Order Forbids Building Sales by Schulman : Investors Would Lose Money, Lawyers Contend
A federal judge in New York on Wednesday blocked efforts by convicted North Hollywood tax shelter promoter Gerald L. Schulman to sell about 580 buildings owned by nearly 5,000 investors in Schulman-created partnerships.
The order, issued by U.S. District Court Judge John M. Walker, comes after lawyers representing some of the investors argued that the investors would lose $160 million of the $200 million they put into Schulman-promoted partnerships if Schulman is successful in selling the buildings to a Los Angeles real estate company. The losses, they argued, would occur because Schulman has repeatedly arranged loans on the buildings, later selling the loans for cash.
At the same time, they argued, Schulman could receive at least $20 million if the buildings are sold because he holds an interest in notes on the buildings, about 80% of which are leased to the U.S. Postal Service.
Schulman, 56, one of the nation’s leading promoters of tax shelters in the late 1970s and early 1980s, was convicted last month in the courtroom of Los Angeles federal Judge Mariana R. Pfaelzer on 20 counts of criminal tax fraud. Government prosecutors argued during Schulman’s trial that tax shelters he promoted had defrauded the government of $28 million by taking interest deductions on phony loans he arranged. A sentencing date has not been set.
Mum on Collateral
The order released Wednesday by Judge Walker comes as light is slowly being shed on Schulman’s North Hollywood-based operation, including his disclosure in a deposition obtained by The Times that he received about $60 million cash in late 1985 from investment banker Drexel Burnham Lambert.
Schulman disclosed in the deposition last month that he pledged notes on the investors’ buildings as col ateral to Drexel without telling his investors about it or how it might affect the title to their properties. Drexel spokesman Steven Anreder confirmed that Drexel provided money to Schulman through a secured bond.
Judge Walker’s order requires Schulman to disclose details to investors about all of the debt placed on the properties they own.
In his deposition, Schulman said the money from Drexel was needed to pay off bills from managing the buildings. Schulman said the notes on the properties have a face value of $500 million to $600 million.
Attorneys in the case said the notes pledged to Drexel represent debt on the buildings that is in addition to the first mortgages on the properties that existed when they were bought by investors.
Claims ‘Without Merit’
In addition to the class-action suit in New York, Schulman is being sued by about 500 investors in federal court in New Jersey. Last month, a judge there issued an order requiring that proceeds from any sale of buildings owned by those investors be put into escrow.
David D. Aufhauser, a lawyer representing Schulman, said he did not want to comment on Walker’s order because he has not seen it. “Certainly, it is Mr. Schulman’s position that the claims made in the suits are without merit,” Aufhauser said.
Schulman has never disclosed in court papers the total price that might be paid for the buildings. Any sale of the properties would need approval of a majority of the investors in each individual building.
In the deposition, Schulman described the prospective buyer of nearly all of the buildings as Equity Realty, whose principal owner is Century City businessman Bruce Littell. He also disclosed that last July he sold for $10 million the contracts to manage the investors’ buildings to Sherman Mazur, a business associate of Littell’s and a prominent Los Angeles arts patron.
Melinda Brun, senior trial counsel with the state Department of Corporations, confirmed Wednesday that Mazur and various companies affiliated with him are being investigated by the department for possible violations of securities laws.
The case, she said, stems from the role Mazur and his firms played in acquiring control of 26 real estate partnerships based in Gilroy, Calif. She added that part of the investigation includes Mazur’s association with Littell and a management company owned by Littell’s wife.
Brun added that Mazur and his companies are defendants in at least six civil lawsuits alleging fraud in other limited partnerships they have controlled as general partner. She said that he has put into bankruptcy proceedings at least 180 limited partnerships he has controlled.
Never Lost Lawsuit
One of Littell’s lawyers, Lawrence J. Szabo of Encino, said he is unaware of any department investigation. He added that it “appears questionable” now whether the sale of the Schulman properties will go through because of the lawsuits and other factors.
One of Mazur’s lawyers, H. Roy Jeppson of Los Angeles, said it is “totally improper” for Brun to disclose any investigation into Mazur or his companies.
“If there is such an investigation, it should not be a matter that is even of public knowledge,” Jeppson said.
Jeppson said Mazur has never lost a lawsuit in which he has been accused of fraud and has never been accused of any wrongdoing by a state or federal agency.
“There has never, ever, ever been any kind of judgment . . . finding that Sherman Mazur has engaged in any kind of fraud,” Jeppson said.
He said all of the bankruptcy court cases Mazur has been involved with stem from Mazur’s efforts to rescue real estate limited partnerships with severe financial problems. He said a large number of them have been reorganized financially under protection of the bankruptcy court.
Jeppson added that Mazur had no business relationship with Schulman before he bought the management contracts.
