Jan. 12 (Bloomberg) -- Fourteen months after Manhattan District Attorney Robert Morgenthau began investigating art dealer Lawrence Salander, a New York state grand jury is considering criminal charges.

The grand jury is hearing the case in lower Manhattan, according to two people who testified and spoke to Bloomberg News on condition of anonymity. Impaneled since at least October, it continues to hear testimony, said two lawyers whose clients have appeared before it.

Salander, his wife, Julie D. Salander, and his Salander- O’Reilly Galleries LLC declared bankruptcy in November 2007 in Poughkeepsie, New York, not far from the Salanders’ second home in Millbrook. Hundreds of creditors have filed claims in U.S. bankruptcy court, including Lawrence Salander’s ex-wife, artists and their relatives who did business with him, gallery employees, business partners, lenders such as Bank of America and clients.

Several allege that Salander sold their art without their knowledge or permission and didn’t remit proceeds. Others say in court papers that he defaulted on loans and other obligations. Morgenthau’s office seized records from Salander’s New York home and gallery at the end of 2007.

Alicia Maxey Greene, a spokeswoman for Morgenthau, said grand jury proceedings are secret and declined to comment. Salander didn’t return a call placed to the Millbrook house.

Personal Bankruptcy

The law firm Baker Hostetler represented Salander in his personal bankruptcy case but was prohibited from “providing advice related to criminal defense or pending/threatened criminal proceedings,” according to the November 2007 court order authorizing its hiring.

“We are not currently representing him and it does not appear that he has the resources to hire counsel,” said John Moscow of Baker Hostetler.

Salander said at a hearing in January 2008 that if he were permitted to sell his gallery’s art he could repay his debts. Since the bankruptcy, a newly hired “chief restructuring officer” has run the gallery and the court has prohibited Salander from having an operating role.

Former New York Observer publisher Arthur Carter and actor Robert De Niro are among those seeking money or art. Creditors say they’re owed about $500 million, although some are duplicate claims. Last month, hundreds of artworks for which ownership isn’t in dispute were ordered released by U.S. Bankruptcy Judge Cecelia Morris.

A grand jury hears evidence from prosecutors before it presents an indictment -- the document with which someone is charged with a crime.

Italianate Mansion

Salander rented a 45-foot-wide Italianate mansion off Madison Avenue for his gallery, at $154,000 a month. A state judge ordered it padlocked in October 2007 and the owner, Aby Rosen’s RFR Holding, put it on the market early last year for $75 million.

Salander, his wife and seven children lived a few blocks north in a six-story, 9,000-square-foot townhouse. It’s for sale with an asking price of $25 million. He traveled in the U.S. and Europe via private plane, in search of unfashionable Renaissance art he believed he could sell at a profit, according to friends, family and court records.

The bet failed. Contemporary and modern art continued to dominate, at least until late 2008, when it tanked along with financial markets.

New Debt

In April, after a Justice Department lawyer monitoring the Salanders’ personal bankruptcy case complained that they were accumulating new debt and slow to sell assets, the court ordered them to cede control of their finances to an independent trustee.

In October, in the gallery bankruptcy, art adviser Gurr Johns was hired to arrange the sale of much of its 4,000 artworks.

The Baer Faxt, an art industry newsletter, reported the existence of the grand jury last week. Salander has not testified in his defense, a person familiar with the situation said.

To contact the reporters on the story: Philip Boroff in New York at pboroff@bloomberg.net; Lindsay Pollock in New York at lindsaypollock@yahoo.com.

Last Updated: January 12, 2009 00:00 EST