Eric Schneiderman: the new (ex-deputy) sheriff in town

After seven months, NY's new Attorney General is winning over some skeptics, but enraging others

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Attorney General Eric Schneiderman
When New York State Attorney General Eric Schneiderman took office earlier this year, some critics feared he would do more ideological grandstanding than consumer protection and reform.

After eight months on the job, the former Democratic state senator (and ex-deputy sheriff) appears to be winning over some skeptics while enraging others.

The relatively low-profile Schneiderman exploded into the national spotlight last month when he filed a last-minute motion to block a proposed $8.5 billion settlement between Bank of America and investors in 530 New York trusts represented by Bank of New York Mellon.

The blockbuster move alleged that Bank of New York effectively tried to carve out a sweetheart deal for itself at the expense of the investors it was supposed to be representing.

Indeed, the AG seems to be seizing on the public sentiment among some (mostly in nonbusiness circles) that the big banks have still not been held accountable for the havoc they wreaked on the economy with the financial crisis, which had its roots in the sale of toxic mortgage-backed securities and other questionable lending practices.

“This is a moment in American political and economic life [where] we should be working to restore public confidence in both the public sector and the private sector,” Schneiderman told The Real Deal in a telephone interview last month.

As the first AG elected to office since the end of the Great Recession, Schneiderman argued that he has a unique opportunity to restore a sense of integrity and stability into a financial system that many critics say was allowed to veer off course by government regulators, ratings agencies and the Washington political establishment.

But the AG is not without his critics. Lawyers for Bank of New York vehemently opposed Schneiderman’s intervention, arguing that he had no authority to step into a private settlement agreement.

In court documents filed last month, they said he did not cite any prior case law showing precedent for a New York AG to intervene in settlement talks of this nature.

Kathryn Wylde, the CEO of the Partnership for New York, a business trade group, said the AG jumped in at the 11th hour (there had been an Aug. 30 deadline to file objections to the settlement agreement) and made “outrageous” accusations against Bank of New York without consulting with the lender first.

Wylde was criticized last month for speaking out about Schneiderman because she’s a board member at the Federal Reserve Bank of New York. But she said she was speaking on behalf of the partnership and has no supervisory role in her board position. And she said that while she disagrees with Schneiderman, after speaking to him she believes that he’s sincere in his view that the settlement is a “bad deal” for New Yorkers, and that he’s not intervening for political purposes.

But Schneiderman is also in the Obama Administration’s crosshairs. Late last month, the administration was pressuring him to relent on his opposition to a separate 50-state settlement over lending practices by major U.S. banks, the New York Times first reported.

“Our aim is to reach a settlement that holds the banks accountable and helps homeowners who have been wronged,” a spokesman for HUD said in a statement. “We have reached out to a number of attorneys general to ensure the agreement preserves their ability to pursue other claims not included in this settlement, including securitization.”

Schneiderman was later removed from a committee of state AGs negotiating the nationwide foreclosure agreement, a move that drew the wrath of the New York congressional delegation. They fired off an angry letter to Iowa AG Tom Miller, who leads the group.

But Schneiderman — who is against a provision in the settlement that will restrict his ability to pursue further litigation — is not backing down.

His office insists that its goal is to even the playing field for investors, so that the banks don’t run roughshod over them.

“The AG remains concerned by any settlement agreement that would fail to provide homeowners with meaningful relief to stay in their homes, allow the housing market to begin to recover and get our economy moving again,” said Schneiderman spokesman Danny Kanner in an e-mailed statement. “While our federal and state counterparts may be working toward the same goals, ongoing investigations by attorneys general cannot be shut down by efforts to settle quickly, and those responsible must be held accountable.”

But despite any headbutting he’s done on the national stage, Schneiderman seems to be making a good impression on at least some in the New York real estate industry so far.

“I think he’s the best of the last three,” said Doug Heller, a partner at the law firm of Herrick, Feinstein, referring to former AG and ex-Governor Eliot Spitzer, and his successor, former AG and current Governor Andrew Cuomo.

Heller — a former senior attorney and special deputy AG under the legendary Louis Lefkowitz — noted that compared to Cuomo, who was HUD Secretary in the Clinton Administration, and Spitzer, whose family had major holdings in real estate, Schneiderman has fewer historical ties to the real estate industry.

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As a result, he said, “he is much more sympathetic to investigating and going after the bad guys.”

Going after predators

While much of the focus in recent weeks has been on the financial sector, Schneiderman has inherited a series of high-profile New York real estate cases as well.

In June, he logged a major victory when a state Supreme Court judge issued a $7.4 million judgment against developer Yair Levy, in connection with the collapse of his Rector Square condominium conversion at 322 Rector Place in Battery Park City. The investigation into Levy was launched by Cuomo after The Real Deal uncovered that Levy had illegally sold apartments to an extended-stay hotel company and misappropriated millions of dollars, among other things. Still, it ultimately fell to Schneiderman to prosecute the case.

Levy, one of the city’s most controversial condo developers, lost the 304-unit building to a foreclosure from Anglo Irish Bank after defaulting on more than $165 million in mortgage debt, and failing to make ground-lease payments and construction-fee payments to contractors.

Judge Joan Lobis ruled that Levy illegally spent money from the building’s reserve fund for personal expenses, among other offenses.

When announcing the decision, Schneiderman called Levy a “predator.” As a result of the judge’s decision, Levy received the real estate equivalent of the death penalty — a lifetime ban from selling real estate, making him the first developer in the current downturn to be slapped with such a punishment.

Levy’s attorney Rex Whitehorn appealed the decision in July, saying the AG and the judge ignored evidence that Levy spent money from an outside fund (not linked to the reserve account) and had documentation from an accountant stating that he put more funds into the building accounts than he removed.

“The AG’s office has handled this entire Yair Levy situation horribly,” said Whitehorn.

Besides the Levy case, Schneiderman said he’s initiated as many as seven other real estate-related investigations, though he declined to name them. The Real Deal has reported on a probe launched earlier this year involving a 48th Street condo tower developed by Manhattan-based Esplanade Capital, a company led by David Scharf and Jay Eisenstandt, as well as investors Kevin and Donal O’Sullivan. The Irish brothers, who run Time Square Construction and Navillus Contracting, recently bought out Esplanade’s stake in the project and threw the property into bankruptcy after lenders sold the defaulted debt.

The probe centers on whether millions of dollars deposited by Irish condo buyers were misappropriated by the developers to finance a bulk purchase deal involving Ireland-based Sorrento Asset Management and BridgeStreet Worldwide, an extended-stay hotel firm. Sources told The Real Deal that subpoenas have been issued to several parties and boxes of documents have been handed over to the AG’s office.

The brothers’ attorney, John Snyder, confirmed to The Real Deal that the O’Sullivans each received subpoenas, but he called the investigation “informal.” He said they are fully cooperating and are working on a new operating plan in bankruptcy court to stabilize the project.

More detailed reviews

Attorney Adam Leitman Bailey, whose eponymous Manhattan-based law firm represents more condo owners than virtually any in the city, said it’s too early to give Schneiderman a grade on his performance. However, he echoes the concerns of many other lawyers about the need for increased staffing in the AG’s real estate division.

As of mid-August, the AG’s Real Estate Finance Bureau — which currently has 46 employees, including 14 attorneys — had 150 condo plans submitted statewide year-to-date, plus 2,400 amendments to these and other plans. Overall, the bureau is currently reviewing 395 plans and their related amendments.

It also has 93 pending escrow disputes, involving buyers and building sponsors over the return of down payments, and 11 active court cases.

Stuart Saft, chairman of the real estate department at the law firm of Dewey & LeBoeuf, said Schneiderman’s office is already demanding much more information from developers regarding new condominium plans. But he said it may be too soon to tell whether it’s a result of the new administration or a reflection of the new economic environment.

“They are giving the plans a far more detailed review — both in terms of the narrative and the economics — than I have seen before,” said Saft, who’s also the chairman of the Council of New York Cooperatives and Condominiums. “I don’t know what instructions are coming from high up, except we’ve all lived through the last four years.” Schneiderman, meanwhile, is seen by some as establishing a new, less political temperament.

“He has really set a tone for that office,” said a real estate industry executive close to Schneiderman who asked not to be identified. “If you go back to Eliot [Spitzer] you would find people who would say that Eliot was a very political AG. There were some questions about how he would threaten people with that power.”

Stephen Spinola, president of the Real Estate Board of New York, praised Schneiderman for being willing to listen to the concerns of the industry, while still maintaining his duty to protect homebuyers and investors.

“I think he is continuing in terms of the Andrew Cuomo style of being aggressive in terms of protecting the consumer, but having the door open [to the industry],” Spinola said.