One of the West Coast’s leading tax-law firms has agreed to settle for $4.9 million three class-action lawsuits accusing the firm of fraud and negligence stemming from work it did for convicted tax shelter promoter Gerald L. Schulman, court papers show.
The firm, Hochman, Salkin & DeRoy in Beverly Hills, is one of the defendants named in the class-action lawsuits, which have been consolidated in U.S. District Court in Los Angeles. The proposed agreement would partly settle those suits, which were filed on behalf of more than 5,000 investors seeking to recover some of the $200 million they invested in the 1970s and early 1980s in real estate partnerships promoted by Schulman as tax shelters.
Hochman, Salkin & DeRoy worked for Schulman, a North Hollywood businessman, in the early 1980s preparing tax opinions for distribution to his investors. The Internal Revenue Service, contending that Schulman’s tax shelters took interest deductions on phony loans he arranged, later disallowed many of the deductions investors believed that they would receive, leaving them with hefty back-tax bills.
Among the allegations made in the lawsuits by investors was that the law firm failed to properly disclose the tax structure of the programs Schulman promoted and that it failed to disclose relevant details about Schulman’s past, including his being disbarred in New York in 1969 and a two-year suspension as certified public accountant that he received in 1973 in California.
The settlement involves both the law firm and partners George DeRoy, Bruce I. Hochman, Avram Salkin and Martin Gelfand. Court papers show that the $4.9 million would be paid into a fund by the law firm’s insurance carrier, First State Insurance, to be distributed later to investors.
Kenneth A. Liebman, a lawyer with Irell & Manella in Los Angeles, which represents Hochman, Salkin & DeRoy, declined to comment Tuesday on the settlement. According to court documents, Hochman, Salkin & DeRoy denied any wrongdoing, but agreed to settle the lawsuits to avoid potentially long and costly litigation. The settlement still must be approved by U.S. District Judge A. Andrew Hauk after details are disclosed to investors.
Schulman was once one of the nation’s largest tax-shelter promoters, building a real estate network of nearly 600 buildings, about two-thirds of them U.S. Post Offices. He was convicted in February by U.S. District Judge Mariana R. Pfaelzer of 20 counts of felony tax fraud and sentenced to 1,000 hours of community service.
In a separate development, a group of dissident Schulman investors filed a lawsuit Monday in Los Angeles that, unlike the class-action lawsuits, names as a defendant the investment banking firm Drexel Burnham Lambert for its role in helping finance Schulman.
In March, The Times reported that Schulman, without the knowledge of his investors, received $60 million from Drexel in exchange for notes secured by the investors’ buildings. The notes were later sold to Executive Life, a unit of First Executive Corp. that is one of Drexel’s best customers and which was also named in the lawsuit.
A Drexel spokesman said the firm has not seen the lawsuit and declined comment. Drexel officials have previously denied any wrongdoing in providing money to Schulman, which they have said was used largely to restructure debt on the properties.
Separately, Pfaelzer at a court hearing Tuesday said that Schulman’s community service should involve working with poor or disadvantaged people. She also ordered him to cooperate with Internal Revenue Service officials in providing his personal tax records for review.