March 27 (Bloomberg) -- Bankrupt New York art dealer Lawrence Salander sat manacled and unshaven in a paint- splattered sweat shirt in criminal court yesterday, hours after he was arrested near his 66-acre property in Millbrook, New York.

His wife, Julie, in a short black miniskirt and leather boots with three-inch stilettos, watched as her husband slumped in his chair, flanked by court officers. She sat next to her stepdaughter Ivana, one of Salander’s seven children.

A New York grand jury accused Salander and his Salander- O’Reilly Galleries LLC of stealing $88 million from investors, clients and Bank of America’s First Republic unit. He pleaded not guilty to all counts. The gallery is under bankruptcy protection and has been closed since October 2007.

State Supreme Court Justice Michael Obus set bail at $1 million. Salander, 59, posted bail today, said Alicia Maxey Greene, a spokeswoman for Manhattan District Attorney Robert Morgenthau. Further details weren’t immediately available.

His lawyer, Charles A. Ross, asked Obus to bar a television camera from the arraignment because Salander was “appearing as a very broken person.” Obus permitted TV coverage.

According to Morgenthau, Salander’s victims include hedge- fund manager Roy Lennox; Jon Landau, Bruce Springsteen’s manager; and tennis great John McEnroe, who briefly apprenticed at the gallery in 1993.

“It’s painful for John,” said his father, John P. McEnroe. “He and Larry were good friends.”

Grand Jury

The grand jury heard the case for six months, and voted to sit for another six months to investigate any others involved with the alleged fraud, according to Morgenthau’s office.

The indictment charges Salander and Salander-O’Reilly with larceny, fraud, forgery, falsifying business records and perjury. He is accused of selling the same artworks multiple times to fund a lavish lifestyle.

For example, the dealer allegedly sold a 50 percent interest in a pair of abstract paintings by Arshile Gorky, “Pirate I” and “Pirate II,” to McEnroe for $2 million.

The following day, he sold a half interest in the same paintings for $2.2 million to Washington developer Morton Bender, Morgenthau deputy Micki Shulman said at a press conference. Salander also borrowed $2.2 million from Bender for his own half-share and used the artwork as collateral for a $2 million loan from Bank of America, Shulman said.

Records Seized

Attorney Charles Lichtman, who represents a Florida woman who sued Salander, said he expects Salander to be convicted and get a long prison sentence.

“I don’t think judges and juries look kindly at anyone who commits big fraud these days,” Lichtman said.

The charges come 17 months after the district attorney’s office seized records from Salander’s New York home and his Upper East Side mansion housing the gallery. In U.S. Bankruptcy Court, hundreds of claims are pending against the gallery, seeking the return of about $300 million, according to the court’s Web site.

“There could be many more victims,” said Morgenthau’s chief of investigations, Patrick Dugan. “But there comes a point of time when you have to identify your best cases and move forward.”

Shulman argued unsuccessfully that Salander should be denied bail. As evidence of Salander’s “astounding arrogance,” she cited a 2006 e-mail he wrote to longtime client Earl Davis, accusing him of “innuendos and bullying.”

Davis had repeatedly requested an accounting of 96 missing paintings by his father, American modernist Stuart Davis. The paintings, which Davis had consigned to Salander-O’Reilly, represented most of his inheritance.

Davis suggested lawyers resolve the mess, prompting Salander to threaten in an e-mail to “use everything I can” to protect his gallery.

“It will not be pretty but believe me Earl I don’t think you understand what you would be in for,” he wrote.

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: March 27, 2009 18:36 EDT