Case 7.11 Boeing and The Recruiting Of The Government Purchasing Agent”; and Kod

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Case 7.11 Boeing and The Recruiting Of The Government Purchasing Agent”; and

Kodak, the Appraiser, and the Assessor: Lots of Backscratching on Valuation This tale of a sort of sting operation required participation from business, government, and a professional. John Nicolo was a real property appraiser who did appraisal work for Eastman Kodak, Inc. (Kodak) at the request of one of Kodak’s now-former employees, Mark Camarata, who served as Kodak’s director of state and local taxes while employed there. Charles Schwab was the former assessor for the town of Greece, New York, an area that included Kodak headquarters. Kodak is both the largest employer and the lar- gest property owner in the town of Greece. According to the indictments in the case, Schwab made reductions in Kodak’s real property tax assessment. Those reductions, according to calculations completed by Nicolo and Camarata, saved Kodak $31,527,168 in property taxes over a fifteen-year per- iod. But Schwab did not make those reductions as a matter of assessor policy, fond feel- ings for Kodak, or the goodness of his public servant heart. He made those reductions at the behest of the other two in exchange for payment. Nicolo’s fee from Kodak, arranged according to a percentage of the amount he was able to save the company, was to be $7,881,798 (about 25 percent of Kodak’s projected tax savings). After being paid over $4,000,000 of his fee from Kodak, Nicolo paid Camarata $1,553,300 for his role in hiring him and then paid Schwab $1,052,100. The essence of the arrangement was that the appraiser agreed to split the tax savings fee with the assessor in exchange for the reduc- tion and with the Kodak employee in exchange for hiring him. The group also managed to involve companies that were buying property from Kodak. For example, in 2004, ITT bought one of Kodak’s buildings in its industrial park as Kodak was downsizing. Immediately upon its acquisition of the building, ITT got an assessment from Schwab that quadrupled the value of the building for purposes of tax assessment. Mr. Camarata referred the ITT officers to Mr. Nicolo, who then talked Mr. Schwab into reducing the assessment value. However, unbeknownst to ITT, the whole scenario had been set up by the group, according to trial testimony. Schwab reduced the assessment value, and Nicolo split his fee with Camarata and Schwab. Camarata entered a guilty plea to various federal fraud charges and agreed to coop- erate with federal authorities in their prosecution of the other two of the property tax triumvirate, who have been charged with fifty-six counts of fraud, money laundering, and other federal crimes. Mr. Camarata faced a possible penalty of twenty years, but was sentenced in 2009 to two years because of what U.S. Federal District Judge David Latimer described as follows: “Your cooperation with the government was immediate and complete. Without your testimony, I think the verdict might have been much more difficult for the government to accomplish ... your help was the linchpin for the govern- ment’s case.” Mr. Camarata was ordered to pay $10 million in restitution as part of his federal pro- secution, but the total amount he will owe remains unclear because of federal income taxes owed, civil damages to Kodak and ITT, and taxes owed to the city based on the undervaluations. Following an eleven-week trial, Mr. Nicolo was sentenced to twelve years in federal prison. He requested home confinement due to health issues and alleged threats and beatings by prison officials, but was denied the request. When Kodak learned of the schemes, it immediately entered into discussions with the town of Greece for the reappraisal of its properties. Kodak also filed suit against Camar- ata and others seeking reimbursement from them for the fees that were paid as part of the scheme. The federal government has been working to sell off property belonging to Mr. Nicolo and others. In 2013, a federal court ordered Mr. Nicolo’s lakefront property, estimated to be worth $500,000, to be sold by auction. The federal and local government have already recovered $10 million from Mr. Nicolo. Kodak received $7.8 million of the amount recovered as its settlement in the case.

Discussion Questions

1. Why do we worry about an agreement by an asses- sor to reduce the assessed value? Couldn’t he have done that anyway, regardless of receiving payment? Does the method for paying appraisers on a con- tingency basis encourage this type of involvement by government officials? Why do you think the three (possibly five) decided to engage in the scheme? Do any thoughts for your credo come from your observations about what happened? After his guilty plea and agreement to coop- erate, Mr. Camarata’s fellow defendants referred to him as a “liar and thief.” What lesson do you learn from this reaction and interaction?

2. Why is this important in modern day world?

Explanation / Answer

1. We worry about the agreement by an assessor to reduce the assessed value as the higher is the value of the property, the higher will be the amount of tax that we will have to pay. The assessed value of the property is the market value of the property. An assessor will give the market value taking into consideration the tax rate and tax assessment. The reduction in assessed value of the property should not be done by the assessor. This is a violation of the law. It is unethical as well as illegal. An assessor will not reduce the assessed value of a property without getting any extra benefit. Thus, only on receiving extra payment, the assessor may reduce the assessed value of the property. The practice of paying appraisers on a contingency basis to encourage this type of involvement by government officials is wrong. Such kind of practices should be avoided and strictly punished. In the given case the government officials did not get encouraged by the contingency payment. The three decided to engage in the scheme for their personal interests and profits. The arrangement among the three was that the appraiser would split the tax savings fee with the assessor in return for the reduction in assessment value and also for hiring him. The arrangement was done for earning more by all the three of them but the minute the scandal was revealed, one among them i.e. Camarata decided to switch sides and became a prime witness in the case. His intention here was to ensure that he gets the minimum punishment by becoming the witness. His fellow defendants referred to him as a “liar and thief” as he had cheated on them by giving the details of the fraud and had also taken away the money. The lesson to be learnt here is that the Camrata was an opportunist. He switched sides and went against his fellow defendants. The fraud was identified but the government officials could not prove it without the inputs given by Camarata.

2. This case is important in today’s world because many people want to make more money these days. Hence they may indulge in fraudulent activities with a group of people. It is important for them to understand that such fraudulent activities will be caught sooner or later and that the group of people who are helping you in the fraud may switch sides and give evidence against you. Thus, one should always work ethically and truthfully.

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