It’s a sold out, ultra-luxury residential development with the world’s richest man in the penthouse.
But a group of investors in Bob Gladstone’s converted condominium at 212 Fifth Avenue this week accused the developer of mismanaging the project’s finances and misappropriating funds, prompting what appears to be a hastily assembled settlement Thursday.
The dispute came to a head Tuesday when a group of investors filed a lawsuit against the Madison Equities CEO, stating they had collectively poured $775,000 into the project in 2014. As part of the agreement, they were told they would get an estimated 50 percent profit on top of their principal, according to the suit, which also named Madison Equities President Anthony Labozzetta as a defendant.
But by September 2019, three months after Amazon CEO Jeff Bezos dropped $80 million for a three-unit spread, investors said they still hadn’t been paid in full — despite several assurances from Gladstone.
The lawsuit alleged the developer didn’t have the money because he misappropriated investor funds and then started to look elsewhere for money to cover his liabilities. “Defendant Gladstone even admitted asking his family for money to pay plaintiffs,” the suit said, pointing to a collection of emails between Gladstone and frustrated investors.
Gladstone and Labozzetta did not respond to requests for comment. Gladstone’s lawyer, Richard Schoenstein, would not address the allegations but in a joint call Thursday with the investors’ lawyer and The Real Deal, he said the parties had reached an agreement in principle to settle the dispute. He declined to comment on the terms of the agreement, citing confidentiality.
The listed plaintiffs are Cheryl Gursky and Steven Rotter, along with three LLCs.
Since sales launched in 2015, 212 Fifth Avenue has attracted a string of high-profile buyers, including Texas billionaire Ed Bass, who purchased two adjacent units in 2017 for $28 million, and Kushner Companies head Charlie Kushner, who purchased three units in the building with his wife, Seryl.
But there have been several disputes along the way.
In 2017, the development team sued the now-shuttered brokerage firm Town Residential, claiming it had failed to meet sales targets and resisted being replaced. The suit was later settled, and Madison brought in a sales team from Sotheby’s International Realty, led by Nikki Field, to move the remaining units.
The following year, Gladstone settled a $100 million libel suit he brought against Town and its CEO, Andrew Heiberger. Gladstone had claimed Heiberger defamed him and tried to “poison public sentiment” against him. In response, Town condemned the suit as “bullying and intimidation.”
And this is not the first investor dispute. Last December, Gladstone signed a “confession of judgment” acknowledging he owed another investor in 212 Fifth Avenue some $3.4 million, plus interest.
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The investors behind the latest suit said they put money into the project through the development’s investment vehicle, 212LLC, which was controlled by Madison Equities. They made up about 20 percent of the total investment in the LLC, while the remaining 80 percent came from other investors.
According to the lawsuit, Gladstone had “full and exclusive right, power, authority and discretion” to conduct the company’s business, meaning his role came with a fiduciary duty.
From May 2014 unity about May 2018, the development “proceeded without plaintiffs receiving any distributions, and virtually no communication from defendants,” the lawsuit said. That time frame was much longer than the investment horizon outlined in the prospectus, according to the suit.
Distributions eventually started coming in, but by June 2019, they abruptly stopped, prompting the investors to contact Gladstone and Labozzetta several times, looking for answers.
By that point, investors had received about 80 percent of their principal investment back, and none of the profit, according to the lawsuit.
In an email reply dated July 2019, Gladstone told the investors there was still $45 million worth of units to close, and that the “soft and interest” costs at the project had been bigger than expected.
Several emails in the proceeding months included more promises from Gladstone that the money was coming soon, though it never materialized, the suit said.
In an email last month, Gladstone told investor Matt Levine — a manager for an LLC that is a plaintiff in the case — that the firm had a “platform deal” in the pipeline that would free up funds to pay the investors back. (It is unclear what the platform deal was.)
“We had thought that some funds would be made available earlier. They need more time, so I have gone to my family and we will be financing an asset which will provide about half the balance,” Gladstone said in the email.
The lawsuit claimed Gladstone was “seeking funding from several outside sources to pay distributions to the Members of 212LLC. But, unless Gladstone had misappropriated funds from 212LLC, this never should have been necessary.”
The investors also claimed Gladstone raised some $579,000 additional equity through the investment vehicle, but did not put it into the development — instead using it for himself and unrelated expenses.
This had the effect of diluting the investors shares, the suit claimed, and deprived investors of an additional share of the overall proceeds.
“Had any of the plaintiffs [known] that Gladstone was going to wrongfully dilute them from the inception, and take over the additional equity investments for themselves, they never would have invested,” the suit said.
Days after he acknowledged in a confession of judgment to owing another investor in the project more than $3 million, Gladstone told one of the plaintiffs in an email that the money was “very close…No BS.”
Investors said their concern intensified after hearing about the debt because it was more than their initial investments.
It’s been a difficult start to the year for Gladstone, who has run Madison Equities since taking it over from his parents in the 1990s.
In January, a spokesperson confirmed that the developer’s ambitious condominium project at 45 Broad Street had been put on hold “due to short-term conditions in the Lower Manhattan market.” It’s not clear when or if the development team will revive the project.
The parties in the 212 Fifth claim have yet to draw up an official settlement agreement, but they say one is imminent.
Write to Sylvia Varnham O’Regan at so@therealdeal.com