The Hartford Courant
THOMAS D. WILLIAMS;
Courant Staff Writer
LOOKING FOR GOLD, ENDING UP WITH
DIRT
WHEN COLONIAL'S GOLD
BUILDING PROJECT FAILED, A UNION PENSION FUND SUED. NOW THE COURT CASE IS RAISING QUESTIONS ABOUT THE FUND'S OFFICIALS.
The Connecticut Laborers Union Pension
Fund, which bought $3 million in bonds on the downtown office landmark Gold Building from
the Colonial Realty Co., later filed a lawsuit against Colonial and other parties,
alleging fraud
Lawyers for the Connecticut Laborers Union
Pension Fund apparently thought they were on safe ground when they filed a federal lawsuit
two years ago to recover $3 million in worthless Colonial Realty Co.
bonds.
But the lawsuit may be backfiring. Evidence of questionable
behavior by pension fund officials is piling up as the court case unfolds.
Sworn testimony reveals that a co-chairman of the pension fund
accepted a $14,000 gold watch from Colonial co-founder Jonathan Googel weeks after the
union purchased its investment. Federal labor regulations prohibit such
gifts.
Still other testimony raises a key question about
how carefully the eight trustees responsible for keeping laborers' investments safe
scrutinized the investment.
A defense lawyer says two trustees, their lawyer and real estate
adviser were told two months before they bought the bonds in September 1989 that the
investment could be extremely risky. No such information, however, was relayed to the
other six trustees before they voted on the investment, evidence shows.
Colonial was limited to $5.2 million in bond
sales on the property, the 26-story office landmark Gold Building in downtown Hartford.
Even before the union purchased the issue, Colonial had already sold all of the bonds that
it was authorized to sell. Colonial officials simply printed more bonds for the union.
Such an intentional oversale violates state
banking regulations and federal securities laws, and jeopardizes the value of the bonds.
The oversold fund -- Colonial Gold Zero Coupon
Ltd.. Partnership -- was a lump-sum-interest investment. Investors put up about $33,000
for a bond that would be worth $100,000 in eight years, resulting in a I 5 percent annual
return. The Gold Zero fund backed a third mortgage for the gold-glass building that,
ironically, was built by members of the union 20 years ago.
The $3 million investment was the second for the pension fund in a Colonial deal. In 1988, the fund's trustees bought $2 million in bonds backing the second mortgage on Colonial Metro, a 12-story Hartford office building known as Metro Center. The $5 million in investments is part of a $200 million union pension fund operated for 10 Connecticut labor unions representing about 5,000 construction workers.
Colonial has since been forced into bankruptcy court, and its
assets are being liquidated. The $5 million in union pension fund investments is now
considered worthless because of the properties' overwhelming debts.
Colonial and its top of ficers have been targets of a wide-ranging
federal grand jury investigation, and last week the company's two founders pleaded guilty
to federal fraud and tax charges. About 6,000 people who invested more than $300 million
in Colonial real estate have filed fraud lawsuits against Colonial and the professionals
who marketed the investments.
One of the lawsuits belongs to the union's pension fund. It was
filed against Colonial; Sorokin, Sorokin, Gross, Hyde & Williams, of Hartford,
Colonial's lawyers; Equity Mortgage Services Inc., of Glastonbury, trustee for the
bondholders; and Connecticut National Bank, which
received and distributed the funds.
The trustees say that Colonial officials bilked the pension fund
out of its investment, and that the other defendants failed to take prudent action to
prevent the fund's losses. The bank, the bondholders' trustee and
Colonial's lawyers should have ensured that only $5.2 million was cashed by Colonial, and
that any additional checks were returned to investors uncashed, the complaint says.
Through their lawyers, Googel and Benjamin
Sisti, the two Colonial founders refused to comment.
Lawyer Hal M. Hirsch, the bankruptcy trustee overseeing the
liquidation of Colonial, argues that the allegations in the union's lawsuit against
Colonial are groundless. And lawyers for Equity and Connecticut National told the court
that their clients were not responsible for Colonial's unlawful
operations.
Although some members of the union have complained
bitterly, but privately, about the loss of pension money and about the way some of the
powerful, unpaid trustees acted, no members have publicly criticized them.
One union leader, who did not want to be identified for fear of
reprisals by leadership, said the union trustees' Colonial investment was ridiculous for
its risk and because the company used nonunion labor. A union investment should both make money and create union jobs, he said.
Others, including pension and labor experts, say
the fund's trustees had no business approving such high-risk investments.
"The laborer is generally too intimidated by union leadership
to complain about things like this," said Susan Jennik, executive
director of the Association for Union Democracy, a New York-based group that helps union
members combat corruption.
"They are in fear of physical and economic retaliation. They
can lose their jobs," Jennik said.
Jennik said that based on a reading of court documents that The
Courant gave her, federal labor authorities should bring a separate lawsuit against the
union pension fund's trustees for "breach of fiduciary duties."
Prompted by press inquiries, officials of the
U.S. Department of Labor are investigating the possibility of fraud by Colonial, and union
officials and advisers. They are also reviewing the acceptance of the
gold Rolex watch by Dominic Lopreato, the fund's co-chairman.
That inquiry has dragged on for more than two years. Officials,
and Lopreato's lawyers, refused to discuss it.
Jennik and financial experts said Colonial's bonds were too risky
for a pension fund portfolio -- especially on the third mortgage for the Gold Building.
Because the mortgage was the last one, it was the most vulnerable. In
the event of a default or foreclosure, first and second mortgage holders get
paid before third mortgage holders.
"At a minimum," Jennik said, "all of the trustees
were lax in failing to adequately investigate."
John H. Langbein, a Yale University law professor who specializes
in pensions, questioned that kind of investment. "In general, the risk level
associated with a third mortgage is so high that it is almost impossible to justify it for
a fiduciary investment," Langbein said. "To someone like myself
who is an expert in the field of investments, the transaction is malodorous on its face."
"Now sometimes the deal can be so spectacular that the risk
can be justified, but the trustees bear a heavy burden of showing that they investigated
the risks and that the potential gain outweighed the risk," Langbein said.
The pension fund's trustees, in depositions taken by defense
lawyers, said they decided to invest in the two Colonial ventures after financial experts
advised them to diversify. More than 90 percent of their investments are government
securities, corporate bonds, stocks and money market cash funds. The two Colonial investments were two of only three
mortgage holdings of the pension fund.
Evidence shows that the trustees did not investigate other real
estate investments. And there is no evidence to show they did anything to scrutinize
Colonial Realty or its capacity to repay.
Three trustees testified that they did not have the expertise to
research the Colonial bonds, so they relied on the advice of their lawyer, William M.
Cullina, a partner in the Hartford firm of Murtha, Cullina, Richter and Pinney, and on
Hartford real estate expert William H. Farley Jr.
The trustees defended their approval of the investment by
emphasizing that Farley, president of the Farley Co., a real estate management firm, said
the Gold Building Zero Coupon bonds would be "a good investment for the f und."
Farley was paid $7,500 for his study of the investment, and
Cullina received more than $44,000 for representing the pension fund in 1989, the year of
purchase.
"You depend on your attorneys, and you pay
all this money for them to say whether it is good or bad. They are the
professionals. I am not the professional. You take their advice and you say, Hey, it's a
good deal,"' testified Anthony Varbero, business manager of Local 146 of the Laborers
International Union of North America in Norwalk and one of the pension fund's trustees.
Farley and Cullina, in testimony, have denied wrongdoing.
Googel's gift of a gold watch was uncovered during a deposition on
Oct. 14, 1992, that Lopreato gave to defense lawyers. Lopreato initially
denied receiving any gift from Colonial.
However, after an off-the-record conversation with his lawyer
during the questioning, Lopreato changed his testimony. Lopreato, who is also business
manager of Local 230 of the Construction & General Laborers Union, admitted that he
received a watch from Googel about six weeks after the $3 million investment.
However, Lopreato said that when he learned the value of the watch
about two weeks later, he decided to return it.
Lopreato gave it to Ronald Welch of West
Hartford, owner of a building cleaning business in Hartford, so Welch could return it to
Googel, Lopreato testified. Colonial sources say that the watch was returned to Googel,
but that he told Welch to keep it, in part because Welch helped introduce Googel to union
officials.
Welch is a mutual friend of Googel's and Lopreato's, Lopreato
said. Welch did not respond to telephone messages left at his business, and at his wife's
business.
Lopreato testified that he believed Googel gave him the watch for
helping Googel make contacts with other union officials to try to sell them Colonial
investments. At least one of those investments cost another union
pension fund $3 million.
A laborers' union local in Albany made a $3
million investment in another Colonial bond issue in 1990, after briefly conferring with
Lopreato and Cullina, and then retaining Farley as an adviser. The bond was on the doomed
Constitution Plaza office project. Albany lawyer Eugene Devine, representing that union's
fund, said he is hiring another lawyer to represent the union in a
complaint against Colonial.
Lopreato said he only casually knew Googel, and had not checked
closely into Colonial. But he said he had earlier made a small personal
investment in a Colonial real estate project.
Lopreato testified that he had not told other trustees about the
watch. But he did tell them about the gift after his testimony.
The trustees have brought no complaint against
Lopreato, and at least two of them said they believe Lopreato did nothing wrong.
"If Mr. Lopreato said he got the watch and gave it back, that is satisfactory with me. We all sometimes do
something on the spur of the moment. If he gave it back, then why would anyone have to
look into it any further? " Varbero said.
However, Jennik said she questions both Lopreato's actions and the
inaction of other board members.
"The acceptance of a $14,000 watch by Mr. Lopreato is on its
face improper. Mr. Lopreato's statement that he gave it to someone other than the person
who gave it to him makes him susceptible to a criminal investigation. When the trustees found out he took the watch, they were obligated by federal regulations at that point to do some investigation and report it to the
proper authorities," she said.
Besides questioning Lopreato's acceptance of the watch, one
defense lawyer has accused pension fund officials of knowing before the purchase that the
bonds were oversubscribed and might be oversold.
In his recent motion to dismiss the lawsuit, Vincent M. Amoroso of
Boston, representing Colonial's lawyers, introduced notes written by
Cullina and Farley during a July 1989 meeting with Googel and Frank Shuch. Shuch was
Colonial's chief financial officer; he committed suicide in February 1992. Those notes prove that Cullina and Farley knew about the potential of an
oversale, Amoroso argued.
The meeting, two months before the union bought the bonds, was
attended by Lopreato and trustee Francis Mazza, who said he cannot
recall what happened at the session.
Amoroso says Cullina wrote: "If we take
$3mm, will be $2 mm over subscribed." He said Farley wrote: "If the union comes
in, they'll be oversold." A close look at the notes confirms that most or all of
those words do appear.
The notes, say Amoroso, show that Cullina and Farley knew that the
bonds would be oversold if the union invested its $3 million. A judge has reserved a
decision on the motion.
Marvin B. Morganbesser, co-chairman of the union fund trustees,
said he doubts Cullina and Farley would have recommended buying the bonds if they had in
fact been oversold. But, if oversubscription was discussed, Cullina, Farley, Lopreato and
Mazza all had a duty to tell the other trustees about it, said
Morganbesser.
In sworn statements, Cullina and Farley deny
that Googel told them the bonds were already oversold. Rather, they said, Googel was
giving them a sales pitch and warning that if the fund did not make its
investment quickly, the bonds soon would be sold out.
"I certainly never thought that Colonial would simply sell
more bonds than it was authorized to sell," Cullina said. "At that time, 1, like
many others, relied upon the integrity of the Colonial general partners, as well as the
belief that those entrusted to ensure that the offering was conducted
properly ... would diligently perform their duties. Only later did I learn that this was
not the case."
But, even after Cullina learned that Colonial
oversold the bond offering, he took no immediate action against Colonial.
When Cullina was informed of the oversale by a reporter in
February 1991, he said that he had spoken with Colonial officials and was satisfied that
the pension fund's investment was safe. The pension fund's trustees did not file suit
against Colonial until November 1991, eight months later. Cullina did not specify what
Googel told him, or what he did to check on Googel's statements.
Through a lawyer, Cullina has declined a request for an interview.
Pension experts insist that once the trustees learned in early
1991 that the bonds were oversold, they were required to quickly demand repayment. If they
were turned down, they should have immediately sued and complained to labor authorities,
said Jennik, a lawyer. Langbein agreed.
Trustees and officials of the international
union said that neither pension fund representatives nor labor union officials complained to federal agents. The trustees and of ficials
said they knew that the U.S. Department of Labor was investigating, so it wasn t necessary
for them to file a complaint. The department could help the union collect damages.
Because bankrupt Colonial Realty might have no money even if the
union's pension fund wins damages, other solvent defendants in the union's lawsuit become
significant if the union expects to get its money back.
However, the pension fund decided not to file suit against either
Cullina or Farley. Board members said
that they made that decision on the recommendation of the law firm of -Paul, Hastings,
Janofsky & Walker of Stamford -- that was hired to take action against Colonial.
That firm, say board members, was chosen from several law firms
recommended by Cullina. Vincent L. Briccetti, who was formerly with the Stamford firm and
continues to handle the lawsuit for the board, would not comment on how he and others in
his firm decided who to sue.
Courant Staff Writer George Gombossy contributed
to this story
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