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From: The Largest, In Connecticut that is, The Connecticut Law Tribune
Time: 10:48:33 AM
ADR Settles Record Breaking $90 Million Class Action
Inventive techniques head off leviathan litigation
Thomas Scheffey The Connecticut Law Tribune April 26, 1999
The unprecedented $90 million settlement between accounting firm Arthur Andersen Inc. and 6,800 investors in 31 Colonial limited partnerships brings to a close the largest litigation matter in Connecticut.
The deal was signed April 21, in an evening meeting, culminating nearly a year of negotiations.
Colonial, which grew to symbolize the greed and excess of the 1980s real estate frenzy, became a bank-busting curse, condemning the Connecticut economy to a black hole of recession as this decade began.
Upon approval by U.S. District Judge Alfred V. Covello, the settlement will be law. It was masterminded by retired federal judge Robert C. Zampano and retired federal magistrate Owen Eagan. In the end, imaginative alternate dispute resolution, not courtroom litigation, dispatched Connecticut's biggest litigation morass of the century.
Trying all 31 sub-cases, with appeals, could have easily dragged on for another decade, lawyers on both sides agree.
The four small Connecticut plaintiffs' firms that banded together to represent the investor class, along with New York's Perry & Windells, were prepared to go to court April 20 over the first of 31 partnerships, the $13.5 million Capitol Center Limited Partnership, consisting of two Hartford office buildings. The plaintiffs contend Andersen's allegedly inept advice induced them to invest in a deal doomed from the start.
Liaison counsel James E. Hartley and Gary B. O'Connor, of Waterbury's Drubner, Hartley, O'Connor & Mengacci, first heard of Capitol Center when it was a new offering in 1988.
Then, a prospective investor asked their opinion on the deal, which allowed generous promoter's fees and projected rocketing appreciation. Hartley and O'Connor say they were skeptical. They advised the client not to invest, but he disregarded their warning.
Indeed, the properties at 370 Asylum St. in Hartford, and on the corner of Washington and Park Streets, were projected to be worth $62 million by 1998 in the offering statement. Today, the city of Hartford assessor's office lists them at $9.2 and $2.8 million, respectively.
Hartley and O'Connor's client was back at their door in 1990, ready to sue Colonial for securities fraud. The Waterbury lawyers explained they needed more than one client to make a case fly, and the man drummed up a small crowd of unhappy ex-investors. A class action was born.
Bridgeport's Koskoff, Koskoff & Bieder was building its own group, as was Hartford trial lawyer R. Bartley Halloran, of Alfano, Halloran & Flynn. William H. Clendenen Jr., of New Haven, rounded out the team. Later, all the lawyers combined their plaintiffs into one large class.
Andersen was defended by New Haven-based Wiggin & Dana, where lead counsel Shaun S. Sullivan headed a team of five partners and 15 associates. They also were assisted by trial partners Peter Fleming and Elliot Louder of the Park Avenue firm of Curtis Malle-Prevost, Colt & Mosle.
Through the decade, smaller defendants settled, including the law firms of Tarlow, Levy & Droney in Farmington and Sorokin, Sorokin, Gross, Hyde & Williams, in Hartford, as well as several small accounting firms, some paying their malpractice policy limits.
Holdout Andersen, worth $6 billion worldwide, was by far the largest, and arguably the most difficult, defendant to tag with legal fault. It bought some peace fairly cheaply. The state accountancy board, represented by Attorney General Richard Blumenthal, won a negotiated settlement of $3.5 million from Andersen in 1993, of which $2.5 million went to investors and $1 million went to cover the investigation's cost. Federal prosecutors settled in 1997 with Andersen for $10.5 million in lieu of prosecution for federal violations. In both of those settlements, as in this one, Andersen admits no wrongdoing.
A criminal prosecution against Andersen partner Edmund Autuori ended up being completely thrown out in 1998 by U.S. District Judge Ellen Bree Burns, who found Googel's key testimony just plain unbelievable, and inadequate to support a criminal conviction.
Such dramatic flips in liability have been par for the course in Colonial-related litigation.
Although Andersen was the big fish left for last, the plaintiffs' lawyers have had considerable practice with smaller fry. Those cases helped build up favorable case law in state courts for the investors.
Over the course of this decade, Hartley and O'Connor pursued state securities law claims in the much-litigated Connecticut National Bank v. Giacomi case, which reached the state Supreme Court in 1995 and 1997.
In the latter Giacomi case, the Connecticut Supreme Court specifically held that an aider and abettor of securities fraud (such as a bank or professional advisor) could be held jointly liable with the primary fraudulent actor.
The U.S. Supreme Court, in the 1994 case of Central Bank of Denver v. International Bank of Denver, specifically excluded aiding and abetting liability under the powerful 10b(5) section of the Securities Act of 1933.
Lawyers and lobbyists for plaintiffs in 1993 passed an amendment to the Connecticut Uniform Securities Act, PA 93-169, which specifically included aider and abettor liability. Justice David M. Borden, writing for the court in Giacomi in 1997, held that an investor-friendly amendment to CUSA could be applied retroactively, which had the effect of snaring Andersen's late 1980s activities in a custom-made legal net. At the time Sullivan commented dryly, "It's really helpful if you can pass your own statute after the fact, and then litigate the case."
Not that the deck was stacked predictably. Sullivan agreed that whichever way the Capitol Center case was decided, it would be appealed: "As Judge Zampano said, there were so many novel issues in Capitol Center that there was no doubt there would be error -- the only question was whether it would be reversible error."
Like the plaintiffs' lawyers, Sullivan agreed that litigation could drag on for another nine years or more.
POWERFUL ADR TECHNIQUES One of the main objections parties have to mediation is that each side has to show its hand -- a detriment if mediation fails and that evidence is presented again in litigation.
Zampano and Eagan got around that by taking evidence separately, in an ex parte proceeding, with only the defense or the plaintiffs in the room at one time. It made it possible to go into great depth on the legal and evidentiary strengths of each side's case, without fear of tipping off the adversary.
Meanwhile, both sides had briefed key motions to dismiss, which were pending before Chief U.S. District Judge Alfred V. Covello as the trial date approached.
So as the mediators soaked up knowledge from both sides, their opinions of the value of the case increased in weight. On top of that, the uncertainty of Covello's pending rulings, and the prospect of litigation as far as the eye could see, put both sides in the mood to settle.
One tool, the federal Racketeer Influenced Corrupt Organizations Act, or RICO, was something that could increase the downside risk of the defendants, because it allows treble damages. If the $350 million in actual damages claimed by plaintiffs had been enhanced by the RICO multiplier, the damage could have hit $1 billion.
Conversely, Sullivan says, he got some strong testimony from Jonathan Googel in eight days of depositions at the federal penitentiary at Allenwood, in which Googel staunchly maintained he wasn't driven to fraudulent schemes until late in the 1980s, after most of the partnerships were created. Thus, Sullivan contends, conspiracy wasn't possible.
"It takes two to tango," he notes. Whether Googel's testimony would have helped Andersen is now a hypothetical question -- now totally moot.
ORACULAR SETTLERS Using their unique perspective, Zampano and Eagan presented the deadlocked parties with a settlement proposal in March, and immediately sparked interest in compromise after months of adamant disagreement. Already respected for their judicial acumen and experience, Zampano and Eagan's persuasiveness was heightened by the fact that they alone knew both sides' cases. Lightly disregarding such a settlement evaluation would be folly, both sides knew.
While federal law may have favored the defendants, the Connecticut Uniform Securities Act, as amended by the Legislature and interpreted by the state Supreme Court, was a distinct advantage for the plaintiffs.
The problem for the investors in suing Colonial Realty was that the people who took their money -- Jonathan Googel and Benjamin Sisti -- are stone broke and in prison. Frank Shuch, another top Colonial planner, wrapped himself in a plastic trash bag and suffocated himself in 1993, after federal prosecutors refused to give him any special deal in criminal prosecution.
The remaining litigation targets, including law firms and smaller accounting firms, settled early, leaving Andersen as the one remaining deep pocket.
BETTER COURSE OF VALOR For Andersen, this deal made sense.
"The lawyers who worked on this case believe the settlement was fair for everyone," says Sullivan, "and I always believe that you can reach a settlement that you think you can live with. It is a lot better to control your own destiny than to roll the dice."
One of the bolder lawyers in the Colonial litigation is bankruptcy trustee Hal M. Hirsch, who now practices in New York City. At one point, Hirsch sued 1,175 lawyers, realtors and other agents for taking commissions on Colonial deals, forcing them to disgorge those fees. He tried without success to sue Andersen in Bankruptcy Court, on an aggressive theory of responsibility.
On hearing of the $90 million settlement, Hirsch says, "I'm impressed. I think the plaintiffs' lawyers did a good job -- and got more than had been expected." In Hirsch's part of the Colonial autopsy, he and other professionals in the bankruptcy got fees of approximately $10 million, and returned close to a nickel on the dollar for unsecured creditors.
Investors will receive considerably more, depending on whether their partnerships were handled by Andersen. Richard Bieder says the formula of how much investors will receive takes into account the number of legal theories that apply and how much the investor was out of pocket. The RICO claim, believed to be weak, applies to all limited partnerships. Thus, Colonial investors in syndications in which Andersen did no work, will still recover some money. The stronger CUSA claims pay more, but require direct Arthur Andersen involvement, Bieder says. According to Hartley, investors will get between 15 and 90 percent of their investments back.
The settlement still needs to be approved by Covello to have the force of law.
DON'T WATCH In February, Gary O'Connor went to see the movie "A Civil Action," the John Travolta film based on a real life case in which a litigation David took on a corporate Goliath, and after years of expense and toil, settled for what he considered a pittance and a defeat.
"Don't see that movie," O'Connor warned his partner Hartley.
Then, two months later, when all the lawyers were handed a script with a happy ending, they seized the chance.
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