Dan's Papers - February 15, 2008

There is a new McMansion at 363 Parsonage Lane in Sagaponack that has been sold three times in the last 18 months, each time for more than it had sold for before. It is an odd story, neither an example of an ever expanding real estate market nor an example of a slowly declining real estate market. It is a story involving a man who stole $40 million over a period of ten years, arguably because he wanted to buy pretty things for his girlfriend, and who is currently in jail. It's pretty remarkable.

This house, which has 12 bedrooms and about 10,000 square feet, was originally built as a spec house by builder John Farrell of Bridgehampton. In the spring of 2006, a man named David Verhotz, who was in the banking business in Cleveland, drove out to have a look at it, approached Farrell and said he would like to buy it. Farrell told him it was only three quarters complete at the time, but Verhotz said he'd buy it anyway. He paid $5.7 million for it. And soon thereafter Farrell finished it up for him.

Verhotz, however, never moved in. Instead, he got arrested by the Feds for embezzling $40 million from the bank he worked for.

Verhotz had been, for ten years, the Vice President and director of Key Corp's International Division. He was in charge of global treasury management. That's a mouthful, but in plain English, it means his job was to approve Key Corporation loans to international banks at low interest rates that these banks would then lend at higher interest rates to their customers living back in America. Over this ten-year period, he would read a letter on stationery from a banker in Thailand or Norway or Belgium or Hong Kong, and check that it was legitimate, and then he'd authorize Key Corp to pay out the money. He made $110,000 a year in this job.

Except that sometimes, on a slow day, Verhotz would look at the ceiling, pick a name out of the sky and arrange for himself to be that person - a bank official at the Delix Bank in Brussels, for example. He had the stationery from these banks and would have the money sent to that bank official. Him.

Since most of the other loans he approved were on the up and up, nobody noticed he was doing this for quite some time. All together during the ten years, he made 106 loans in which he got the money and instead of doing what the paperwork said would be done with it, just put it into his bank account. This is a little less than one a month. So maybe these bogus loans were coming in under the radar for a while when you consider all the other legitimate loans that were being approved by this fellow.

In any case, according to the Feds, somebody finally noticed that these 106 banks not making regular monthly payments to Key - Verhotz, as the "banker," would sometimes use money from new phony transactions to make payments on the old - had all been approved by one particular banker at Key.

It turned out that Verhotz, who had separated from his wife and was in the middle of divorcing her, had taken up with a New York woman named Kim Chan without telling her he was still married and, by that time, had bought, much of it for her, an 11.8 carat emerald cut diamond engagement ring worth more than $1 million, a Mercedes-Benz convertible CLK320, a Tiffany platinum/silver diamond necklace and bracelet, a diamond encrusted Patek Philippe watch, diamond earrings from Harry Winston worth $500,000, a condominium in Manhattan at 260 Park Avenue South worth $2.3 million and, from Farrell, the house on Parsonage Lane. The Feds seized it all.

"When I first met him, I thought there was something rough about him," Mr. Farrell told me. "I keep up with many of the people I sell houses to. But I wasn't interested in doing that with this guy. He seemed to have an abrasive personality. And he didn't seem to be somebody who had this kind of money."

A little over a year later, in September of 2007, Verhotz was in jail, Kim Chan was or was not sad and forlorn, and the Feds called Farrell to say that they had the house and all the other toys that Verhotz had bought, were looking for a missing $8.1 million and were interested in unloading the house back to Farrell.

Farrell offered the Feds $6 million for it, which was $300,000 more than he had sold it for. He did it readily for two reasons. One was that he'd finished up the house and done a whole lot of landscaping. And the other was that he felt he could re-sell the house again pretty quickly for more money. In fact, after buying it from the feds for $6 million, he put it back on the market for $7.35 million figuring that it would sell right away because it was probably worth $8 million. He was right.

"It sold in just three weeks," he said. "I was glad to get the re-sale done. Sometimes you just want to get something over with."

Among other things, on each of the three occasions that this house was sold, a check was written to the Town of Southampton for about $120,000, once by Farrell, once by the Feds using Verhotz's ill gotten money, and once again by Farrell. This would be 2.5% of the sale price each time, a sum that is deposited in the Southampton Town Land Preservation Fund.

Thank you very much, all of you. We'll make good use of it. And good luck to you Ms. Chan.