Untangling the Salander Mess

More than two and a half years after Salander-O’Reilly Galleries collapsed into bankruptcy, investors and other art experts are still sorting out claims linked to hundreds of artworks as they attempt to untangle owner Lawrence Salander’s convoluted and fraudulent business dealings.

In March, the dealer, who is free on $1 million bail, pleaded guilty to 29 counts of grand larceny and one count of scheming to defraud. He was ordered to repay his victims fully—the Manhattan district attorney’s office estimated the overall scope of his fraud at $120 million—and he faces 6 to 18 years in state prison. Sentencing was scheduled for June 23.

Salander has admitted to selling artworks he did not own and keeping the proceeds. He frequently exchanged works he did not own to satisfy outstanding debts; solicited investments to purchase artworks or shares in artworks that he then improperly resold to other clients; and failed to inform or pay consigners when their works were sold.

When he pleaded guilty, Salander stated in court, “I presented investment deals in two ways, as pre-sale investments and speculative investments. I defrauded investors in both pre-sale and speculative investments in a variety of ways…. for example, by selling three one-half shares of the same work.”

Afterward, Manhattan district attorney Cyrus R. Vance Jr. said, “Lawrence Salander’s desire for an extravagant lifestyle turned long-time friends and trusted business colleagues into his personal piggy banks. The defendant not only stole money from his victims, but in some cases he stole their family’s heritage.”

Salander’s criminal-defense attorney, Charles Ross, did not respond to requests for comment, but he told ARTnews he had advised Salander not to give interviews. Last summer, the district attorney also arrested and indicted Salander’s former gallery director, Leigh Morse, on charges of “stealing from and defrauding consigners of art.” Morse was free on bail as well, pending a hearing scheduled for June 24.

Salander’s fraud ensnared a lengthy list of victims, ranging from museums, banks, and individual investors to consigners, collectors, and former friends. The list includes celebrities such as the actor Robert De Niro, who consigned his artist father’s works to Salander, as well as the former tennis pro John McEnroe, who reportedly once interned at the gallery to learn the art trade. Salander admitted to defrauding Renaissance Art Investors, collector Hester Diamond, Connecticut-based hedge-fund manager Roy Lennox, and Gerald Peters Gallery, among others.

He admitted to stealing from Earl Davis (son and heir of Stuart Davis), the estate of Elie Nadelman, the estate of Giorgio Cavallon, the estate of Louis I. Kahn, and the Lachaise Foundation, as well as the estate of Robert De Niro Sr.

Some collectors and creditors have been successful in getting at least a part of their art or money back amid ongoing bankruptcy proceedings. In January, De Niro paid $14,000 in exchange for the return of six of his father’s paintings. Dozens of other victims are still fighting to recoup their losses, pursuing Salander—and sometimes one another—in court. In many cases, there are multiple ownership claims for the same work.

The Philadelphia Museum of Art sued its insurer, AXA Art Insurance, in an attempt to recoup $1.5 million in losses for two paintings—by Maurice Prendergast and Arthur B. Davies—consigned to Salander-O’Reilly Galleries. Its suit states that the dealer sold the paintings without informing museum officials and kept the proceeds. AXA has denied the claim, taking the view that the museum is responsible for its own business dealings and should have performed due diligence to protect its interests.

In a complaint filed in May 2009, McEnroe and Morton A. Bender, a Washington, D.C.-based trustee of the Dorothy G. Bender Foundation, sued collector Joseph Carroll over his acquisition of a painting by Arshile Gorky referred to in their lawsuit as Pirate II. According to the complaint, in October 2004 the painting was on display at an auction in Paris of the collection of the late Julien Levy, a New York dealer. Salander approached Bender and proposed a partnership to buy both Pirate II and Pirate I (the complaint does not specify where Pirate I was purchased).

“Specifically,” the complaint reads, “Salander proposed that Bender purchase 50% of Pirate I and Pirate II for $2,039,830 and that Bender advance a loan of $2,155,046 to Salander Galleries with 12% interest representing Salander Galleries’ share for the purchase of the remaining 50% interest in Pirate I and Pirate II.” The price for both paintings was $4.19 million. Bender accepted the offer, and the deals were documented in writing.

In the same month, the suit states, Salander approached McEnroe and offered him a 50 percent interest in the same paintings, Pirate I and Pirate II, in exchange for $2 million. McEnroe also agreed to the deal. As with many of the investment transactions that Salander structured this way, he told his backers that he already had a buyer or buyers lined up so that the work could be resold quickly for a profit in which the investors would share.

In early 2007, McEnroe found out that Salander had sold Pirate II without his consent, the complaint states. And “despite the fact that Bender owned a 50% interest in Pirate I, Salander falsely represented to McEnroe that he…had the sole, exclusive and unencumbered right to sell or market Pirate I and to retain 100% of the proceeds.”

According to the complaint, instead of marketing and selling Pirate II, Salander “entered into a series of improper transactions, without [Bender’s and McEnroe’s] knowledge or consent, culminating in the subsequent sale of Pirate II” to Carroll. As outlined in the court filing, Salander created shell companies to which he transferred investments. In this case, he transferred the gallery’s interest in the work to an entity called the Seven Salander Children Group before it was ultimately transferred to Carroll in an exchange/buyback agreement. McEnroe and Bender allege that Carroll should have been aware that the exchange was “far below Pirate II’s fair market value.”

In a statement provided to ARTnews, Carroll’s lawyer, Jeffrey Udell, said that “Joe Carroll is yet another victim of the deceptive conduct of Lawrence Salander.” Udell says that before buying Pirate II, Carroll performed “standard and extensive due diligence, the result of which revealed no ownership interest in Pirate II by either John McEnroe or Morton Bender. Mr. Carroll thus purchased the painting in the utmost good faith and acquired clear title to the work.”

In a March 2009 letter addressed to the New York gallery Edelman Arts, an attorney for Bender wrote, “It has come to our attention that The Pirate II is presently on display at [a booth] at The Armory Show…[as] part of a ‘private collection.’ The Bender Group never sold or authorized the sale…and continues to assert that it owns a 50% interest in The Pirate II.”

Carroll has also been sued by Earl Davis, who alleges that Salander transferred eight works by Stuart Davis to Carroll without Earl Davis’s knowledge or permission.

One Salander victim, who did not want to be identified, said, “People have said to me, ‘You’re a smart guy. How could you have been taken in by him?'” As in the case of Bernard Madoff, Salander’s reputation as a highly respected and successful dealer, as well as his apparent ability to charm friends and colleagues, gave those who did business with him a sense of confidence.

Salander’s private residences included an elaborate town house on the Upper East Side of Manhattan and a 60-acre estate in Millbrook, New York. Salander has seven children, three from a prior marriage and four with his second wife, Julie. He rented the Frick Collection to throw Julie a 40th-birthday party. Former friends said he traveled exclusively on chartered jets, for business trips to Italy or to art fairs. One source, who lost millions of dollars to Salander and who did not want to be identified, remembered walking into a birthday party for one of Salander’s children to see Robert De Niro handing out pizza.

The town house is under contract for a figure “very close” to the asking price of $14.25 million, according to Lydia Rosengarten, a broker with Realtor Leslie J. Garfield & Co. Large groups of rare books, carpets, furniture, and decorative arts taken from Salander’s properties have been brought to auction, with the proceeds earmarked for the bankruptcy estate. Antique furniture and rugs were sold by the Hudson Valley auctioneers Stair Galleries in May and raised $552,000, with the proceeds earmarked for repaying creditors. Additional property from the Millbrook estate is scheduled for sale at Stair in July.

Joseph Sarachek, of Triax Capital Advisors, who was appointed chief restructuring officer of the Salander bankruptcy case shortly after it was filed, in 2007, told ARTnews at the time that more than 4,200 items from the gallery and the Manhattan and Millbrook residences were inventoried, including paintings, sculptures, and antique furniture and rugs.

Christie’s announced the sale in June of 130 Old Masters and 19th-century works, including paintings by Rubens, Palma Vecchio, and Jacopo Bassano, from the bankruptcy estate of Salander and the galleries. The sale was expected to realize in excess of $2.5 million, according to a Christie’s statement. Given the often contentious procedural wrangling that has characterized this bankruptcy, the trust—the entity that is overseeing execution of the bankruptcy settlement—secured title insurance protection on each lot so that clients could acquire works with the confidence that they are free and clear of any claims or liens, according to a Christie’s spokesperson.

According to court documents, the first $2.5 million in proceeds has been earmarked for the unsecured creditors committee, which represents the Salander creditors who are deemed lower priority on the repayment list than “secured” lenders. Among the secured lenders is the Bank of America subsidiary First Republic Bank, to which Salander owes more than $30 million. Salander admitted to submitting a fraudulent loan application to Bank of America for a $2 million personal loan in which he pledged artworks he didn’t own as collateral.

Some victims have abandoned their recovery efforts, noting that the legal costs would almost certainly outweigh any funds or assets they might recoup. Many of Salander’s victims did not want to be interviewed or speak on the record about their claims because of ongoing litigation.

As in a Ponzi scheme, many of Salander’s victims were lured by quick profits paid with money whose source Salander misrepresented. But once he had an investor on the hook, the payouts vanished. For example, Roy Lennox, a hedge-fund manager and Millbrook neighbor, met Salander in late 2001. In 2003 Salander persuaded him to invest $400,000 for a 50 percent share in a painting by Corot. Salander told Lennox he could purchase the work for $800,000 and already had a buyer lined up who was willing to pay $1.25 million for it. Lennox agreed to the proposal and one year later received his initial $400,000 back as well as a payment of $225,000, the supposed return on his investment.

The next month, February 2004, Salander approached Lennox with a similar proposition. He offered him a 50 percent interest in a sculpture by the 16th-century Italian Santi Buglioni, San Giovanni da Capestrano, for $375,000, promising Lennox that he would get back $550,000, which Salander “personally guaranteed.” Over the next few years, Salander approached Lennox with about a half dozen similar proposals, offering him shares of works by such artists as Goya, Stuart Davis, Marsden Hartley, and Jackson Pollock. But Lennox rarely received payments, and the few he did receive were much smaller than had been promised.

Salander eventually began offering to repay him with works from the gallery inventory, court filings state. On one occasion, he sent Lennox a number of works “he selected without consulting Lennox. Lennox returned them.” Lennox’s lawsuit against Salander seeks $4.8 million in damages and funds owed. It is still pending before the bankruptcy court.

Another major claim against Salander was brought by Renaissance Art Investors, which is controlled by Donald Schupak, chairman of Triumph Apparel Corporation (formerly Danskin). Schupak, who has retained Barry Slotnick as his attorney, seeks as much as $22.5 million in property and funds related to a consignment agreement with the gallery. Slotnick said that Salander’s guilty plea gave RAI “some measure of satisfaction. But knowing that Mr. Salander will be spending time in jail does not erase the fact that he defrauded RAI out of tens of millions of dollars, which has yet to be repaid.”

One of the hardest-hit victims in the Salander fraud was Earl Davis, who for more than two decades maintained a friendship and business relationship with the dealer. Hundreds of his father’s works were consigned to or stored in the gallery and were frequently loaned to museums or other venues. They were covered by an agreement under which Davis retained the right to approve sales before they were executed.

According to his complaint against Salander, the arrangement started unraveling in 2005, when the gallery appeared to have what Davis described as “bookkeeping problems.” Davis learned that some of the most important paintings in the estate had been sold, but Salander had neither informed him of the sales nor remitted the proceeds, according to court filings. Two of Davis’s works turned up in a show at the Whitney Museum with the owners listed as people other than Earl Davis (the suit did not identify them). Another art gallery was selling five of his works, and Carroll confirmed to Davis that he owned ten, court papers reveal.

Gallery invoices, including those seized by the district attorney, showed that Salander had sold many of these works, taking in at least $9 million over the years. Davis also discovered, through searches of New York state financial filings, that Salander had pledged at least 14 works by his father as collateral to secure debt obligations. Davis demanded, in 2006, that the gallery cease all sales and return his inventory, and later obtained a court order supporting his claims, but he is still missing more than 40 paintings and 50 works on paper created by his father. As a result of the gallery bankruptcy filing, the transfer of numerous Stuart Davis works both within and outside the United States, and Salander’s extensive sales to “good faith” buyers, Davis’s legal recovery efforts have proved impossible in some cases and extraordinarily expensive at best.

Until the end, when his business finally collapsed, Salander apparently believed he could talk his way out of the mess he had created. In a late 2006 e-mail to Davis, the dealer wrote, “The only thing that could stand in the way of paying you would be my death….The fact is your trust was, is and will be well placed with me. You will get paid every cent you are owed.”

According to a mid-2008 court filing, Salander’s friend Michael Lewitt, a Palm Beach money manager, was supplying the dealer and his family with $25,000 a month for living expenses. Lewitt did not respond to a request for comment.

Through an entity called Galleon Group LLC, Lewitt operates a Westchester gallery near Salander’s Millbrook home, called Phoenix Art, at which Salander is an unpaid employee.

It’s a far cry from the lavish showcase on East 71st Street where Salander once reigned. A guest who was among the throng at the opening party there in 2005 remembered complimenting the dealer on his new space.

Salander replied, “I’m either going to make a killing or it’s going to kill me.”

Eileen Kinsella is editor of ARTnewsletter.