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In Depth March 27, 2008, 5:00PM EST

Suite Scams

(page 4 of 4)

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David Esseks, a former prosecutor, says a fancy address can lend credibility Jens Umbach/Keiko Represents

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A cease-and-desist letter from accounting firm Ernst & Young to Sucarato

Gottschalk claims she and her husband were tricked into giving Sucarato $450,000 Bill Cramer/Wonderful Machine

Law enforcement authorities think companies that run virtual offices should do more to prevent fraud among their tenants. Authorities also think there's a need for more oversight of such firms. Currently, prosecutors have little recourse to pursue criminal or civil actions against operators of virtual offices. Providing a safe haven for scamsters isn't a crime. And it's hard to prove the managers of such facilities knowingly support or benefit from their wayward tenants--assuming they did at all. In fact, companies are only required to register with the Post Office as "commercial mail receiving agents," which simply means they must check the identification of customers leasing a virtual office. "These facilities are in a gray area," says former prosecutor Esseks. "They really have to know that wrongdoing is going on." USPS's Levinson is less forgiving: "You'd have to be deaf, dumb, and blind to not know what's going on."

A LEGITIMATE NICHE?

SRI and other owners of virtual offices defend their practices, saying the industry fills a genuine need, particularly for startups on shoestring budgets or freelancers who don't want customers to know they largely work out of their homes. Indeed, the business has blossomed in recent years as companies, even large ones, look for greater flexibility in staffing options. Together, virtual offices and executive suites generate more than $14 billion in annual sales, according to the trade group Office Business Center Association International.

As for fraud, the industry says it has a zero-tolerance policy. Paul Carter, a former president of the New York chapter of the industry trade group, says it's not uncommon for operators of virtual offices to share notes about problem tenants. If they suspect wrongdoing, the owners report it to the authorities. "We take fraud prevention very seriously," says Dennis Watson, a spokesman for Regus, which operates 950 facilities in 70 countries. "But not every individual engaged in fraudulent activity can be identified."

Investors, at least, may soon have a way to help tell the pretenders from the pros. The SEC is developing a system that would alert investors to suspicious financial firms--those with phony addresses or those passing themselves off as big-time Wall Street brokerages. As part of the program, the feds plan to create a Web site listing investment advisers who aren't registered with any U.S. securities regulator, a sort of who's who of the financial underworld. Already, the SEC has identified 50 such outfits. The SEC had wanted to launch the site, not unlike those already maintained by regulators in Britain and other countries, early this year. But it has been delayed as the agency awaits feedback from other law enforcement groups. There is concern that posting a list of potential imposters could impede active investigations.

Such a service will be too late for Emily Gottschalk and her husband, Milt. Sucarato spent months cozying up to the couple, befriending them and gaining their confidence. After signing up as a volunteer racing assistant with the Atlantic Highlands Yacht Club on the New Jersey shore, he began boating with the Gottschalks. On long sailing excursions, Sucarato, a former Republican candidate for township council in Old Bridge, N.J., often chatted up his hedge fund and investment advisory business. Sucarato certainly seemed successful, cruising around town in either his Porsche or his BMW.

He later provided the Gottschalks with financials for the fund company, documents reviewed by BusinessWeek. The reports, which noted they had been audited by accounting firm Ernst & Young, showed dazzling returns from trading stocks, commodities, bonds, and futures. His portfolio included multimillion-dollar stakes in technology companies Google (GOOG), IBM (IBM), and Nvidia (NVDA). A visit to Sucarato's office at 67 Wall Street only cemented the Gottschalks' faith in his investment prowess. The relationship jelled, and soon Sucarato was selling them more services. He even offered to find a buyer for Emily Gottschalk's small 10-year-old marketing firm, Garr Group. "It was all very artful," says Gottschalk.

But the Gottschalks started to grow wary of Sucarato in early 2007. According to court papers and interviews, they discovered that an offer for Garr Group that Sucarato said he secured from a Chicago private equity firm was "fraudulent and forged." Meanwhile, Ernst & Young says they never audited Sucarato's reports. After being contacted by the Gottschalks, the big accounting firm sent a cease-and-desist notice to Sucarato: "We demand that anyone who has been furnished with these documents be notified by you that they are fictitious and have never been issued by Ernst & Young," Robert M. Burnham, E&Y's director of investigative service, wrote in the March, 2007, letter.

The Gottschalks eventually got their initial investment back from Sucarato after several requests. But the Gottschalks are still suing for $277,000--the amount of profits the couple says Sucarato's reports showed they earned. They're also seeking damages from Sucarato's failed attempt to sell Garr Group. Sucarato filed a counterclaim, asserting the Gottschalks still owe him money from a business loan and other expenses. On Mar. 14 a New Jersey judge threw out Sucarato's counterclaim and ordered him to pay Gottschalk's legal fees in the matter.

There are at least two other disgruntled investors, Mark Holtzman and Russell Lugli. They claim through their attorney that Sucarato "owes them substantial sums of money." Sources familiar with the situation say Sucarato allegedly bilked the two men out of more than $1 million.

Sucarato says he has offered to return their money. The investors' lawyer, though, disputes that notion. "They put money in and never got it back," says C. Blaine Morley, their attorney. "Demands have been made on him several times."

Meanwhile, Sucarato says he's winding down the hedge fund business, which had become "time consuming and stressful." Instead, he's focusing his efforts on his private equity firm, NYFC Capital, which claims to have invested more than $400 million in a variety of businesses. He also has a third venture, NYFC Properties, a real estate investment company he co-manages with his wife. As for the open investigations, he says: "The only thing I'm guilty of is being a good friend."

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