Yahoo Finance In the Manafort verdict, a primal lesson about debt
The Paul Manafort verdict highlights the wisdom of a folksy bit of financial advice: Know when to fold ‘em.
On Aug. 21, a federal jury found Manafort, President Trump’s 2016 campaign manager, guilty of eight counts of tax evasion, bank fraud and failing to register a foreign bank account. On 10 other charges, the jury deadlocked, which could lead to a new trial. But the eight charges alone could put Manafort in jail for the rest of his life – a reminder that even the high and mighty make stupid, self-destructive decisions.
From 2006 through 2014, Manafort earned as much as $65 million working for foreign politicians, much of it for the former president of Ukraine, a Russia-backed ally of Vladimir Putin. Manafort ran most of that money through a variety of foreign accounts, allowing him to avoid paying U.S. income tax on it. Prosecutors say he avoided taxes on at least $15 million in income.
Manafort used those untaxed, overseas funds to buy at least four properties worth millions of dollars, including a 5,500-square-foot beach house in the Hamptons, a $3 million Brooklyn brownstone and a $2.9 million Manhattan condo. Since Manafort paid for the properties in cash, he didn’t need loans to cover basic mortgage costs. But his Ukraine work began to dry up in 2014, and by late 2015 Manafort was growing desperate for money. He was house-rich and cash-poor, like many others have been—except on a scale ordinary folks might find hard to contemplate.
If you owned four expensive houses and suddenly needed cash, what might you do? Right—sell one. Or two. Or even three, which would still leave you one house to live in. But Manafort didn’t sell anything. Instead, he applied for a series of seven-figure bank loans, supplying bogus financial information and using various ill-gotten properties as collateral. Those loans left Manafort drowning in debt and gave prosecutors key insights into his overall criminal enterprise.
Lying about his debt
Here’s one example of a Manafort real-estate scheme. In 2012, he paid $3 million for a three-story townhouse in the trendy Carroll Gardens section of Brooklyn. The money came from an account in Cyprus that Manafort used to evade U.S. taxes. In early 2015, with money suddenly tight, Manafort sought and received a $5 million loan against the property from Genesis Capital, a California lender, claiming he’d use $1.4 million of that money for renovations that would raise the value of the property to $8 million. That allowed him to qualify for a “construction loan” larger than the value of the property at the time. But instead of using the money to improve the property, prosecutors say, Manafort used it to pay off another loan and make purchases having nothing to do with the Brooklyn brownstone.
A short while later, Manafort got a second loan on the Brooklyn property – $3.4 million from Citizens Bank—without disclosing the first loan. He also lied about his Manhattan condo, saying it was an owner-occupied second home, when in reality he was renting it out on Airbnb for upwards of $500 per night. In essence, Manafort lied about his indebtedness and made his finances look much more stable than they were, allowing him to get a loan the bank probably would have declined had it known the truth.
All told, Manafort got $20 million worth of fishy loans using properties as collateral, including the posh beach complex in ritzy Bridgehampton that’s worth an estimated $7 million. Why did Manafort need all this money? Apparently to finance a gilded lifestyle that bordered on surreal. Among his now notorious indulgences were a million-dollar wardrobe, $934,000 worth of antique rugs, a beach-house waterfall, a fleet of Range Rovers and the widely panned $15,000 ostrich jacket. Since Manafort never testified in his own trial, we don’t know how he justified such expenses, especially when his finances became precarious. But it goes without saying that financial advisors condemn the use of debt to pay for extravagances.
Manafort seems to have believed his high-profile work for the Trump campaign would lead to lucrative new business opportunities, allowing him to pay off millions in debt. That was only one of his delusions. In reality, Manafort’s work for the Trump campaign is the very thing that put prosecutors on his tail and led to his Shakespearean downfall. Some villains mainly betray themselves.
Confidential tip line: rickjnewman@yahoo.com. Click here to get Rick’s stories by email.
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Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman
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