Manhattan Art Dealer Faces Federal Prison Over Investor Scam

(Bloomberg) -- A Manhattan art dealer pleaded guilty to using paintings by Wassily Kandinsky and other renowned artists as bait to defraud collectors and investors out of millions of dollars.

Ezra Chowaiki, who was the face of Chowaiki & Co. Fine Art Ltd. on Park Avenue before its bankruptcy filing in November, entered his plea Thursday in federal court in Manhattan. He agreed to forfeit $16 million and 25 works of art, including paintings by Pablo Picasso, Marc Chagall and Edgar Degas.

Prosecutors said they plan to return the works to their rightful owners, though many of the paintings must be tracked down first. Some were transferred overseas, they said.

“I knew that what I was doing was wrong and illegal,” Chowaiki said, reading from a prepared statement while seated next to his lawyer. “I'm terribly sorry.”

Chowaiki, 49, faces as long as 20 years in prison for wire fraud, though prosecutors have agreed to recommend a term of four to five years.

U.S. District Judge Jed Rakoff accepted the plea deal after questioning how prosecutors could take possession of paintings whose whereabouts were unknown. He also pressed Chowaiki to explain what he'd done.

‘Give Me Money'

"You would say to people, ‘Give me money to purchase art,' when you were really going to use that money other purposes, is that correct?" Rakoff said.

"Yes," Chowaiki replied.

"And you knew that when you were doing this that this would likely bring harm to the people you were doing this to?" the judge asked.

"Yes," Chowaiki said.

The gallery operator's arrest last year stunned the New York art world and left collectors scrambling to file claims in the bankruptcy case. His defense attorney, Daniel Parker, said after a hearing in December that his client had an "impeccable reputation" and planned to restore it.

Chowaiki's scams have helped expose the murkier side of fine-art financing. Such deals often aim to turn a quick profit on famous works, but complex valuations and ownership structures can leave investors burned, especially when a seller's good reputation is substituted for proper due diligence.

New York Art Dealer Duped Clients Out of Millions, U.S. Says

Prosecutors said Chowaiki ripped off at least a half dozen art dealers with sham transactions in which some victims were led to believe they were buying stakes in fine art earmarked for quick resale. Other victims left works at his gallery on consignment and never got them back, including one collector who lost a $1.2 million painting, prosecutors said.

Chowaiki, who lives in Brooklyn, opened the gallery in 2004 with partners, and was the minority owner. The criminal case followed three civil suits in November accusing him of the same types of frauds, as well as a lawsuit by Sotheby's Inc. seeking repayment over a botched deal.

A review of the gallery's bankruptcy documents by the Federal Bureau of Investigation revealed it had less than $300,000 in assets and almost $12 million in claims by dozens of art dealers, including six victims in the criminal case, according to the complaint.

The scheme ran from 2015 until November, prosecutors said. Victims lived in New York, Pennsylvania and Ontario, Canada, according to the criminal complaint.

The gallery, which held works by dozens of A-list artists, including Paul Cezanne and Edgar Degas, offered art financing and appraisal services, once boasting on its website to have set "the gold standard for art research.”

“This guilty plea is just the first step in making whole Chowaiki's many victims,” Judd Grossman, a lawyer for victims, said in an email. “There is still a lot of hard work ahead in tracking down these stolen artworks.”

The works to be forfeited include Alexander Calder's "Pink Faced Cat," Max Ernst's "Temptation of St. Anthony," and Piet Mondrian's "Broekzijder Mill in the Evening,” according to a court filing.

The case is U.S. v. Chowaiki, 17-mj-9231, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Erik Larson in New York at elarson4@bloomberg.net.

To contact the editors responsible for this story: David Glovin at dglovin@bloomberg.net, Paul Cox

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