NEW YORK — The Fred Leighton bankruptcy and sale saga took another turn on Monday when the jeweler’s former owner, Ralph Esmerian, was arrested on federal fraud and embezzlement charges involving at least $217 million in loans — most of the money coming from Merrill Lynch.
Esmerian, 70, a fourth-generation jeweler who accessorized Hollywood A-listers such as Nicole Kidman and Catherine Zeta-Jones, was led in handcuffs from his girlfriend’s Tudor City apartment.
He was charged with stealing or double-pledging more than $40 million in collateral in connection with the loans he took out to buy the luxury estate jeweler in 2006, according to a criminal complaint filed in the Southern District of New York. Esmerian was also accused of committing bankruptcy fraud by deceiving and making false statements in Fred Leighton’s bankruptcy proceedings.
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Esmerian financed the purchase of Fred Leighton and his own company, REI, by obtaining at least $217 million in loans from financial institutions and other sources, including auction houses, jewelry dealers and private individuals, according to court papers,
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“Ralph Esmerian allegedly lied and looted to maintain his personal and financial status by tricking his lenders, stealing from investors and deceiving the bankruptcy court,” Manhattan U.S. attorney Preet Bharara said.
Calls to Esmerian’s attorney, Patricia Pileggi, were not returned by press time.
If convicted of all the charges, Esmerian faces as much as 40 years in prison. He was to be arraigned in Manhattan Federal Court.
In order to finance the Fred Leighton purchase, Esmerian borrowed $177 million in two loans from Merrill Lynch, now part of Bank of America, in 2005 and 2006. The loans were secured by Fred Leighton’s inventory and Esmerian’s personal collection of rare jewelry, antiquities and other valuable objects pledged to Merrill Lynch. But less than three months after obtaining the second loan, Esmerian allegedly sold more than $1.6 million worth of the Merrill Lynch collateral to a third party. Soon after, he double-pledged more than $6 million in collateral to get other loans, the complaint said.
To provide help on the business side, Esmerian installed Peter Bacanovic, a former Merrill Lynch broker who was convicted and imprisoned in the Martha Stewart insider trading case, as president of Fred Leighton. There were no charges involving Bacanovic.
But in 2008, at the dawn of the economic downturn, Merrill Lynch wanted to pull out of its investment and sought repayment of the $183.3 million balance. Merrill Lynch wanted to set up an auction with Christie’s for Esmerian’s personal collection, which had been valued by one expert at more than $89 million. Christie’s, however, estimated the worth at $35 million.
Esmerian wanted to sell the pieces, which were initially put up as collateral, on his own. He said he had buyers lined up for several of them.
The auction was halted, and later aborted, when Esmerian put Fred Leighton into Chapter 11 bankruptcy protection in April 2008.
The complaint said that was when Esmerian “repeatedly and systematically embezzled” from Fred Leighton and related debtors, selling property and pocketing the cash for himself and to pay off debts.
Bharara said that in one instance Esmerian “secretly sold” a diamond butterfly brooch worth $2.5 million and had $1 million of the proceeds wired to his personal bank account in two installments. One of the two $500,000 installments was wired to a bank account in Switzerland.
The brooch originally had been designated debtor property as a Fred Leighton asset, according to the complaint. Its sale was a violation of the cash collateral order.
Merrill Lynch found out because the brooch appeared on an auction block in Hong Kong. The complaint said Esmerian lied about how the brooch wound up in Hong Kong and how it was recovered.
In September 2008, Merrill Lynch notified the auction house and other parties of its security interest in the brooch. As a result, Esmerian was required to return the accessory, but the return of the item cost him $3.5 million, the complaint said. Through additional loans, the sale of items that didn’t belong to him and the sale of debtor property valued at roughly $10 million, which he sold for “substantially less than value,” Esmerian raised enough money to buy back the brooch, court papers said.
The complaint alleged that this wasn’t the first time Esmerian took expensive jewelry from an individual, sold it and “fraudulently kept the proceeds from the sale,” resulting in millions of dollars in losses to that individual.
In 2009, Fred Leighton was acquired for $25.8 million by FL Acquisitions LLC — comprised of Kwiat Enterprises and Och-Ziff Capital Management Group — and FOF Inventory Holding. The move put the high-end jeweler back on the map and back in the spotlight.
Fred Leighton chief executive officer Greg Kwiat, said on Monday, “The most important thing is that Esmerian is not affiliated with Fred Leighton in any way since we purchased it in 2009. I’ve never met him personally or worked with him professionally.”