Gerald Schulman: A Success Story Built on Fraud

Gerald L. Schulman spent money in ways that prove how easily deep pockets can buy prestige.

For $15,000 a year, he joined an elite circle of Democratic contributors who lunched regularly with U.S. senators, at least four of whom visited his Encino home. For a $100,000 donation, the San Diego Zoo named an exotic bird hatchery after him. For an estimated $25,000, Schulman bought one of 28 existing copies of a Declaration of Independence replica printed in 1823 by order of John Quincy Adams.

But Schulman really made his mark as a real estate syndicator. Since the mid-1970s, Schulman persuaded 5,000 investors to put up $200 million and pool their money in tax shelters. His clients included comedian Robin Williams, film director Woody Allen and enough major league baseball players to field an all-star team.

With their money, Schulman formed investment partnerships that acquired nearly 600 buildings, two-thirds of them used as U.S. post offices, which generated close to $40 million a year in rent. His North Hollywood-based Postal Management Services Co. in 1986 claimed to manage $950 million in assets in 47 states and Puerto Rico. He also was the Postal Service’s biggest landlord.

For anywhere from $10,000 to $250,000, an investor could own a piece of a post office or other government facility, or a public utility building in hamlets such as Starkville, Miss., or in large cities such as Los Angeles, where a Schulman partnership owns a post office near International Airport.

“I was very impressed with him. I thought he was a very successful man, very generous and a very good man,” said former Gov. Edmund G. (Pat) Brown, a friend of Schulman’s.

What virtually no one knew was that Schulman was a twice-convicted felon, that he was disbarred in New York and suspended as a certified public accountant in California for two years. Nor were his investors told that the man to whom they entrusted their money had filed for personal bankruptcy in 1970.

Last February, U.S. District Court Judge Mariana R. Pfaelzer in Los Angeles convicted Schulman of 20 counts of felony tax fraud. At the trial, federal prosecutors alleged that he had defrauded the government of $28 million in taxes through 91 partnerships he organized.

The way he did it, they said, was by shuffling hundreds of millions of dollars between banks and corporations in Panama and the Netherlands Antilles to create the illusion that loans were being made so that interest payments could be written off.

In an earlier stage of the case, Judge Thomas Tang of the U.S. 9th Circuit Court of Appeals wrote on behalf of the court that Schulman’s transactions were “a sham that lacked substance because there was no economic risk associated with the purported loans.”

Schulman has not yet been sentenced, pending a decision by Pfaelzer on a request by Schulman’s lawyers to overturn her verdict.

Back Taxes Due

Schulman, through lawyer David H. Aufhauser, declined to be interviewed. Aufhauser said that Schulman maintains his innocence, adding that Schulman carefully checked on whether the programs he promoted were legal before going through with them.

“Everything Gerry did with respect to those partnerships was done on the advice of legal counsel,” Aufhauser said.

Schulman faces other legal headaches as well. Angry investors who have been hit with hefty back-tax bills because of disallowed tax deductions have sued Schulman and some of his associates for fraud in New York, Newark, N.J., and Philadelphia. The investors claim that they could lose as much as $200 million because disallowed tax deductions. They also have alleged that they could lose up to $200 million that they had invested in Schulman’s programs, in part because the properties were sold to them at inflated values, and because they have been heavily mortgaged.

Schulman’s attorney Aufhauser disputes the figures of potential losses cited in the lawsuits. He said that under agreements the Internal Revenue Service has been negotiating with most investors, some of the disallowed tax write-offs will be reinstated, although how much varies widely among investors.

Schulman’s investors are confused, to say the least. Dr. Roland A. Schaumloffel, a Long Beach physician, said he invested $100,000 for a share of post office buildings in such places as South Gate, Gilroy, Calif., and New York state.

“Someone told me recently that I ought to be a millionaire by now with the way property has appreciated,” he said. “But I’m not a millionaire. I don’t know where I am.”

Served Four Months

The story of Gerald Schulman and his post offices, as told in court documents, depositions and interviews with associates, is full of such mysteries.

Schulman, now 56, is a native of New York. He received a bachelor’s degree in business administration in 1955 from City College of New York and a law degree in 1961 from St. John’s University. In 1969, public records show, he pleaded guilty in New York to federal charges of attempting to steal property worth nearly $20,000 from a New York bank. He was placed on probation for five years.

In 1971, according to court records, he pleaded guilty in Newark, N.J., to making false statements by overvaluing the collateral for a loan from the U.S. Small Business Administration. He was sentenced to a one-year term in federal prison and served four months at the federal facility in Lompoc, Calif., according to prison authorities.

Other records show that Schulman was disbarred from practicing law in New York in 1971 as a result of the criminal conviction. In 1973, his accounting license was suspended in California because of his criminal record. They also show that he filed for personal bankruptcy in 1970, listing less than $3,000 in assets and unsecured debts of more than $300,000. He was discharged from bankruptcy later the same year.

Contrast that picture with the Gerald Schulman of the 1980s. His San Fernando Valley estate in the Encino hills, appraised two years ago at $2.4 million, includes a sunken tennis court, an 8,000-square-foot home that has a two-story closet with a circular staircase and a guest house with its own beauty parlor.

“It was very elaborate. There was the sunken tennis court, a guest house in the back, as I recall, and a waterfall of some sort that ran through the garden,” recalled Rep. Tony Coelho (D-Merced), the House majority whip, who said he visited the home for a political fund-raiser.

Large Contributions

Schulman also had a fascination with birds. He set up the International Foundation for the Conservation of Birds, which sponsored conferences in Universal City that drew experts from all over the world.

Campaign records show that he gave at least $100,000 total to various Democratic candidates, with his favorites being Sen. Alan Cranston (D-Calif.), former presidential candidate Sen. Paul Simon (D.-Ill.) and California Assembly Speaker Willie Brown (D-San Francisco).

Despite his large political contributions, nobody seemed to know what he was after.

“I don’t recall any particular issues that were foremost in his mind. He was friendly, had a lot of energy, was very concerned about the country and concerned about the issues,” said Sen. Donald W. Riegle Jr. (D-Mich.), who got to know him through Schulman’s membership in a $15,000-a-year club for donors to Democratic Senate campaigns.

In large part, Schulman’s career turned around by tapping the hunger rich people have for tax shelters, by aggressively selling his tax-shelter programs and by using a plan designed by an iconoclastic Northern California tax attorney named Harry Margolis.

According to former associates, in the early 1970s Schulman began toying with the idea of owning post office buildings. The advantage is simple: The federal government is a stable tenant that will pay its rent. Others had the idea before, but no one exploited it like Schulman.

“We marketed post offices to the masses,” one former Schulman salesman said.

Byzantine System

What was needed was investor money to buy them, which Schulman got by promoting the investment as a safe tax shelter. His aggressive sales force often worked closely with accountants and financial planners to sell the tax shelters.

That’s where Harry Margolis comes in. Margolis, who died last year, was an attorney and a tax shelter promoter from Los Gatos. His clients included such celebrities as est guru Werner Erhard.

Part of Margolis’ system was to design investment partnerships that, federal authorities alleged, would lend money to themselves in a Byzantine system of foreign corporations and banks. By moving money around, an impression was created that loans were being made. That created interest payments that tax shelter investors could then deduct.

Government investigators concluded that it amounted to nothing more than a person taking a dollar out of his left pocket and putting it into his right and expecting a tax deduction.

Margolis was brought to trial on tax fraud charges twice in Northern California, but he was acquitted both times, in 1977 and 1986. (Schulman’s attorneys argue that, because Margolis was never convicted, Schulman’s conviction on similar tax fraud charges should be reversed.)

Schulman got to know Margolis in the early 1970s and became his client. Ultimately, Schulman adopted the Margolis method in promoting his own tax shelters.

In late 1984, federal investigators, in the course of trying to build a case against Margolis, stumbled across evidence that would eventually lead to Schulman’s indictment and conviction.

The investigators, acting on a tip, went to a market called the Ample Hamper in Tortola in the British Virgin Islands. Next to the potatoes in a storeroom were two tons of Margolis files. So voluminous were the records that it cost $20,000 to ship them back to the United States by air freight.

Inside, federal authorities said, were records showing that what Schulman was doing with investors’ money was a virtual blueprint of what Margolis did.

They later discovered, for example, that $95 million passed electronically through 50 largely dormant Panamanian bank accounts in a single day in 1979. At the start of the day, each account had less than $250 in it. At the end of the day, each had less than $250 in it.

Huge Portfolio Assembled

Schuman’s lawyers argued during his trial that all of the transactions were legitimate loans, that all of the companies involved had profited from the loans, and that there was economic risk involved for the banks and companies when they lent the money.

Using the Margolis-inspired tax shelter idea, Schulman found plenty of investors eager to put up their money and he assembled a huge real estate portfolio.

In Cheyenne, Wyo., public records show, a General Services Administration building is owned by a partnership that includes actor-director Woody Allen, who invested $49,500. Others who invested in the building include several of Allen’s associates, including collaborator Marshall Brickman, producer Charles Joffe and manager Jack Rollins.

Chief among the concerns of investors and their lawyers now is evidence they say suggests that Schulman repeatedly placed second mortgages on investor properties without telling them. In various cases, according to lawyers in one suit, debt totaling up to five times the original mortgages on the property have been taken out by Schulman. Court papers also allege that Schulman benefited personally from the loans, receiving an undetermined amount of interest directly and indirectly from them.

Changes in the federal tax laws have taken much of the appeal out of tax shelters. As a result, in the past two years the money stopped flowing into the Schulman programs, his associates said.

In a deposition last February, Schulman insisted that the loans were needed to pay expenses associated with managing the buildings and to meet large, so-called “balloon” mortgage payments as they came due.

In late 1985, he received $60 million through a complex loan from the investment banking firm of Drexel Burnham Lambert. The loan was secured by notes on the investors’ buildings.

Investors were not told of the Drexel loan, according to Schulman’s deposition. Attorneys for the investors are now raising questions about why Drexel would lend the money when the properties were already so encumbered with other loans.

“Essentially, they’ve assisted Schulman in carrying out a scheme in which the investors have lost all of their equity in the properties,” said Robert G. McCoy, a Chicago lawyer who represents some investors in a lawsuit.

A Drexel spokesman denied that, saying the financing it provided had restructured existing debt instead of adding new debt to the properties.

Loans Sold

Of the $60 million Schulman received, the Drexel spokesman said, $20 million was placed in escrow for future mortgage payments, $26 million was used to pay off senior debt owed to other lenders, and the rest was paid to limited partners or used for property management expenses.

To secure the loans, Drexel received notes that two Schulman trusts held on the properties, which have since been sold to a Drexel customer that the spokesman would not identify. According to other sources and records, the buyer was Executive Life, which is part of Beverly Hills-based First Executive Corp., one of Drexel’s best customers. A spokesman for First Executive confirmed that the company holds notes, but he declined to elaborate.

As Schulman was pressed financially, he sought help in 1987 from his rabbi, Isaiah Zeldin of the Stephen S. Wise Temple near Sherman Oaks, according to Schulman’s deposition. Zeldin, who confirmed his role in an interview, introduced Schulman to temple member Sherman Mazur, a Century City businessman whom real estate consultants have called a “white knight” for troubled real estate partnerships.

Schulman arranged for Mazur to pay $30 million for the right to manage all the post office, government and public utility buildings and a small interest Schulman held in notes on the properties. In return, Mazur would receive management fees and a potential profit on the refinancing of the notes.

Mazur’s involvement has raised concern among investors and their lawyers. Past investors and business associates have alleged that Mazur has defrauded investors in various real estate partnerships he took over. The allegations, contained in court records, suggest that he and his American Resource Corp. allowed properties he took over to slip into foreclosure by failing to pay lenders, and that Mazur “skimmed” rent money from partnerships. He has steadfastly denied the allegations.

Mazur is also the subject of investigations by the California Department of Corporations for possible securities violations and the U.S. Trustee’s Office for possible bankruptcy fraud, both agencies confirmed. He has not been charged with any wrongdoing.

Mazur’s lawyer, H. Roy Jeppson, confirmed that about 10 buildings are in jeopardy of foreclosure because the rents they receive are substantially below the debt payments and expenses. According to several sources familiar with the Schulman operation, a number of others may eventually have difficulty meeting loan payments if they cannot be refinanced.

Jeppson said Mazur does not skim money from the partnerships he takes control of and is confident that the investigations will turn up no wrongdoing. He said that Mazur is pumping $1.5 million a month of his own money into the Schulman properties to save them, and that, without Mazur, the properties might have been lost to foreclosure by now.

The lawsuits filed against Schulman are being consolidated into one case in Los Angeles. Settlement negotiations have taken place, but no one is predicting when a resolution may be reached.

Meanwhile, investors such as Schaumloffel, the Long Beach physician, are anxiously waiting. Schaumloffel said his stack of correspondence and papers related to his Schulman partnership is two feet high and growing.

“I thought this was a decent tax shelter, and everything seemed to be working all right for several years,” he said. “This has been such a headache.”