Cracks show in case vs. ex-Duane Reade execs
One or more of the allegedly bogus real estate deals that former Duane Reade executives structured with affiliates of retail brokerage Winick Realty Group was in fact a legitimate transaction, according to recent testimony in a federal trial in Lower Manhattan.
The revelation is a minor setback for the prosecution, which says dozens of complex leasing transactions, most involving companies controlled by Winick Realty CEO Jeff Winick, were used to artificially pump up earnings through virtually worthless transactions.
The government claims the leasing transactions were generally shams without a legitimate economic purpose, structured only to boost Duane Reade’s bottom line.
Testimony indicating that at least one of those transactions was not a sham could lead jurors to question the prosecution’s claims that other deals were bogus.
The trial of the two former drugstore executives, Anthony Cuti, former CEO, and William Tennant, former CFO, is in its seventh week today. The trial will likely extend into June, court papers show.
The chink in the prosecution’s case came in the testimony of Duane Reade’s outside accountant Kevin Hallinan on May 4, a partner at PricewaterhouseCoopers and a witness for the prosecution.
Under cross examination by defense attorney Reid Weingarten, Hallinan said a 2003 purchase of lease rights by Winick’s company Store Op LLC from Duane Reade at 505 Eighth Avenue — which the government had claimed was bogus — in fact could have made money for Winick.
“We understand this could be one potential reason for entering into a transaction,” Hallinan said.
Hallinan was one of seven prosecution witnesses to testify in the trial over the past two weeks. Others included Marvin Putter, the founder of New York City Love Stores, a chain of health and beauty stores Duane Reade purchased in 1999. Later two contractors testified, and they were followed last week by a partner in private equity firm Oak Hill Capital Partners, which took Duane Reade private in 2004, and two current Duane Reade executives.
While most of the testimony in May has been a dry recitation of accounting practices and real estate documents, Michael Green, the Oak Hill partner, noted the startling amount of income Duane Reade recorded through real estate deals for several years.
It was this income that prosecutors said Cuti referred to as “the special sauce,” when he was trying to get Oak Hill to buy the company.
In 2000 Duane Reade earned $7 million through such deals, known as real estate concession income. However, that source of profit was declining, and by 2002, just $4 million was earned, he said.