THOMAS D. WILLIAMS;
Courant Staff Writer
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
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
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 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
"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
"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
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
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
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
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
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
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
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,
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
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
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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