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Mystery loan lets Jacksons keep both homes

July 11--WASHINGTON -- A year ago, former Rep. Jesse Jackson Jr.'s attorneys said his family was in "significant financial peril" as he and his wife, Sandi, awaited sentencing for looting $750,000

July 11–WASHINGTON — A year ago, former Rep. Jesse Jackson Jr.’s attorneys said his family was in “significant financial peril” as he and his wife, Sandi, awaited sentencing for looting $750,000 from his campaign coffers.

Jackson had to come up with that amount to pay a court judgment. Prosecutors wanted to seize the equity in the couple’s two homes if he didn’t.

The Chicago Democrat ponied up $200,000 before he entered prison last fall. Then he paid off the balance with a $550,000 wire transfer in late May, while keeping both his houses.

The Jacksons aren’t saying where the $550,000 came from, but a Tribune investigation points to a mysterious lending company created at a law firm used by Michael Milken, the convicted “junk bond king” of the 1980s who is a longtime friend of the Jackson family.

The mystery company, LS Financial LLC, was formed April 23 in Delaware, a state known for easy-to-create companies that must disclose little about themselves. LS Financial’s registered agent is The Corporation Trust Co., which is the agent for more than 290,000 other businesses at a single address in Wilmington, Del.

About a month after LS Financial was formed, it gave the Jacksons a promissory note for up to $567,549.47. That represents a second mortgage on the Jacksons’ red-brick row house in Washington’s upscale Dupont Circle area. The couple also have a less expensive home in Chicago’s South Shore neighborhood.

Mortgage underwriters and real estate professionals consulted by the Tribune said the Jacksons — one in federal custody, the other headed to prison next year — were unlikely candidates for a second mortgage from a traditional lender, especially after the collapse of the housing market triggered stricter regulations to qualify for such a loan.

But a private lender — such as a friend or relative — isn’t bound by the tighter rules, they said. And one expert said the apparent equity in the Jacksons’ Dupont Circle home made the second mortgage a reasonable risk, because if the loan isn’t repaid, a foreclosure sale is an option.

Very little is known about the Jacksons’ lender, LS Financial. Its “certificate of formation” was signed by paralegal Reese Ella Day, a notary public for 48 years who has been with the California law firm of Maron & Sandler since at least 1998.

Maron & Sandler is in a downtown building in Santa Monica where Michael Milken and his brother Lowell also have offices. It has long been the go-to law firm for Michael Milken, a billionaire investor and philanthropist who served 22 months in prison after getting a 10-year sentence in 1990 for six felonies including conspiracy and securities fraud. He was banned for life from working in the securities industry.

When the Tribune reached Day by phone to ask about the creation of LS Financial and why it made the loan to the Jacksons, she said: “Yeah. Do you know what, I cannot talk to you about that. I’ll see what I can find out and get back to you.”

She ignored later requests for comment.

Richard Sandler, a childhood friend of the Milken brothers, is a partner at Maron & Sandler and was Michael Milken’s employer after his release from prison in 1993. He answered some Tribune questions by email.

“Neither Michael Milken, Lowell Milken nor I are a manager or member of the entity you reference,” Sandler wrote.

Asked if one of the Milkens’ for-profit or not-for-profit entities was involved in the Jacksons’ second mortgage, he said, “No.”

But he declined to answer a question about whether a friend, relative or associate of the Milkens was involved.

A spokesman for Michael Milken did not respond to written questions. Lowell Milken’s spokeswoman, Bonnie Somers, said by email that he was not involved in the loan or the creation of the limited liability company.

Jackson Jr., 49, now in an Alabama prison camp, was unavailable for comment, and his lawyers did not respond to inquiries. Sandi Jackson, 50, a former Chicago alderman who must serve a year in prison on a tax conviction after her husband gets out, did not respond to Tribune requests for comment.

The couple’s prison terms were staggered so one parent could care for their children, who are 14 and 10 years old.

Longtime family friends

Michael Milken, who has a fortune estimated at $1.5 billion to $2.5 billion, has been a friend of Jackson Jr.’s father, civil rights leader the Rev. Jesse Jackson, for 30 years.

The elder Jackson was a speaker at the Milken Institute’s annual global conference in Beverly Hills, Calif., April 27-30, just days after LS Financial’s creation. Also speaking was Judy Smith, who was Jackson Jr.’s crisis communications guru during his fall from grace. She inspired the TV show “Scandal,” which is about a professional fixer.

The elder Jackson declined to comment on his son’s second mortgage. Smith did not reply to emails.

Another connection to the Milkens is Jonathan Jackson, brother of Jackson Jr. and an assistant professor at Chicago State University.

He worked in 1989 for the now-defunct Drexel Burnham Lambert investment firm in Beverly Hills, where Michael Milken sold the high-yield, high-risk bonds known as “junk bonds.”

Jonathan Jackson, who also declined to comment for this story, later worked for another Milken venture, Knowledge Universe, a global education company.

D.C. home value rises

The Jacksons paid $575,000 for their Dupont Circle row house in 1998, three years after Jackson Jr. entered Congress. But it is worth far more now.

The couple put the home up for sale briefly in 2012 with a $2.5 million asking price and a listing describing it as an “exquisite” residence with five fireplaces, four bedrooms, three full baths, two half baths, two kitchens and a rooftop deck with a Jacuzzi.

At the time, Jackson Jr.’s congressional office said the couple wanted to sell the home because of medical bills. By then, the congressman had been treated for months for conditions identified as bipolar disorder and depression. After a long medical leave of absence from Congress, he quit his job later in 2012.

The couple bought their Chicago home on East 72nd Street for $200,000 in 1994. Now they own it outright, and it has an estimated market value of $237,000, Cook County records show.

By contrast, the D.C. row house’s assessed value went from $429,000 in 1998 to $1.28 million in 2010, when the Jacksons refinanced with a new mortgage of $402,000, records show.

At the time, interest rates for a 30-year fixed mortgage averaged 4.27 percent, according to Freddie Mac. If one assumes that those were the terms of the new mortgage and they kept up with their payments, the balance of the first mortgage would have fallen to $376,000 in May.

Now the home is assessed at $1.3 million, but real estate experts who know the area said the property is likely worth as much or more than Zillow’s estimate, which is nearly $1.8 million. puts the home’s value much higher: $2.7 million.

Robert Van Order, a real estate professor at George Washington University, said the expected equity probably tipped the scales in favor of a second mortgage, even if the couple have limited financial resources.

“Equity is like ketchup,” he said. “You can pour it over something bad, and it still will taste good.”

His calculation: The nearly $568,000 second mortgage and the estimated $376,000 balance on the first mortgage mean they still owe roughly $944,000. But if the home, hypothetically, is worth $1.8 million, there’s ample equity to leverage.

The second-mortgage holder’s risk is that property values could crash near Dupont Circle, Van Order said. “That could happen,” he said. “It’s not very likely now.”

That doesn’t mean the Jacksons could have gotten a second mortgage from a traditional lender. The key criteria for such a loan subject to federal rules are an applicant’s income, credit score, debt-to-income ratio and the equity in the property, underwriters said.

One mortgage lender who spoke on condition of anonymity said that if the couple had asked a bank for a $567,000 loan, “they would laugh them out the door.”

A Washington real estate attorney, Thomas Kaufman, agreed that financing from an established lender was probably not in the cards. “You need a source of income to pay the loan,” said Kaufman, president of the American College of Real Estate Lawyers.

An inmate ordinarily wouldn’t qualify unless his spouse had “independent income or trusts or something like that,” he said.

It’s unclear whether Sandi Jackson is now earning a paycheck, but even if she is, those wages wouldn’t continue once she enters prison, Kaufman said.

When Jackson Jr.’s lawyers pleaded for mercy for him last year, they said he had a “negative monthly cash flow” and no income other than Social Security payments and Federal Employees Retirement System payments.

Backing a pardon

Exactly who lent money to the Jacksons may never emerge. But it’s clear that Jackson Jr. is a Michael Milken admirer — and advocate.

The Tribune has learned that a draft of Jackson Jr.’s unpublished memoir spends a page and a half extolling Milken as a “brilliant Wall Street financier” who seems to have made the most of his life despite “brief legal difficulties in the middle of a long career.”

“If I were president,” Jackson Jr. writes, “he’d be amongst the first I would pardon, followed by 1 million Americans who are nameless and faceless, yet no less deserving.”

Milken, 68, has unsuccessfully sought presidential pardons twice, during the last year of Bill Clinton’s administration in 2000 and the last year of George W. Bush’s in 2008, Justice Department spokesman Wyn Hornbuckle said.

The Office of the Pardon Attorney has not received an application from Michael Milken during President Barack Obama’s tenure, Hornbuckle said.

Milken’s lawyer, Sandler, was asked whether the loan was tied to Milken’s bid for a presidential pardon. He emailed: “No matter who may or may not have made the loan to the Jacksons, it would not have any connection to a possible presidential pardon for Michael Milken.”

Tribune reporter Mary Ellen Podmolik contributed.

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