Four Construction Executives Are Charged With Fraud

By CHARLES V. BAGLI

Four veteran construction executives and their company have been charged with systemically stealing tens of millions of dollars from investment firms, insurance companies and law firms as they built corporate offices in buildings across Manhattan.

The four men, who worked at Lehr Construction Corporation, routinely inflated the cost of mechanical, electrical and other subcontractor costs by 10 percent to 13 percent on office projects, according to an indictment unsealed Wednesday in State Supreme Court in Manhattan.

The Manhattan district attorney’s office raided Lehr’s offices 14 months ago, seizing records, hard drives and a “black book” that they said provided a detailed accounting of the scheme. Prosecutors said the company, which also was indicted, and the senior executives — Jeffrey Lazar, Todd Phillips, Steven Halper and Steven Wasserman — stole at least $30 million from 1998 to December 2010. The men were to be arraigned midday.

The indictments are part of a widening investigation by the district attorney into the city’s multibillion-dollar interior construction industry. It is also the second time in 13 years that executives at Lehr, a construction company that at its peak had roughly $500 million a year in billings, has been charged with fleecing their corporate customers, and the third corruption case involving a member the Lazar family, which founded Lehr.

“This construction company was corrupt at all levels,” said Cyrus R. Vance Jr., the Manhattan district attorney. “Its executives developed — and successfully executed — a scheme to steal millions of dollars from their clients.”

Over the last year, investigators from the district attorney’s rackets bureau and the Special Investigations Unit of the State Police have interviewed nearly 100 subcontractors and subpoenaed property owners including Goldman Sachs, Bank of America and L&L Holdings for records of work overseen by construction companies, including Lehr.

But a handful of subcontractors, including P. J. Mechanical Corporation, are expected to be indicted Thursday on charges related to the Lehr investigation, according to defense lawyers and investigators. Edward A. McDonald, a lawyer for P. J. Mechanical, declined to comment.

On April 15, another construction management firm, the Builders Group, and three of its corporate officers pleaded guilty to a separate scheme to steal millions of dollars from clients at office and condominium projects in the New York area.

The district attorney’s office and the industry experts say that corruption generally adds 10 percent to the already high cost of construction in New York, making the city less hospitable to business than other locations. “Sadly,” Mr. Vance said, “greed and corruption impose a hidden billion-dollar-a-year tax on New York City’s construction industry.”

Mr. Vance said that this was a company-wide scheme. “Fraud adds a 10 percent hidden tax,” he said. “It is passed on to clients, businesses and the public. It is illegal and intolerable.”

According to the district attorney, on jobs in which Lehr served as construction managers, the men created a document known as the “bid package,” and required every subcontractor to inflate their bids by 10 percent or more using suspect “contingencies.”

After the subcontractor was selected by Lehr and the client, it would then secretly negotiate with Lehr executives about their real price for the work, with the inflated bills submitted to the client, prosecutors said. Among the clients who overpaid were Gilder, Gagnon, Howe & Company; Warburg Pincus; Zurich North America; and Ramius Capital Group, the district attorney’s office said.

Sometimes Lehr would reap the illicit profit by demanding a kickback from the subcontractor, prosecutors said. Other times, prosecutors said, the executives would underpay the contractors by the same amount on other jobs, so that the illegal sums would not show up in an audit. A big break, investigators said, came when they found a “black book” in the office of a Lehr employee, Mark Martino, that provided a detailed look at the scheme and which subcontractors owed money to Lehr.

Mr. Martino was not charged Wednesday, in a clear sign, lawyers involved in the case said, that he is cooperating with investigators. Mr. Martino declined to comment.

Corruption is so endemic to the construction industry, said John E. Osborn, who specializes in construction law and represents property owners, “that it’s part of regular business practices.”

“It looks like the same thing that happened in the late 1990s is happening all over again,” he said.

Thirteen years ago, more than 39 executives and nearly three dozen companies pleaded guilty to bribe taking and grand larceny, including Herbert Construction and Structure Tone, which as the biggest single beneficiary of the illegal scheme, paid a $10 million fine. The executives routinely overcharged Fortune 500 companies like Sony to build corporate office space.

Among those charged were Gerald Lazar and his brother, Howard Lazar, who together ran Lehr Construction. They pleaded guilty to bribery and paid $3.3 million in restitution. Howard Lazar, who pleaded guilty in the 1970s to attempted bribery of city construction inspectors, served a short prison sentence and was forced to leave the industry.

Gerald Lazar and his wife, Janet, who own a majority stake in the company, were not charged on Wednesday.

According to the district attorney’s office, the new scheme began right around the time the old one was broken up. Mr. Lazar’s son Jeffrey, who oversaw the sales, estimating and purchasing departments, was indicted on charges of enterprise corruption and grand larceny. Investigators say that Jeffrey Lazar and Mr. Phillips, who shared responsibility for day to day operations, met weekly at their Broadway offices with Mr. Halper and Mr. Wasserman to work out the details of their scheme.

Even if Mr. Vance obtains convictions, recovering any money might be difficult. Earlier this year, Lehr filed for bankruptcy protection, citing a depressed real estate market and the district attorney’s investigation.