Former Chief Investment Officer Admits Bank Fraud Relating To $91.5 Million Commercial Loan
NEWARK, N.J. – A former chief investment officer of a medical property management company pled guilty today to a bank fraud conspiracy involving a $91.5 million commercial mortgage loan, Acting U.S. Attorney Rachael A. Honig announced.
Barton Schack, 65, of Ringwood, New Jersey, was charged by information with one count of conspiracy to commit bank fraud. United States District Court Judge Madeline Cox Arleo accepted the guilty plea.
According to documents filed in this case and statements made in court:
Schack was the chief investment officer of Regent Medical Properties (“Regent”), a property management company located in Glen Rock, New Jersey. Sovereign Medical Services, and affiliates (“Sovereign”), was a network of multi-specialty, out-patient medical practices headquartered in Glen Rock, New Jersey, with various practice locations. Co-conspirator 1 was the founder and chief executive officer of both Regent and Sovereign.
In April 2016, Schack and Co-conspirator 1 used fraudulent representations to obtain a $91.5 million loan (the “Mortgage Loan”) from Lender 1 and others secured by thirteen medical office buildings in New Jersey, New York, and Florida (the “Medical Properties”). The borrowers in the Mortgage Loan were thirteen separate special purpose entities—majority-owned by Co-conspirator 1—one for each collateral property (collectively, the “Borrowers”).
Schack and Co-conspirator 1 exploited the fact that, through Sovereign, Co-conspirator 1 controlled approximately half of the tenants in the Medical Properties. Schack and Co-conspirator 1 misrepresented to Lender 1 the physical occupancy status of certain affiliated tenants and the Medical Properties’ true rental income.
After the Mortgage Loan closed, Schack and Co-conspirator 1 continued their scheme to conceal the actual financial status of the Medical Properties by submitting fraudulent financial statements to the loan servicer on a monthly basis. Those misrepresentations allowed Schack and Co-conspirator 1 to avoid accelerated payment on the Mortgage Loan.
Finally, after the Mortgage Loan closing, Schack and Co-conspirator 1 diverted rent payments owed through the “lockbox” account procedure specified in the Mortgage Loan agreement. Instead, Schack and Co-conspirator 1 used the funds for both Regent’s operating expenses and Co-conspirator 1’s personal expenses, including credit card bills of up to approximately $80,000 per month and private jet payments. Through such means, Co-conspirator 1 diverted millions of dollars in rental payments from the “lockbox” account over the course of the Mortgage Loan for his own personal use.
Shortly after the closing of the Mortgage Loan in April 2016, Lender 1 sold its interest into two commercial mortgage-backed security loans. By 2019, approximately three years after the closing of the Mortgage Loan, the Borrowers were sixty days behind on loan payments, and administration of the loan was referred to a special servicer. In February 2020, the Borrowers declared bankruptcy.
The conspiracy to commit bank fraud count carries a maximum penalty of 30 years in prison and a $1 million fine. Sentencing is scheduled for June 22, 2021.
Acting U.S. Attorney Honig credited special agents of the FBI, under the direction of Special Agent in Charge George M. Crouch, Jr., and IRS-Criminal Investigation, under the direction of Special Agent in Charge Michael Montanez, with the investigation leading to today’s guilty plea.
The government is represented by Assistant U.S. Attorneys Andrew Macurdy and Shawn Barnes of the U.S. Attorney’s Office Criminal Division.
Defense counsel: Brent Culpepper, Esq.