate receiver David Pasternak, who has called their firm, Advanced Development and Investment Inc., a "massive fraudulent enterprise."

Amid divorce proceedings last year, Pasternak told the judge that he had found "possible criminal activity" at ADI, which has built affordable housing projects up and down the state with taxpayer money. On Tuesday, he warned Gordon that his abrupt removal would make it impossible for him to reconstruct the company's finances and determine the amount of low-income housing funds that were "fraudulently collected."

Pasternak, a lawyer, said that number is at least $134 million but predicted it would grow. "This court cannot and should not close its eyes to what has occurred here," he told the judge.

Larry Ginsberg, Mithaiwala's attorney, said Pasternak's accusations were "narrative, not fact." "His work is finished," he told the judge. "He needs to issue his final bills."

The hearing unfolded just days after the cities of Los Angeles and Glendale filed separate lawsuits alleging that ADI dramatically marked up the cost of their development projects while receiving tens of millions in public funds. And it was attended by about two dozen lawyers whose clients have a stake in ADI's future, as well as at least one prosecutor from the U.S. attorney's office.

Gordon scheduled a hearing for Wednesday to sort out the transfer of ADI's assets, including its low-income apartment buildings, $600,000 worth of gold bullion and a Bentley. A separate hearing will determine whether Pasternak should hand over forensic accounting reports on ADI that have been sought by a federal grand jury.

Lawyers for the city of L.A. said they would not have learned of the alleged fraud had the divorce case not been filed. The case led to the hiring of Pasternak, whose disclosures of alleged wrongdoing in turn led to the federal investigation.

Pasternak was named ADI's receiver in February 2010, just as divorce proceedings were growing acrimonious between Karimi, then ADI's president, and Mithaiwala, the daughter of the company's founder, Ajit Mithaiwala.

The Mithaiwalas fired Karimi from his post as ADI's top executive, cutting off his cellphone and email, according to court documents. Karimi accused the Mithaiwalas of improperly pocketing ADI funds. And Jannki Mithaiwala placed an advertisement in an Indian newspaper publicly criticizing her husband.

All of that was quickly overshadowed by Pasternak, who, after months of reviewing ADI's books, concluded that the company had a lack of internal controls and had maintained two sets of invoices for various construction jobs. Pasternak also said he was informed that Karimi and Mithaiwala had underreported their income to the Internal Revenue Service and other agencies by $80 million.

Another $25 million in company funds had been moved to India, he alleged.

Last summer, Pasternak issued a 29-page report accusing ADI executives of inflating the cost of their multistory apartment buildings and destroying records. He also fired Ajit Mithaiwala, Jannki's father.

Appearing in court Tuesday, Pasternak said he has had to address hundreds of construction and maintenance problems at the company's developments. He told the judge Karimi and Mithaiwala could not be trusted to address the needs of thousands of low-income tenants.

Pasternak said he has struggled to obtain records on the company and traveled to India last year with a team of forensic accountants. Karimi, who is now living in India, refused to turn over those records, Pasternak said.

Karimi "apparently has no intention of returning to the United States," Pasternak said, "for reasons which I believe to be self-evident."

Thomas Mesereau, Karimi's criminal defense lawyer, has repeatedly said that his client has not committed any wrongdoing.

Jannki Mithaiwala attended the hearing and, when questioned by her lawyer, confirmed that the couple had decided not to split. Karimi appeared via a video feed from India. He and his wife said their decision to reconcile was not the result of any outside pressure.

By David Zahniser and Jessica Garrison, Los Angeles Times - April 27, 2011

http://www.latimes.com/

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