Hialeah mayor’s testimony highlights own involvement in lending schemes

The testimony of Hialeah Mayor Carlos Hernandez in federal court has opened a window into the city’s years-long shadow banking industry.

04/19/2014 1:58 PM

04/20/2014 11:57 AM

A big-city mayor took the stand in Miami federal court last week and admitted he charged exorbitant, illegal interest rates to a Hialeah businessman — Florida law calls it “loan-sharking” — which he failed to report as income on his tax returns.

But he was not the mayor on trial.

Carlos Hernandez, Hialeah’s current mayor, testified as a government witness in the tax-evasion trial of his predecessor, Julio Robaina.

On the stand, Hernandez was asked specifically if he had received as much as 36 percent interest annually on loans he made to a Hialeah jeweler later convicted as a Ponzi schemer.

“Yes, sir,” he told prosecutor Richard Gregorie. Florida law says anything over 25 percent interest is a crime.

Hernandez was also asked whether he plans to amend his tax returns.

Yes, he said. Hernandez’s tax returns from that time, which have been public for years, show he did not report the income.

Why Hernandez, mayor of Miami-Dade County’s second-largest city, can’t be charged with violating Florida’s loan-sharking laws is clear: The statute of limitations — one year — ran out long ago.

Why he couldn’t be charged with federal income-tax evasion is not as clear. Hernandez did not respond to a request for comment for this story.

Hernandez doesn’t have immunity from prosecution, which never came up during the course of his testimony. The federal statute of limitations has expired for some, but not all, of the unreported interest payments.

Yet Hernandez appears safe from suffering the same fate as Robaina — who faces, among other things, charges that he failed to report on his tax returns the income he received from 36-percent interest rates he charged to the same Hialeah jeweler.

By having Hernandez testify Wednesday on their behalf, prosecutors signaled they view him more as a cooperating witness than a criminal target.

Gregorie, the lead prosecutor in the case, declined to comment about Hernandez’s testimony while the trial is ongoing.

And compared to Robaina, Hernandez was a little fish. Prosecutors say Robaina and his wife, Raiza, hid $2 million in income to avoid taxes. Hernandez’s tax returns show that he failed to report $100,000 in interest income he received between 2007 and 2009, paid in 37 check installments of $2,400 and $3,000.

In the end, Hernandez’s testimony opened a window into Hialeah’s years-long shadow-banking industry, in which both he and Robaina had participated. Hernandez was called as a witness to bolster the prosecution’s case that lenders such as Robaina, Hernandez and others routinely charged Perez 36 percent interest on loans.

“The shadow banking system, by its very nature, is very secretive and doesn’t leave a paper trail,” said Ryan Stumphauzer, a former federal prosecutor in Miami who now heads his own firm. “The prosecution can’t rely on documents as they would in a normal white-collar criminal case involving the traditional banking system.

“The government has no choice but to rely on people who have dealt directly with the secretive system and are willing to go on record to describe it.”

Left unanswered

Like Robaina, Hernandez lost tens of thousands of dollars when he made $180,000 in loans — at 3 percent monthly interest, or 36 percent annually — to convicted Ponzi schemer Luis Felipe Perez between 2007 and 2009. Perez paid him $100,000 in interest, Hernandez told the court.

Prosecutors contend that Robaina charged Perez the same 36-percent interest on $750,000 in loans and collected some $300,000 in secret cash payments and $300,000 in check payments. Robaina’s defense counters that he charged only 18 percent and that the payments were made only in checks.

Hernandez did not report any of the checks he received from Perez on his city financial disclosure forms, or on his 2007-09 federal tax returns attached to some of those forms, according to records obtained by the Miami Herald.

It’s unclear whether Hernandez has since amended those returns or otherwise settled with the feds. The prosecutor and defense attorney treaded lightly on the mayor Wednesday. Hernandez did not respond to a series of questions the Herald emailed Thursday to his chief of staff, Arnie Alonso.

Among the questions Hernandez didn’t answer: whether he fears any future charges, or why he repeatedly and publicly denied three years ago that he charged Perez high interest rates.

Under U.S. law, tax-evasion charges can be brought against someone within six years after the alleged crime of filing a false tax return. In Hernandez’s case, prosecutors conceivably have until 2016 to consider filing charges on unreported income on returns filed as late as 2010.

Interest income must be reported even if the financial deal later goes awry. While Hernandez ultimately lost money in the shadow-banking scheme, he would not have known that when he entered into the loan agreement with Perez and began receiving interest payments.

Hernandez’s tax returns were attached to the real-estate and financial-interest disclosure forms he filed with the city of Hialeah.

His 2009 tax return, from before his tenure as mayor, listed his profession as “councilman and investor.”

A matter of time

Under Florida law, a “loan shark” is defined as someone who lends money at an annual interest rate higher than 25 percent. An annual interest rate over 18 percent is considered “usury,” which is not a criminal offense.

But it’s too late for Miami-Dade State Attorney Katherine Fernández Rundle’s office to charge Hernandez with loan-sharking, a second-degree misdemeanor, because of the lapsed one-year statute of limitations.

With that time restriction, prosecutors would have been unable to make a case even when the Herald first reported Hernandez’s loans to Perez in 2011. At the time, Hernandez, who was seeking reelection, bashed the newspaper and claimed Perez had swindled him. Hernandez, the former city council president, had ascended to the mayor’s seat a few months earlier, taking over after Robaina resigned to run for county mayor.

An earlier version of this story mischaracterized how Hernandez ascended to the mayor’s seat.

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