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Investors Sue Businessman, Alleging Tax Shelter Fraud

November 03, 1987|JAMES BATES | Times Staff Writer

Nearly 500 investors, including major league baseball players Rick Sutcliffe, Frank Tanana and Shane Rawley, are suing North Hollywood businessman Gerald L. Schulman for securities fraud, claiming they are among 4,000 people nationwide who invested $200 million in a fraudulent tax-shelter scheme Schulman devised.

The suit alleges that investors in real-estate limited partnerships organized and promoted by Schulman from 1977 to 1985 have lost or will lose $200 million in tax deductions disallowed by the Internal Revenue Service.

The lawsuit, filed Friday in U.S. District Court in Newark, N. J., alleges that investors were enticed to buy into limited partnerships that would own post offices and public utility buildings that would be leased to the government and other tenants. The suit seeks to recover the $200-million investment, plus $500 million in punitive damages, as well as to remove Schulman as general partner for the real-estate partnership and to have a receiver appointed to take over the business.

Schulman's privately held Postal Management Services firm in North Hollywood claims to be the largest manager of post office, telephone, state and federal buildings. According to one 1986 company report obtained by the Times, Postal Management Services manages buildings worth about $950 million and controls about 10% of the gross rents paid by the U.S. Postal Service.

Gary Meyers, a New Jersey attorney who represents the investors, said the case is one of the largest securities fraud cases involving tax shelters in number of investors and in the amount invested. He said each investor put up from $20,000 to as much as $800,000.

Suit Without Merit

Schulman's attorney, Bruce I. Hochman, said the lawsuit is without merit.

He said the money ultimately went toward the purchase of buildings, adding that the dispute with the IRS is basically over whether the payments should be considered down payments on properties or tax-deductible interest payments.

The investors contend that they were told the payments were tax-deductible because the money was technically used to pay interest on short-term loans purportedly used to buy buildings.

Instead, investors and federal prosecutors allege, the loans were never made. They claim that through a series of check swaps through bank accounts in the Netherlands and Panama, Schulman and his associates instead created the illusion that interest payments were being made.

Little is known about Schulman, 55, an accountant who is scheduled to go on trial Nov. 10 in U. S. District Court in Los Angeles on 20 counts of criminal tax fraud.

In March, 1986, Schulman was indicted by a federal grand jury on the charges, which stem from 91 of the partnerships he promoted. The charges were dismissed in June, 1986, by District Judge Mariana R. Pfaelzer, but reinstated in May by the 9th U. S. Circuit Court of Appeals, although it upheld the dismissal of two perjury counts.

Hochman contends that depreciation on the purchased buildings will be allowed by the IRS, that there were no penalties assessed on investors and that after the properties are sold, the IRS will allow deductions that will offset potential gains.

Key Incentive Disallowed

But Meyers said the IRS has disallowed the key incentive for investors, a big tax write-off in the first year.

The suit says Schulman was disbarred as a New York attorney in 1969, filed for personal bankruptcy in Los Angeles in 1970 and had his accounting license suspended in California for two years in 1973.

None of those problems were disclosed to investors in an offering circular, the suit claims. Hochman said he could not comment on those allegations.

Investors were primarily doctors, lawyers and executives. According to court records and attorneys, however, the 477 plaintiffs in the lawsuit include five major-league baseball players: utility man Lee Mazzilli of the New York Mets, and pitchers Rick Rhoden of the New York Yankees, Sutcliffe of the Chicago Cubs, Tanana of the Detroit Tigers and Rawley of the Philadelphia Phillies.

According to interviews with former Schulman employees, he is well-connected politically among Democrats. One of his firms, Schulman Management Co., was the second largest contributor in the San Fernando Valley to Mayor Tom Bradley during 1983 and 1984 with $8,000, according to a 1985 Times computer study of campaign contributions.

At a meeting of disgruntled investors in September, Meyers and attorney Robert P. Glickman, who jointly represent the investors filing suit, said IRS documents they obtained, which were prepared in 1984 and 1985, indicate that Schulman's net worth is more than $300 million.

Hochman accused the attorneys of inflating their estimate to get people to join in the lawsuit.

In addition to Schulman, the suit names as defendants eight individuals and 38 domestic and foreign companies with ties to him.

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