Sunday, October 1, 1989
Scandal's end: Prison
Here was the denouement to the Matthews and Wright story. Two years after we broke the story and explained the scam, court evidence confirmed our reporting as it sent the Wall Street firm's principal protagonist to prison.
BOND-FRAUD SCANDAL'S LATEST CHAPTER: PRISON
By Howard Goodman
Inquirer Staff Writer
To Moshe Lichtman, a developer who tried in 1986 to bring a major trash
resource-recovery plant to the ailing city of Chester , the attitude of
Matthews & Wright Inc.'s municipal- bond chief Arthur Abba Goldberg
was best expressed when Goldberg jokingly described a bond issue the
firm had underwritten in Guam as "selling bonds to the cannibals. "
"Lichtman thought this to be ironic," reads a recently released FBI
report, "because Goldberg had food dripping out of his mouth when he
said it. "
Exploitation, racism and gluttony - the themes surge through the
evidence amassed by prosecutors in the Goldberg case, which came to its
probable end on Monday with the one-time Wall Street wunderkind
sentenced to 18 months in federal prison and ordered to pay $400,000 in
fines and restitution.
The sentence, by U.S. District Judge Jesse W. Curtis Jr. in Los
Angeles, came two months after Goldberg pleaded guilty to three counts
of mail fraud for playing the key role in a bond -fraud scandal that
rocked the financial industry when it came to light in 1987.
With a breathtaking appetite, the evidence shows, Goldberg lured some
of America's poorest communities into the municipal- bond business to
make huge sums of money for his firm, never caring whether the trash
plants or housing projects that the bonds were supposed to finance were
ever actually built.
His firm, Matthews & Wright, issued hundreds of millions of dollars
worth of bonds for the struggling, predominantly black communities of
Chester and East St. Louis and East Chicago Heights, Ill.; the Sac and
Fox Indian Reservation in Oklahoma, and the Pacific islands of Guam,
Palau and the Commonwealth of the Northern Marianas.
From 1984 through August 1986, according to the evidence, Goldberg
ordered that fraudulent studies be written to justify preposterously
large bond issues for several of these communities. In 1985, he gave the
then-governor of Guam $70,000 in "campaign contributions" to push
through a $300 million bond issue there. After the bonds were issued,
Matthews & Wright pocketed $10.5 million in fees while Guamanian
developers tried vainly to get financing they expected for intended
housing projects. As if those profits were not enough, Goldberg then
skimmed $57,000 from the Guam bonds ' development fund, writing
phony requisitions that sent the money to a Jersey City, N.J., credit
union he founded and controlled.
Most daring of all, the evidence shows, Goldberg engineered a dizzying
scheme to underwrite more than $2 billion in tax-free bonds with checks
that had no money behind them - in a nearly successful attempt to beat
Internal Revenue Service tax deadlines on Dec. 31, 1985, and Aug. 31,
1986, meant to halt suspicious bond issuances.
The bond deals brought Goldberg and an associate, Frederick L. Mann,
more than $11 million in profits, according to prosecutors.
But the communities, their hopes raised by Matthews & Wright's
promise of riches, saw none of the huge projects built - although in
Chester , at least, officials insist their dreamed-of $335 million trash
plant will yet be realized. Across the country, the scandal hurt
localities' credit ratings, cut into the value of bondholders'
investments and cost the U.S. Treasury millions in lost taxes.
The Inquirer uncovered the Matthews & Wright phony-check scheme in
a series of articles in 1987 that helped draw investigators' attention
to the case. By December of that year, a federal grand jury on Guam indicted Goldberg
and Mann on 52 counts of bribery, fraud, conspiracy and other charges.
Mann, a Canadian citizen, is fighting extradition to the United States.
Before the scandal broke, Goldberg, 49, was known on Wall Street as
"Abba Dabba Do" and "Abba Cadabra" for his skill in turning the small
Matthews & Wright company into a municipal- bond powerhouse. A
lawyer and a former deputy attorney general of New Jersey, he had built
a reputation as a humanitarian who had worked hard to help Soviet Jewish
emigres. The Jersey City credit union, for example, was supposed to be
for emigres' benefit.
But grand jury testimony and FBI reports show a different side of the
man. ''An examination of his conduct," said K. William O'Connor, U.S.
attorney for Guam, "will not reveal a single instance where he hesitated
to lie or cheat or cover up to achieve his aim. . . . His greed has
caused incalculable harm. "
In anticipation of Goldberg's sentencing, O'Connor submitted more than
900 pages of prosecutors' evidence - grand jury testimony, FBI reports,
financial records and bond documents - to the U.S. District Court in Los
Angeles, making public more details about the scandal than had been
They show that Matthews & Wright was far from honest when its
officials insisted, as they did to reporters and bondholders when the
story was breaking, that the company did nothing wrong. As a spokesman
said in 1987, ''Matthews & Wright believes that they have helped and
done great work for these areas, and will continue to do it. "
The truth was that the company viewed "these areas" as unsophisticated
backwaters whose power to issue municipal bonds could be easily
exploited for profit. And the bigger the bond issue, the bigger the
Goldberg said as much to John Zaccaro, a Matthews & Wright employee
ordered to work on the Guam bond issue. Zaccaro quoted Goldberg's words
to the grand jury: " 'I don't give a s- if the housing ever gets built,'
" Zaccaro testified Goldberg told him. "Excuse my - that's an exact
quote. 'I just want to see this deal close. ' "
The grand jury testimony reveals that Goldberg had unusual reasons for
teaming up with Mann, a globe-trotting businessman who had been
convicted of fraud in 1984 for bilking a dying widow of $65,000 she had
entrusted to his care. According to Zaccaro and Richard Massey, another
former Matthews & Wright employee who testified before the grand
jury, what was especially useful about Mann was his Canadian
citizenship. "And as a Canadian citizen," as Massey put it, "Canada did
not have any laws against making payments to foreign officials. "
According to the testimony, Goldberg habitually took advantage of men
who were economically dependent on him.
Zaccaro - no relation to Geraldine Ferraro's husband - was a poor,
young lawyer just out of law school, trying to support his wife and
daughter by working chiefly as a security guard at a garbage dump, when
Goldberg hired him at $15,000 a year. He told the grand jury he was
grateful for the job.
After two weeks on the job, Zaccaro was ordered to write a phony
feasibility study to justify $80 million in housing bonds for the
Northern Marianas that had already been issued. Another Matthews &
Wright employee had previously calculated that the Marianas needed no
more than $35 million worth of housing. Goldberg told him "to make the
numbers dance," Zaccaro testified. Zaccaro did; he fixed the numbers to
justify the $80 million issue.
Phillip Kieffer, the town manager for Secaucus, N.J., had borrowed
from Goldberg's New American Federal Credit Union in Jersey City - most
of it at Goldberg's suggestion. While still in debt, Kieffer agreed when
Goldberg asked him to write socioeconomic studies to justify the
inflated Marianas and Guam bond issues.
Joel Schwartz, the New American Federal Credit Union manager, owed his
job to Goldberg, who had hired him. In late December 1985, Goldberg
asked him to sign some bond documents as an officer of the Commercial
Bank of the Americas, a bank he had never heard of. It was a shell bank,
incorporated by Mann and two others in the Northern Mariana Islands with
only $500,000 and operating out of a post office box.
On Dec. 31, Goldberg asked Schwartz to bring to Matthews & Wright's
Wall Street offices several packs of the credit union's "starter checks"
- blank checks without the customer's name pre-printed.
Schwartz did as he was told. His signature proved central to Goldberg's
scheme of underwriting bonds without real money. Schwartz told the grand
jury: ''I felt as if I didn't do this then, yes, I may have a problem
with my job either now or down the road. "
Neither Zaccaro, Keiffer nor Schwartz has been charged in the case.
It was a dizzying scheme. Hundreds of millions of dollars worth of
bonds were "paid for" in the starter checks from the credit union, where
no money was backing them up. They were instantly signed over to the
Commercial Bank of the Americas and just as instantly redeposited in the
credit union. They thereby bypassed the banking system, assuring that no
one would ever try to cash the worthless checks.
Later, after the IRS deadlines had passed, Matthews & Wright made
money on the bonds by selling them to the public, claiming that the
then-impermissible sales were allowable "remarketings. "
To a Congress and IRS already suspicious of the municipal- bond
industry, Matthews & Wright's behavior was the final straw.
Regulations governing the issuance of tax-free bonds were tightened in
1985 and 1986, and it will probably be a long time before they loosen
up. For poor municipalities like Chester , an important possible source
of revenue has disappeared.
Goldberg is to report to federal marshals on Nov. 1 to begin his prison
term. He will be eligible for parole after six months.
Back in 1985, while Goldberg was pushing the inflated $300 million bond
issue for Guam, others in the industry warned him that he was "killing
the goose that laid the golden egg," an FBI report says.
The goose is dead. And as Goldberg heads off for prison, that might be
his most enduring legacy.
Inquirer staff writer Barbara Demick contributed to this article.