Drexel, Insurer Agree to Settle Tax-Shelter Suit
The Drexel Burnham Lambert investment bank and Executive Life, a Los Angeles insurance firm, will pay about $30 million to settle a class-action lawsuit brought on behalf of 4,200 people who invested through a North Hollywood tax-shelter promoter that the two companies helped finance, according to court records and lawyers familiar with the case.
The settlement is expected to be presented today for approval to U.S. District Court Judge A. Andrew Hauk in Los Angeles.
The investors, who include such celebrities as motion picture director-writer-comedian Woody Allen, comedian Robin Williams and Chicago Cubs pitcher Rick Sutcliffe, in the late 1970s and early 1980s bought limited partnerships in post offices and other buildings leased to federal and state government agencies. The partnerships were sold by Gerald L. Schulman, once one of the nation’s largest tax-shelter promoters.
In 1987, investors sued Schulman seeking to recover about $200 million they had invested in Schulman partnerships. Drexel and Executive Life were added as defendants later in the class-action suit, which alleged that they had aided Schulman in defrauding investors.
Schulman was convicted last year of 20 counts of felony tax fraud for cheating the government out of $28 million in taxes through programs that he promoted. He was sentenced to 1,000 hours of community service and appealed his conviction.
Drexel became involved with Schulman in late 1985, when Schulman received $60 million through a complex loan from Drexel that was secured by notes on the investors’ buildings. In previous interviews with The Times, Drexel officials have said the money was provided largely to restructure existing debt on the properties. A Drexel lawyer familiar with the case would not comment.
To secure the loans, Drexel received notes held on the properties by two Schulman trusts. The notes were later sold to Executive Life, part of Los Angeles-based First Executive Corp., one of Drexel’s best customers and a major buyer of its high-yield, high-risk “junk bonds.”
Drexel and Executive Life are expected to split responsibility for the $30-million payment. As part of the settlement, Century City businessman Sherman Mazur, who took over the management of the properties, is being bought out for an undisclosed sum and replaced as manager. In addition, Schulman is giving up his rights to some of the notes on the properties. As part of the agreement, the investor group will settle with Schulman and Mazur, who also were defendants.
The settlement would be the second with Schulman investors in the case. Last year, Hochman, Salkin & DeRoy in Beverly Hills, one of the West Coast’s leading tax-law firms, agreed to pay $4.9 million to end lawsuits stemming from work it did for Schulman.
The $35 million, plus about $1 million in interest earned so far, that is coming from both settlements represents about 18 cents for every $1 that people invested in the programs.
How much investors will ultimately get is uncertain. For one thing, lawyers in the case will probably split nearly 25%, said Herbert Beigel, one of the lawyers representing investors.
In addition, investors will receive additional money as the properties are sold, if the total proceeds exceed $400 million. And although Drexel and Executive Life are paying $30 million, it is likely that they may recoup some of that money as the post office and government buildings are sold.
