The guilty pleas have trickled out in dribs and drabs: three in August, two in February, and another in March.
Slowly, a federal investigation has mapped a confluence of desperation and profit, inattention and daring in one of New Jersey's most extensive if low-key real estate markets, the sale of municipal liens for unpaid taxes.
In recent months, six regular purchasers of the liens have pleaded guilty to rigging the bidding system in a scheme that began operating at least as far back as 1998. So far, two lawsuits filed by property owners have alleged that participants and associated companies have defrauded them.
Investigators have acknowledged little beyond the bare-bones admissions in the pleas, but a spokeswoman for the U.S. Department of Justice intimated there are more to come. "This is a continuing investigation," she said.
In municipal offices around the state, however, some officials have already heard enough to conclude that fraud may not be the only thing that is unraveling. The state's low-cost but virtually unsupervised system for collecting delinquent taxes also could be coming unglued, creating a sticky situation for dozens if not hundreds of towns.
"Potentially, this could have implications across the entire state and maybe beyond," said William Dressel, executive director of the state League of Municipalities.
"Every town could take a hit on it," said Vincent Belluscio, executive director of the Tax Collectors and Treasurers Association of New Jersey.
After all, he said, some members have contacted the association to report that some of those targeted by the federal investigation, already have resumed bidding on municipal liens, apparently not barred from doing so by their guilty pleas.
For towns looking for advice from the state on how to handle the tricky situation, "there hasn't been any direction that I'm aware of," Dressel said.
"Unfortunately, with all these pronouncements about individual pleas, we're not hearing a lot about what's going on," he said.
Local tax collectors bring in money for many entities besides their towns: school districts, counties, fire districts, libraries and so on. The towns owe them their full shares, even if not every property owner has paid. So state law provides for a steady revenue stream even when some taxes are in arrears.
The current system dates to the Great Depression, when hard times caused many property owners to fall behind on payments, undermining already strained municipal collections. The law was changed to allow towns to auction off their liens, tax sale certificates, to third parties. A successful bidder pays the arrears and related costs to the town, then can collect from the delinquent owner or eventually foreclose on the property.
"That's why this current law works so well," said Richard Cushing, an attorney for many municipalities and other public entities in Hunterdon and Warren counties.
"The idea is to have third parties collect from the delinquent taxpayers," Cushing said. "Otherwise, a small town would have to use its own resources, resources it might not have, to go after them," spending more tax money to collect tax money already due.
Towns must hold at least one annual public auction of tax sale certificates. The system offers plenty of incentives for bidders. They are able to charge the property owner interest on the tax debt plus a premium. Historically, these were no more than 8 percent. But that had to change in the 1980s, "when interest rates were at 18 and 20 percent" on other types of investments, Belluscio said.
So the legislature raised the allowable interest rates on tax sale certificates to as much as 18 percent, while the premium can add as much as 6 percent more. If the property owner is unable to pay off the arrears and interest, as well as keep other payments current, the lien holder can foreclose after just two years.
That's why in some investment circles, tax sales certificates have been touted as safe bets, never more so than in recent years when interest rates plummeted elsewhere.
"Where else are you going to get an 18 percent return these days?" asks Michael Perle, a Secaucus-based lawyer who has a stake in the federal investigation.
For an investor going into an auction, though, that top rate is not guaranteed. The system assumes municipalities have an interest in avoiding future hiccups in payments, and a delinquent taxpayer likely will find it harder to pay high interest. Since any winning bidder must pay the town, the question is, how little is he willing to charge the property owner? That bidder who sticks at 18 percent will lose to one who offers 17 percent, or 10 percent or even zero percent interest.
Even at zero interest, the lien holder still can charge the premium plus costs. Those can mount quickly during the two years a delinquent property owner gets to make full payment. Once that period expires, the lienholder can demand the lump sum or file to foreclose on the property.
That assumes competitive bidding for tax sale certificates. As laid out in court documents from the federal probe, though, the six men who have pleaded so far all admit conspiring not to contest their colleagues' auction bids.
A seminal event for the federal investigation occurred in 2007 in the small borough of Newfield in Gloucester County. At an auction where 59 tax sales certificates were sold, all went for 18 percent interest based on just one bid apiece.
Nobody complained or raised a red flag at the auction or years thereafter, until the Federal Bureau of Investigation served a subpoena for the auction records, according to borough attorney John Eastlack.
"Just like all of the other municipalities caught up in these federal requests for records, the Borough of Newfield had zero knowledge" of any problems or probes, Eastlack said. Local officials "followed the procedures" under state tax law to conduct that and other lien auctions, he said.
That's one point on which everyone seems to agree.
State tax law allows a tax collector to delay a certificate sale for up to eight weeks. Once a sale starts, though, the law requires that the collector "shall sell at public auction each parcel of real property which has been so advertised." Under the statute, a local governing body may remove a collector who does not sell an advertised property.
After all, if a certificate on a property does not sell, the town is back to square one: trying to work out its own deal with the delinquent taxpayer or foreclosing and selling the property itself.
Tax collectors do not have any leeway at auctions. “That's the whole problem," Belluscio said. "Towns have to auction the tax certificates. If they fail to do so, the whole penalty falls back on the tax collector."
"The law is really specific that the tax lien sale must proceed even if the tax collector suspects something," Dressel said. "If it would be curtailed, the tax collector could be suspended or even lose his license."
New Jersey law establishes a forum for competitive bidding but does not spell out what happens if bidders decline to compete with each other. The guilty pleas have been to violations of federal anti-trust law.
While the state Division of Local Government Services nominally oversees such municipal activities, "we haven't received anything" from the agency on how to respond, Belluscio said.
"The law has to be changed to make it easier for a tax sale to be stopped," Dressel said.
"There have been lots of discussions" in recent months about potential consequences for municipalities from the federal probe, he said. But at the moment, he does not know of any resulting policy or legislative initiatives.
The situation needs more attention, Belluscio said, because the sales are cumulatively a $100 million annual market.
Belluscio and the other officials and lawyers referred questions to the state Division of Local Government Services. However, the division does not keep statistics on tax lien sales, according to Lisa Ryan, a spokeswoman for its parent agency, the state Department of Community Affairs.
As for advice, the division "provides general guidance on tax lien sales and generally encourages municipalities to comply with the law," Ryan said. They should report suspected fraud to the appropriate law enforcement agency, she said.
The Justice Department has elicited guilty pleas from tax lien investors William A. Collins of Medford; Isadore H. May of Margate; Richard Piscotta Jr. of Long Beach Township; David M. Farber of Cherry Hill; Robert W. Stein of Huntington Valley, Pa., a partner in a Cherry Hill law firm; and Robert E. Rothman of New York, who owns a real estate company in Englewood.
In Stein's case, his admitted involvement began at least as early as 1998, extending into spring 2009. During some of that time, he was co-owner and manager of Crusader Servicing Corp. and Royal Tax Lien Services. His co-owner was Royal Bancshares of Pennsylvania, an arm of Royal Bank America that acquired Crusader in a merger and then launched RTLS as its own lien investment tool.
With few other public details, Stein and the others admitted participating in meetings and discussions, agreeing not to compete against each other or "certain bidders" for tax sale certificates. A Justice Department spokeswoman declined to specify places where these activities occurred, noting the investigation encompasses the entire state.
"Most of the activity seems to be focused down in South Jersey," Belluscio said, but it is not clear that it will stay there.
On March 30, Newfield resident Raymond V. Contarino Jr. filed suit, seeking to establish a class action against four of the six who have admitted guilt as well as other parties. They include the New York investment firm M.D. Sass, which participated in the 2007 Newfield auction but has not been charged in the federal probe, as well as U.S. Bancorp of Minneapolis, which provides administrative services for the company.
But two weeks earlier, Lebanon Township resident Jeanne Boyer filed a state suit since transferred to federal court. She alleges that she too was victimized when she inadvertently missed a tax payment on her home on Musconetcong River Road. The mortgage, which had included her property taxes, has been paid off. According to Boyer's suit, she then missed three quarterly tax payments, totaling $4,064.47, because she thought the bill was due annually.
Although Boyer was applying for tax relief through the state's senior freeze program, Crusader was able to buy the lien on her property in 2002 for $5,557.67, including costs and fees. When she attempted to redeem the tax certificate in 2004, she was told she owed Crusader a lump sum of $24,000, according to the suit.
After years of legal back-and-forth, the bill was $113,000 on Feb. 21, 2012, when a state appellate panel refused to hear Boyer's case. But two days later, Stein entered his guilty plea to a federal bid-rigging charge. That "explained for the first time the lack of competitive bids" and the 18 percent interest that socked Boyer, according to her lawsuit, filed by Perle.
He became involved in Boyer's dispute with Crusader through a friend and former partner. Looking at auctions conducted in Lebanon Township, "there appears to be a pattern of non-competitive bidding" on other properties, he said. While it is difficult to track down the information, Perle said his firm examined data from across Monmouth County, "and there seems to be the same pattern of 18 percent bids," he said.
"My sense of this is that for years, it was like a club," Perle said, with a fairly small number of investors puttering around the state, buying small numbers of certificates at competitive auctions. "That changed when financial institutions started getting involved, bringing more resources to the table, the monetization of everything."
As tax sale certificates became desirable investment vehicles, financial companies like Crusader began scooping up large numbers, he said. But they seem to have concentrated on smaller municipalities, avoiding places like Jersey City or Irvington where a big buy might attract attention, he said.
With larger volume purchasers, towns face more fallout from their problems, according to Belluscio. He described the potential impacts of the Lebanon Township case as "really interesting, because they're asking to have completed tax lien sales thrown out" on other affected properties.
Even if a municipality is found to have done nothing wrong in the conduct of its sales, Dressel said, that outcome could throw into question the titles and tax bills for properties around the state. At the very least, many could face legal bills.
How many? Well, that's unclear, except that the potential number of plaintiffs is in the thousands.
As part of Boyer's suit, Timothy Boyer, an officer of Crusader and RTLS, submitted a declaration that the companies bought 19,903 and 8,864 tax sale certificates, respectively, during the period of Stein's admitted conspiracy. But they are only two of the firms affiliated with those identified in the probe. For example, Farber is an owner of two Cherry Hill funds that invest in tax liens, as well as a Barrington firm that manages their portfolios.
While the language of Boyer's suit leaves open the possibility that Lebanon Township might join her as a plaintiff, Cushing, the municipal attorney, said it is not yet clear whether that step is warranted or even desirable. For now, he said, the best thing his municipal clients can be is cautious.
"We don't know that the municipality is the victim of this," he said. "It seems to me that the real victims are the individual taxpayers."
Meanwhile, Newfield has seen yin and yang from the federal investigation. Five year's after its troublesome auction, this week, the borough saw interest bids that were "across the board, all the way down to zero," said Tax Collector Lawrence Nightlinger. On the downside, "we had six liens that didn't sell," he said.