Beginning around 2005, many old fishing lodges and motels in Montauk got sold and converted into summertime hot spots for the Hamptons set. Some changed their names to become Sole East, Montauk Beach House, Navy Beach and The Surf Lodge (located on the gentle waters of Fort Pond.) Others kept their classic names, but got a full New York City high-tech overhaul. And the crowds came.
Thus nothing seemed wrong when the Panoramic, a 50-year old 117-room resort and residence development that spills down a cliff face to the ocean beach, was sold in 2007 to two men from Nassau County. They were Brian R. Callahan and Adam J. Manson.
The fact is, however, the men ran smack into four very difficult problems after making this purchase. For one thing, the real estate market collapsed late that year. For another, the Panoramic was in great disrepair from its years and years of neglect and assault from ocean storms. Nearly all the resort would have to be rebuilt, and that would mean shutting it down for a while. For a third thing, the Town of East Hampton, which has jurisdiction of Montauk, began, in my opinion, to give this project a hard time causing delay after delay. And fourth, as it turned out, the men had borrowed the money from a bank to pay not only for the initial $30 million purchase but for the expensive renovations which were now proceeding. Two years passed. In 2009, the men re-opened at least part of the resort as the Panoramic View Resort & Residences and invited in potential buyers. But the units didn’t sell. And now the bank wanted the loan paid back. There was no money now though, and not much hope of getting any. One option they might have had at that point was bankruptcy. They didn’t choose that option.
Last Thursday, Federal Prosecutors arrested the men and charged them with 24 counts of conspiracy to commit securities and wire fraud, using several investment funds Callahan managed that contained other people’s money. There were many millions of dollars in these funds, and this cash was supposed to be invested safely in financial securities—mutual funds, hedge funds and other instruments. But, according to the charges, when the loans from the banks came due for the Panoramic, Callahan began dipping into the investment funds and diverting money to pay the loans and the bills for their Panoramic project to keep it afloat, then hiding the fact they were doing that.
Soon, according to the charges, they took it a step further. They began operating a Ponzi scheme. Callahan would declare excellent returns at his investment funds, returns they were not getting, and these claims would attract new clients to bring in new money. With this money, the funds would pay the earlier investors the high dividends, and that would bring in still more new money. According to the FBI, the Montauk Fire Department was in for $600,000, with promises it would be invested in mutual funds and other securities. In the end, the scheme had taken in nearly $100 million, according to the Feds. A lawsuit was filed last year by the Securities and Exchange Commission about the lost funds. And then on Thursday came these indictments. Mr. Callahan has been released on $2 million secured bond. Mr. Manson has been released on $1 million secured bond.
A statement was issued by Loretta E. Lynch, the United States Attorney for the Eastern District.
“The men employed all the tricks in the typical con man’s bag,” she said, including forgery, fake documents and stealing identities. “The lies stop now.”
As for the Securities and Exchange Commission lawsuit, it says it is seeking money not only from Callahan and Manson, but also from Callahan’s wife and Manson’s sister, who the SEC claims has offshore accounts. Lawyers for the two men say they have done nothing wrong. They are pleading not guilty.
And yet, if they did do these things, is it possible that they did it all to save the Panoramic, and that its purchase and repairs could have run up toward $100 million?
A New York Times article last Thursday headlines TWO USED PONZI SCHEME TO PAY FOR MONTAUK RESORT RENOVATIONS, PROSECUTORS SAY. And in the article, there doesn’t appear any report of wildly extravagant spending. There are no 200-foot yachts, no private planes, no trips around the world. Mentioned in the indictment are money spent for golf club fees, down payments on a home in Old Westbury and a condo in Westhampton and payments on luxury cars.
Maybe it WAS what the Panoramic cost. In December of 2010, I wrote an article objecting to what I believed was an unfair ganging up on the renovation at the Panoramic by the Town of East Hampton. Here was a beautiful old resort, built by the French family in 1959 before zoning, now in serious need of repair, now sold and being restored by an outside investor who was doing, it seemed to me, everything the town asked. Yet here were some town officials saying the Panoramic was now putting up illegal elevators, illegal new buildings—maybe one six stories high, new rooms out of outdoor porches, parking lots re-graded without approval from the planning board and so forth and so on. One official said wasn’t it strange how they got the building permit almost immediately after the sale. Was there something up with the Building Department? Writing this got me an invitation from Adam Manson. I should come down and see all their construction and renovations for myself.
Because the Panoramic sits on a cliff face leading down to the ocean, you really don’t see the whole place up close and personal unless you are invited. What you do see from the road are two low buildings behind a parking lot off the Old Montauk Highway. Behind, everything leads down to the sea. In all the years I have been in Montauk and the Hamptons, I’d only been to the Panoramic one or two times. I eagerly accepted the invitation, and came with my wife who also wanted to see it.
Manson, a tall, handsome man in his late 30s, was very enthusiastic about the project. He showed us the plans, led us through buildings that had been finished, others that were underway and still others that were in their original state.
There were no elevators, no six-story buildings, no enclosed porches. In every building, because the resort pre-existed zoning, all structures had to be exactly as they had been. All the doors and windows were redone exactly in the same place. All the porches and outbuildings had to remain the same. Nothing could be enclosed. We looked it over. Everything conformed to exactly that.
“One exception,” Manson told me, “was that today the state requires roof pitches to be a minimum of 40 degrees. But some of our buildings had 30-degree pitches. We had to do something. And we couldn’t raise the roofs. So we lowered the walls. And then, with permission, we put false dormers so the exterior would look nice. But they are not a second story. They do add extra light into the rooms though.”
The parking lot that was re-graded?
“There was no re-grading. There was a requirement that we put in propane heating tanks underground. So we dug holes in the parking lot. I think somebody saw the piles of dirt from the holes we dug. It was awhile before we put it all back. They must have thought that was a re-grading.”
What about “the new building?” We looked at the plans.
“This is what they say is a new building,” Manson said pointing to a drawing alongside a drawing of a building. “It’s the second floor of the building alongside. This is how architects show a second floor. Off to the side.”
Both my wife and I were very impressed with Manson and his project. He led us down brick paths between the buildings.
“These are old bricks, very hard to get,” he said.
“But we got replacements. The town insisted we use the same bricks as before. If we changed them we’d have to go through a planning process.”
About half the buildings had been renovated. They were quite beautiful.
Whether he could sell this project I did not know. Asking price was $2 million for a double unit. But what was being done here would make the French family proud. And there were so many new amenities. New kitchens. Beautiful furnishings. There were portable hot tubs on the decks.
“You can sit in a tub and watch the waves,” Manson said proudly.
As for the Montauk Fire Department, here were enthusiastic young men in finance with offices in Great Neck, and an investment fund that gave a great return—it made perfect sense they would put their money in Callahan’s fund, if that is what they did.
Sadly, I have to report that, if true, this is the second time in the last ten years that the Montauk Fire Department got fleeced for more than a half million dollars.
In 2007, it was found that the longtime Montauk Fire District secretary-treasurer, a woman everybody trusted, secretly was embezzling money and writing checks to herself and others that, over time, had now amounted to more than $500,000. She was arrested and charged. She met with prosecutors and pleaded guilty. The district attorney said she used the money for such things as gambling in Las Vegas, for paying her child’s private high school tuition, and for mortgage payments.
In the end, she agreed to pay what she owed by selling her house. She put it up for sale for $510,000. If she could make the restitution, the agreement said, she could serve one to three years in prison. If she failed, the maximum term would be longer, 5 to 15 years. This was in the fall of 2007. Shortly thereafter, the housing market collapsed. Now it was probably worth $300,000. And it didn’t even sell for that. In fact, there were no takers at all.
In the end, this woman, Terri Gaines, put a family house in Southampton up for sale and sold it. She gave the Montauk house to her children. She gave the money to the fire department. Then, in 2009, she went to jail to serve out her shorter sentence.
As for the Montauk Fire Department’s $600,000 investment in one of Callahan’s funds, we’ve now learned it was only out at risk a short time. They withdrew the money, because “questions were raised about the vagaries of the fund,” a fire department official told Newsday. “We got everything