The Real Deal New York

Major property owner Jeffrey Sutton testifies in Duane Reade fraud trial

April 23, 2010 12:32PM
By Adam Pincus

Prominent Manhattan landlord Jeffrey Sutton took the witness stand earlier this week and testified about a deal prosecutors say was part of a scheme by Duane Reade executives to use bogus real estate deals to inflate the company’s profits.

Sutton, an owner of more than 100 buildings with a focus in retail, explained how he served as an unwitting conduit for the Duane Reade executives, who are on trial in Manhattan federal court for attempting to artificially boost their public company’s short-term earnings with these transactions.

The landlord told the jury Tuesday about negotiations between his company and Duane Reade concerning a 2001 deal related to a property on Staten Island.

Prosecutors said one of the former executives referred to income from real estate transactions as a “special sauce,” that added to the firm’s bottom line.

Prosecutors maintain Sutton, president of Midtown-based Wharton Properties, did not knowingly take part in the Duane Reade executives’ real estate scheme and he has not been accused of any wrongdoing in the case. Sutton holdings include the Aeropostale location at 15 West 34th Street, American Girl Place at 609 Fifth Avenue and Abercrombie & Fitch at 720 Fifth Avenue.

The government charged Anthony Cuti, the drugstore’s former CEO, and William Tennant, former Duane Reade CFO, with multiple felony counts including securities fraud for exaggerating income using bogus real estate deals and reducing expenses though false vendor credits between 2000 and 2005. Attorneys for Cuti and Tennant say the deals were legitimate business transactions.

Prosecutors Tuesday discussed a complex lease transaction from 2001 arranged for 358 Fifth Avenue, across from the Empire State Building, in which an entity called Blue Trophy, controlled by another real estate owner, agreed to pay Duane Reade more than $2 million that was used to pump up earnings that year.

But the deal collapsed, and the $2 million pledged was never paid. The government said Duane Reade still needed that payment. So Duane Reade used Sutton, who was negotiating with the drugstore chain on a lease in Staten Island at Victory Boulevard and Clove Road, to make it.

“[Cuti] wanted us, you know, my group also to pay $2 million for — on behalf of Blue Trophy for certain things to happen by — to be done by — Duane Reade,” he said, under questioning from the prosecution.

Prosecutors say Duane Reade provided $3.9 million to Sutton in 2001. Of that, $1.9 million was to buy his control of the Staten Island lease, and a $2 million overpayment was quickly returned to Duane Reade, in April 2002, to satisfy the pledge by Blue Trophy.

Did he know what Blue Trophy was when he agreed to the deal in 2001, prosecutor Rebecca Ricigliano asked.

“No,” Sutton said. He said in later testimony that he believed Blue Trophy was a subsidiary of Duane Reade.

Sutton ultimately did about a half-dozen deals while Cuti was at Duane Reade.

Sutton’s testimony also shed light Tuesday on how he first started working with Duane Reade and Anthony Cuti, and how a dispute with one of the drugstore’s founders ended up in rabbinical court.

Sutton wanted to lease a space in Far Rockaway to Duane Reade in 2000, his first such deal with the drugstore. He talked with one of the founders of Duane Reade, Jack Cohen, who set up a meeting with Cuti. That led to more meetings and tours of more than two dozen possible locations, some owned by Sutton, others not. On those he did not own, Sutton would seek to buy the property or structure a long-term lease to control the property, and then lease it to Duane Reade. Cohen wanted to be involved in these deals with the drugstore and Sutton.

Eventually Sutton’s relationship with Cohen soured, Sutton said, when he realized Duane Reade’s preferred broker Winick Realty Group had not been informed of the relationship with Cohen, and Winick Realty CEO Jeff Winick was upset about it. Sutton said the disagreement was eventually settled in a Jewish religious court, known as a beit din, in Sutton’s favor.

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