Opinion ID: 710227
Heading Depth: 2
Heading Rank: 2

Heading: The Allegations of Hirsch's Complaint.

Text: 7 Because the Complaint was dismissed on motion pursuant to Fed.R.Civ.P. 12(b)(1), we accept as true all of the allegations of the Complaint and construe them in Hirsch's favor. Pennell v. City of San Jose, 485 U.S. 1, 7, 108 S.Ct. 849, 855, 99 L.Ed.2d 1 (1988); Thompson v. County of Franklin, 15 F.3d 245, 249 (2d Cir.1994). 8 Googel's and Sisti's criminal convictions--and the instant bankruptcy--both stem from illegal Ponzi schemes that they perpetrated through their partnership, Colonial, in collaboration with Andersen and the other defendants. 3 Googel and Sisti formed Colonial in the 1960s as a vehicle to sell real estate limited partnerships from which they derived interests in the real property and fees for management services. Beginning in 1975, Andersen performed extensive services for Colonial, Googel, and Sisti by providing forecasts and analyses for, and access to potential investors in, Colonial's real estate syndications. Andersen's initial contributions were unofficial, in that Colonial was not allowed to put Andersen's name on any of the financial documents prepared by Andersen. In or about 1981, however, Andersen commenced formally placing its name upon financial documents prepared for Colonial's syndications. In exchange for the expertise, credibility, and business contacts that the Andersen name provided to Colonial, Colonial agreed to hire Shuch, an alleged embezzler who was the brother-in-law of David Federman, a partner at Andersen with primary responsibility for the Colonial account. 9 Shuch, Googel, and Sisti then formed Colonial Realty II, a general partnership in which each of them held a one-third interest and which participated as a general partner in some of the Colonial limited partnership syndications. Googel, Sisti, or Colonial always was the other general partner in such partnerships in order to control Shuch's participation in the projects. Shuch, in turn, established Consulting Enterprises, Inc. (Consulting), a Connecticut corporation, and performed all his work for Colonial and related entities as an employee of Consulting, for which he received in excess of $5.5 million in payments between 1986 and 1990. The Complaint alleges that the fees generated from each syndication grew enormously as Andersen had represented they would if Shuch was retained, and that thenceforth the fees began to drive the syndication transactions. 10 The Complaint further alleges that Andersen sought to place Shuch as an employee of Colonial so as to obtain control of Colonial, that [t]he dramatic increase in Colonial's business was a direct and proximate result of Andersen's control over the Colonial syndications, and that Googel and Sisti may not have fully understood the financial status of their burgeoning operations, while Andersen knew everything because it was [sophisticated] and highly skilled in the business, real estate finance and syndication. In addition, Shuch and Andersen took the lead in preparing the false and misleading private placement memoranda (PPMs) and financial forecasts by means of which the Ponzi schemes were primarily carried forward, 4 and Andersen placed [its] investors in these deals. 11 Thus, it is claimed that Andersen created in Colonial an industry giant which Andersen could and did display to other potential clients as an example of the success and prestige which any company could attain if it hired and paid Andersen. In a subsequent RICO case statement filed in compliance with a standing order of the district court, Hirsch asserted that [Andersen]'s fraudulent and illegal conduct with respect to the projections and forecasts has caused the Debtors to incur extraordinary liabilities consisting of contingent financing obligations, guarantee obligations, and trade debt ... [, as] evidenced by the more than $10 billion in claims filed against [Colonial, Googel and Sisti], including approximately $6.9 billion in claims filed against the Debtors by investors. 12 On the other hand, it is also alleged in the Complaint that [i]f Andersen and Colonial did not find the forecasts to be attractive enough then the numbers were changed until they were [emphasis added], and that Colonial and Andersen knew that there was a clear inability to satisfy the dividends to the investors from the revenue of the respective partnership [emphasis added]. 13 In 1989, Colonial and Andersen formulated their largest transaction, involving the acquisition and syndication of a number of properties from the Travelers Insurance Company (the Travelers Portfolio). An acquisition team consisting of approximately ten Andersen employees and one Colonial employee undertook a due diligence evaluation of the acquisition (the Due Diligence Investigation). The Travelers Portfolio included Constitution Plaza, which consisted of five office buildings, a pedestrian plaza, and two parking garages in downtown Hartford, Connecticut, and various other properties located throughout the United States. As described in the Complaint, this syndication was to be the project which would hide the Ponzi scheme and rehabilitate the Ponzi Participants [i.e., Googel, Sisti, Shuch, Colonial, and Andersen, see supra note 3]. Colonial, Andersen, Tarlow, Sorokin and Weinstein knew and discussed between them that if the Constitution L.P. [the limited partnership formed to acquire the Travelers Portfolio,] was not syndicated then Colonial would fail. 14 Predicated upon Andersen's conclusions following the Due Diligence Investigation, the Ponzi Participants were induced to cause Constitution L.P. to purchase the Travelers Portfolio for $179 million. Subsequently, however, only Constitution Plaza was offered in a public syndication, and the remaining Travelers Properties were transferred from Constitution L.P. to another Colonial-sponsored partnership. Although the offering sought to raise $60-72 million, only approximately $38.58 million was actually realized. The Complaint alleges that Andersen was both negligent and deliberately fraudulent in its conduct of the Due Diligence Investigation and preparation of subsequent financial analyses in connection with the public offering of Constitution Plaza, as a result of which Andersen was ultimately replaced as the auditor of Constitution L.P. 15 The new auditor of Constitution L.P., Joseph Cohan & Associates (Cohan), thereafter reported that the PPM distributed to investors with respect to the Constitution L.P. syndication was false and misleading, whereupon it was ostensibly determined in April 1990 that an amendment to the PPM and offer of rescission would be circulated to the investors in Constitution L.P. These documents were prepared for the record, and Shuch was designated to mail them, but it was never intended that they be mailed. Rather, the Ponzi Participants allowed further investors in Constitution L.P. to be solicited on the basis of the existing, misleading financial information. 16 The Complaint also alleges that Shuch transferred over $5.8 million in 1989 to his wife and to a trust which Federman served as trustee. These transfers greatly decreased the value of Shuch's personal guarantees of payment on notes issued by investors in Constitution L.P., and commensurately increased the potential liability of Googel and Sisti as secondary guarantors of these notes. Andersen knew about these transfers as a result of preparing gift tax returns for Shuch with respect to them, and had a duty to inform Googel and Sisti concerning them, but never did so. 17 Despite Googel's and Sisti's participation in the Ponzi schemes, the Complaint alleges that they remained ignorant throughout the relevant time period of their own precarious financial position due to the fraud and/or negligence of Weinstein, which prepared Googel's and Sisti's personal financial statements. According to the complaint, Weinstein knew that the Financial Statements [of Googel and Sisti] would be utilized as the basis for the Net Worth Statements to be included in each private placement memorandum. Weinstein further knew that the Financial Statements would be used by Googel, Sisti and Colonial to obtain financial accommodations and extensions of credit thereto and to the partnerships. 18 On September 14, 1990, involuntary bankruptcy proceedings were commenced against the Debtors in the United States Bankruptcy Court for the District of Connecticut. The cases were subsequently consolidated, and Hirsch was appointed as trustee of the Consolidated Estate. Hirsch thereafter commenced this action, and defendants-appellees moved to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(1). 19