The Real Deal New York

Jury selected in Duane Reade execs’ trial

Former Winick President Cory Zelnik is on tap to testify tomorrow

April 06, 2010 06:00PM
By Adam Pincus

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alternate textFrom left: Cory Zelnik of Zelnik & Company; Jeff Winick of Winick Realty, former Duane Reade locations at 304 Madison Avenue, 360 Park Avenue (building photo source: PropertyShark)

The hidden world of Manhattan retail brokerage will be thrust under a spotlight during the federal trial that opened today with jury selection against two former executives of Duane Reade.

The criminal case against the former executives, Anthony Cuti and William Tennant, in Manhattan federal court hinges on the prosecution’s claims that complex leasing transactions, most involving Jeff Winick’s Winick Realty Group, were fraudulently accounted for.

The trial began today with jury selection and tomorrow the first witnesses are expected to be called, beginning with former Winick Realty president Cory Zelnik, now CEO of Zelnik & Company, a legal source said.

The world of retail leasing is far less transparent than office leasing, with the terms of many deals kept private by the parties, retail brokers say.

Prosecutors charged in an October 2008 indictment that the former Duane Reade executives set up bogus real estate deals and vendor transactions to pump up income for earnings reports for the publicly traded company, between December 2000 and June 2005.

Cuti served as CEO until being fired in November 2005, and Tennant, a former CFO of the company, left Duane Reade in September 2001 to serve as a consultant for the retailer until 2005.

In the indictment alleging a conspiracy to commit securities fraud, the government lays out a two-part scheme involving real estate leasing for Duane Reade locations in the New York metro area.

In the first part, landlords, brokers and developers allegedly paid millions of dollars for leasehold rights, options on properties and for delivering property late, which are fees known as real estate concession transactions. Then, to repay those landlords, brokers or developers, so-called “return payments” were structured from Duane Reade. The return payments, prosecutors say, show the original transactions had no true economic benefit and falsely inflated their income statements.

Prosecutors claim the deals were worthless for several reasons, including that the leases were close to expiring so held little value; the property itself was not valuable; and Duane Reade did not leave the location even after striking a deal or Duane Reade had already sold the rights.

Cuti and Tennant pleaded not guilty and have denied the allegations. Court filings indicate that Cuti has sought additional documents from Winick to make his case that the deals were in fact legitimate.

Winick Realty or two companies — Danielle Equities and Store Op — controlled by company CEO Jeff Winick are involved with 43 of the 51 allegedly fraudulent transactions listed in court papers.

Although the transactions were described as fraudulent in the indictment, the charges against Cuti and Tennant were for making false statements in Securities and Exchange reports and other records but not for the transactions themselves. Neither Winick Realty nor Jeff Winick were named in the indictment and there are no allegations of wrongdoing against them.

Cuti and Tennant’s attorneys did not immediately respond to request for comment. Winick through a spokesperson declined to comment.

Court records sketched out a number of the transactions. For example, in one allegedly bogus real estate concession deal, prosecutors claim a Winick entity agreed in January 2000 to pay Duane Reade $806,000 with respect to eight former Manhattan locations including 360 Park Avenue and 304 Madison Avenue.

Cuti’s lawyer says in court papers that in fact Winick received an economic benefit from such concessions, because many were relocation deals and he earns a commission fees from each new lease.

In another, Winick’s company Store Op allegedly agreed in July 2004 to pay $3.4 million with respect to a lease at 2465 Broadway. In order to repay that amount, prosecutors claim an entity called TRJJ Corp. agreed in June 2005 to assume responsibility for $2.9 million of what Store Op was obligated to pay Duane Reade.

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