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Homes of the rich and infamous; Corporate scandals don’t keep executives from living well.

Jul 15, 2011

Author: Jon Swartz – USA TODAY – Section: MONEY

SAN FRANCISCO – While former WorldCom CFO Scott Sullivan sat stoically before lawmakers last week, amid cries that executives responsible for corporate scandals be jailed, construction continued on his $15 million lakeside mansion in Boca Raton, Fla.

 

Other corporate chieftains continue to pour millions into modern- day castles, while being dogged by corporate bankruptcies and allegations of improper financial behavior. The biggest: the soon- to-be $94 million estate of Gary Winnick, chairman of Global Crossing, which this year filed the fourth-biggest bankruptcy case ever.

 

Much of the upper Enron contingent continues to live well, too. Former chief financial officer Andrew Fastow, the alleged mastermind behind partnerships that plunged Enron into a financial abyss, lives in a $700,000 house in Houston and is building an 11,400-square- foot home in the so-dubbed “Beverly Hills of Houston” worth more than $1 million.

 

A congressional committee’s investigation of Martha Stewart for allegedly taking advantage of inside information to unload shares in ImClone hasn’t stopped renovation on two homes she owns on a $15 million, 153-acre farm in Bedford, N.Y.

 

Home is where the money is.

 

None of the executives have been charged with anything illegal. They all say they are innocent of financial improprieties as several investigations unfold. They clearly have the money to spend, and real estate is always a good tax break.

 

But there are other perks and reasons for profligate spending on homes, experts say.

 

In all states, debtors who file for Chapter 7 bankruptcy must liquidate most of their assets to pay creditors. The federal bankruptcy code, however, lets them keep some things exempt from liquidation. States determine which assets, such as clothing, cash or home equity, are exempt. Only five states have unlimited homestead exemptions. Florida, where Sullivan lives, and Texas, where Fastow lives, are two of them. The others are Iowa, Kansas and South Dakota.

 

“The exemption was expressly created in Texas in the 19th century to attract settlers and, later, rich people,” says Charles Tabb, a bankruptcy law professor at the University of Illinois.

 

A tearful Linda Lay, wife of former Enron CEO Ken Lay, in January said the couple might be forced to declare bankruptcy. But after selling homes in Aspen, Colo., commercial property and personal items, they no longer face that threat, family spokeswoman Kelly Kimberly says. That is, legal experts say, unless shareholder lawsuits siphon their finances. Regardless, Texas law permits the Lays to keep an unlimited amount of equity in their 13,000-square- foot Houston penthouse, valued at $7.1 million.

 

Florida has long been a haven from creditors. Former Sotheby’s CEO Diana Brooks, who pleaded guilty in October 2000 for her role in a price-fixing scheme with rival Christie’s, denies she and her husband acquired a $4 million waterfront property in Florida to take advantage of the homestead law shortly after the government started its investigation. Brooks was sentenced to six months home detention and three years probation in April.

 

Attacking the perk

 

Some in Congress are trying to cap unlimited homestead exemptions. But a proposed bill to do that – now stalled in Congress – could be toothless in Texas and Florida, where the homestead exemption is protected by the states’ constitutions, Tabb says. Other loopholes could also be exploited, experts say. “If the law allows you to keep your home instead of handing it over to creditors, why not take advantage?” Tabb asks.

 

Finances aren’t the only reason executives build extravagant digs. Psychologists, real estate agents and lawyers say other factors are at work, including:

 

* A fortress mentality. Many top-level executives build palatial homes – often in gated communities – as a defense mechanism. “It offers a sense of invincibility when things are going badly,” says psychologist Karen Foster of Management Psychology Group. “It shelters them from reality and offers privacy.”

 

Sullivan’s new 24,000-square-foot, five-building Mediterranean- style hideaway is ringed by gates with television monitors. It comes with a private lagoon, a two-story boathouse and 18-seat movie theater. Sullivan started construction on the multimillion-dollar house on four acres he bought in 1998. He currently lives in a modest Boca Raton neighborhood. He has been mum on various WorldCom probes and accusations that he improperly hid expenses.

 

* Ego. Most executives view their homes as testaments to their professional legacy. “A lot of executives look at their house as an image of themselves,” says Jonathan Bloom, a real-estate attorney in Boca Raton. “It’s visual proof of how smart, rich and successful they are.”

 

The biggest monument belongs to Winnick. He is pouring $30 million into restoring his ostentatious 65-year-old Los Angeles mansion – dubbed Casa Encantada, or House of Enchantment – raising its value to $94 million, the nation’s priciest.

 

Winnick spokeswoman Marcia Horowitz says the 64-room, 23,000- square-foot Georgian-style home – once owned by hotel magnate Conrad Hilton – needs repairs.

 

Flabbergasted laid-off Global Crossing workers, meanwhile, are attempting to recoup $32 million in severance pay
wiped out by the bankruptcy filing.


Bloom & Freeling . Attorneys At Law
2295 NW Corporate Blvd . Suite 117 . Boca Raton, Florida 33431
T.561.864.0000 . F.561.864.0001