On August 26, 2003, the US Attorney for the Southern District of New York, announced that Balkany had been detained on charges that he misappropriated approximately $700,000 in federal grant money.[14]
Balkany as the President and Director of Bais Yaakov, a Jewish day school in Brooklyn, applied for, in November 1999, and later received a $700,000 Congressional "Economic Development Initiative" grant administered through the auspices of the United States Department of Housing and Urban Development. According to the Complaint, he said that the entire grant amount would be used to pay off a mortgage on a building located on the Bais Yaakov property for an entity called "the Children's Center of Brooklyn" to house educational and therapeutic programs for disabled preschool children.[14]
In November 2001, auditors began a preliminary investigation of a number of "Economic Development Initiative" grants that had been awarded in the New York metropolitan area, including the $700,000 "Children's Center" grant. In connection with the investigation, auditors allegedly learned that the "Children's Center" had failed to file any of the regular progress reports required under rules and procedures of the grant. When auditors interviewed Balkany, he insisted the funds had been used to convert a Bais Yaakov building into the "Children's Center" but he refused to provide the auditors with access to the school's books and records, according to the Complaint.[15]
Subsequently, investigators obtained records for the Bais Yaakov account at Chase Manhattan Bank into which the grant money had been deposited. Those records reflected that all of the money received from HUD in December 1999 had been withdrawn from the account by early February 2000, a two-month period in which Balkany wrote more than 250 checks drawn against the account. According to the Complaint, further investigation revealed that only one check, for approximately $6000, was used to pay down any of the pending mortgages against the Bais Yaakov property, which at the time of the grant totaled more than $1 million.[14]
Balkany diverted the funds to an array of individuals and entities who were not entitled to the earmarked funds. He diverted $300,000 to an Israeli corporation in which his son-in-law was an officer, and another $5,000 to a New York import company run by another son-in-law. He also diverted approximately $80,000 to a variety of other rabbis and Jewish schools and organizations located in Brooklyn. He also wrote out 32 checks against the Bais Yaakov account, totaling approximately $78,000, all made payable to "Rabbi Balkany" which were subsequently endorsed and either cashed or deposited into a personal account at another bank.[14] He also used thousands of dollars in grant funds to pay for personal items such as life insurance premiums; credit card bills and income taxes.[14]
Balkany was charged in the Complaint with theft of government property, filing a false claim, wire fraud and obstruction of justice and released on a bond of $750,000.[14]
In a deal with prosecutors in 2004, Balkany agreed to restrictions on his movement, six months probation, full restitution of the monies and admitted that he was wrong in not complying with specific terms of the grant's use. In return the State Prosecutor's Office promised not to pursue the case.[16]
On February 18, 2010, Balkany was arrested and charged with extortion, blackmail, wire fraud and making false statements in a Federal Court in Manhattan.[17] The hedge fund involved was SAC Capital. Balkany received two checks totalling $3.25 million and was arrested shortly after. The complaint filed reported that he claimed that he could prevent a federal prisoner from telling U.S. authorities about alleged insider trading at the firm. According to court records, Balkany told an investigator with U.S. Attorney Preet Bharara′s Manhattan office in a conversation recorded by prosecutors, that SAC had inside tips about two companies which make medical devices and a company which makes molecular diagnostic products. SAC, which has since been riddled with insider trading convictions, had a SAC lawyer alert prosecutors to the extortion attempt, and a prosecutor said during the trial that Balkany "lied" and that there was no evidence of illegal trades.[18] This was later proven untrue. SAC was involved in multi insider trading convictions and investigations. In February 2011, two former employees were charged with insider trading.[19]
Balkany's assertions were further proven correct when in November 2012 federal prosecutors levied charges against additional former SAC Capital traders.[20][21] Portfolio manager Michael Steinberg was arrested in March 2013 and accused of using inside information to make $1.4 million in profits for SAC Capital.[22] In June 2013 nine former SAC employees were charged with conspiracy and securities fraud.[23] With the conviction of Mathew Martoma on February 6, 2014 after a speedy four week trial, a total of eight former SAC Capital employees have been found guilty.[24]
Despite these future disclosers which would support Rabbi Balkany, on November 10, 2010, Balkany was found guilty of all charges.[25] On February 18, 2011 he was sentenced to four years in prison.[26] In March 2012 Balkany appealed his conviction, claiming that he should be allowed to present an entrapment defense. The appeal was rejected and the original conviction upheld by the U.S. Second Circuit Court of Appeals.[27]
He was partially released on Wednesday 9/4/13.
