Connecticut Nat. Bank v. Giacomi

Citation659 A.2d 1166,233 Conn. 304
Decision Date30 May 1995
Docket NumberNo. 15089,15089
CourtSupreme Court of Connecticut
Parties, 64 USLW 2080 CONNECTICUT NATIONAL BANK v. Robert A. GIACOMI. CONNECTICUT NATIONAL BANK v. Joseph J. SANTOPIETRO. CONNECTICUT NATIONAL BANK v. Joseph SANTORO et al. CONNECTICUT NATIONAL BANK v. Jack R. GIACOMI. CONNECTICUT NATIONAL BANK v. John J. DePASTINO et al. CONNECTICUT NATIONAL BANK v. Robert R. ROSA.

Darrell K. Fennell, Stamford, with whom, on the brief, were Philip M. Chiappone, Michael Winger and Jeffrey A. Rinde, New York City, for appellant (plaintiff).

James E. Hartley, Jr., Waterbury, with whom, on the brief, was Robin L. Bialy, Orange, for appellees (defendant Robert A. Giacomi et al.).

Richard P. Weinstein, West Hartford, with whom, on the brief, was Peter B. Rustin, Hartford, for appellees (defendant Joseph Santoro et al.).

Eileen McGann, Ridgefield, filed a brief for appellee (defendant Joseph J. Santopietro).

Before PETERS, C.J., and BORDEN, BERDON, NORCOTT and KATZ, JJ.

KATZ, Associate Justice.

The primary issue in this appeal is whether a person who "aids and abets" another person's fraudulent conduct in connection with a securities transaction has violated General Statutes (Rev. to 1993) § 36-472 of the Connecticut Uniform Securities Act (CUSA). 1 The plaintiff, Connecticut National Bank (CNB), 2 brought suit, as payee, against the defendants, 3 as makers of promissory notes that were payable on demand. The defendants, all among the group of investors in the now defunct Great Rings Limited Partnership (Great Rings), did not deny that they had executed the notes or that demand had properly been made but raised, inter alia, the special defense under General Statutes (Rev. to 1993) § 36-498(g) that the promissory notes are unenforceable as contracts in violation of CUSA. 4 After a trial to the bench, the trial court, Blue, J., concluded that the aiding and abetting of another person's securities fraud forms an "independent" basis for the imposition of liability under CUSA. Applying that rationale, the trial court found that CNB had aided and abetted fraud in connection with the defendants' purchase of securities from Great Rings, and consequently determined that CNB's conduct was an affirmative defense to the defendants' liability on the notes under § 36-498(g). CNB appealed from the judgment of the trial court to the Appellate Court, and we transferred the appeal to this court pursuant to Practice Book § 4023 and General Statutes § 51-199(c).

We are unpersuaded that § 36-472 includes within its prohibitions the aiding and abetting of another's fraudulent conduct and, therefore, we reverse the trial court's judgment for the defendants. Because the trial court did not consider other possible defenses raised by the defendants, and the record contains no findings of fact in that regard, we remand the case to the trial court for further proceedings with respect to such defenses.

Resolving extensive and conflicting testimony, the trial court found the following facts that are relevant to this appeal. Great Rings was a real estate investment enterprise formed in 1988 under a certificate of limited partnership. The general partners at that time were John Woodhull, Charles Mantione and Leslie Cristini. The Great Rings partners initially intended to purchase four parcels of unimproved land on Great Rings Road in Newtown, upgrade their zoning, and prepare single-family home sites that would then be resold at a profit. At some point early in Great Rings' existence, Kenneth Zak, a former salesman with the "infamous" Colonial Realty Company, Inc. (Colonial), became associated with the enterprise as a salesman. Among the various general partners and salespeople associated with Great Rings during its existence, only Zak had any contact with CNB and the particular defendants in this case.

In order to raise money to finance the Great Rings development, Zak and the general partners planned that "investors were to borrow the entire purchase price of their shares ($50,000 each) from a bank. Their notes would be directly payable to the bank. The partnership would guarantee a return at 8 percent per annum to the investors, to offset the interest on the notes to the bank. It was contemplated that in two years there would be sufficient funds to pay off the principal. Thus ... the partners would raise millions, and the investors would never pay a dime out of their own pockets." This scheme "contained a substantial Ponzi element from the very beginning" because the "only conceivable source" of the 8 percent per annum return to the investors before the raw acreage could be developed was the original contributions of the investors themselves.

Zak approached employees of CNB to provide the financing to investors. In 1989, Zak met with Neal Fitzpatrick, then a senior vice president and regional manager of CNB, who "agreed that the bank would loan money to those investors that the bank deemed qualified." Fitzpatrick then contacted two other bank employees, Inta Ezerins in Hartford and James Truelove in Waterbury, who also agreed to provide financing. The trial court determined that "[i]t is clear from the evidence that these bankers reached a detailed agreement with Zak that each investor's loan was to be in the amount of $50,000 (the entire purchase price of a Great Rings share) and that, in return for the loan, each investor would sign a demand note to CNB in that amount, with an informal maturity date two years hence and with interest set at 1 percent over prime. These terms were tailored to fit the needs of the Great Rings partners with exactitude."

Great Rings retained Attorney D. Robert Morris of Pullman, Comley, Bradley and Reeves for its legal work, including the preparation of documentation such as the certificate of limited partnership, a private placement memorandum dated May 1, 1988, and filings with the Securities and Exchange Commission and other agencies. Because Great Rings intended to make its venture exempt from the registration requirements of the federal Securities Act of 1933, it wanted to show that the venture involved not more than thirty-five purchasers of securities. To ease the fulfillment of that requirement, Great Rings was able to exclude from the thirty-five person limit each "accredited investor," a person with "a net worth ... exceeding $1,000,000 or with an income exceeding $200,000 a year in each of the two most recent years. 17 C.F.R. § 230.501(a)(5) & (6)." Also, Great Rings had to show that nonaccredited investors had "such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment." 17 C.F.R. § 230.506(b)(2)(ii). The Great Rings partners entered into an escrow agreement with People's Bank of Bridgeport (People's), which agreed to hold subscription funds until subscriptions for twenty units were accepted on the approval of attorney Morris. The agreement contemplated that People's would return all money directly to the investors if subscriptions for twenty units were not accepted by October 1, 1988.

The trial court also made extensive findings about how particular individuals helped to solicit investors and facilitate the sale of Great Rings units. 5 There were "four principal promoters" of Great Rings in Waterbury: (1) Kenneth Zak; (2) his brother, William Zak; (3) Francis Donnarumma, then the corporation counsel of the city of Waterbury; and (4) James Truelove, then the vice president in charge of the private banking division of CNB's Waterbury branch. 6 As the primary salesperson, Kenneth Zak used various misleading sales techniques, made misrepresentations and committed forgeries in offering and selling the Great Rings units to investors. 7 Specifically, as to Truelove's participation, the trial court found that he "was involved in at least the general decision to use Donnarumma to target local officials" in Waterbury. 8 Further, it found that in providing financing to Great Rings investors, Truelove ignored internal bank guidelines "with wholesale abandon" and shared with Kenneth Zak some personal information about Donnarumma's finances. 9 The trial court determined that this financial information about Donnarumma "immeasurably assisted" the Zak brothers in perpetuating and concealing their fraudulent sales techniques and practices.

Regarding the sale of Great Rings units to the particular defendants in this case, the trial court painstakingly detailed the deceptive practices and misrepresentations of fact by the Zak brothers. This factual backdrop is largely undisputed. Additionally, the trial court made findings about CNB's involvement, primarily through Truelove, with the selling and financing of these defendants' units in Great Rings. Joseph Santoro and John DePastino decided to purchase units from Kenneth Zak after he explained the benefits of Great Rings and the availability of financing through Truelove. They ultimately signed their promissory notes with CNB to finance their units after a five minute meeting with Truelove's assistant, "Freddie." Santoro testified that they signed blank notes after Freddie assured him that "Truelove was aware of all that was going on and that all that was needed was his signature." This apparently led Santoro to believe that CNB had preapproved of the Great Rings investment. 10

Robert Rosa testified that he had learned about Great Rings through William Zak, with whom Rosa was familiar from prior investments in Colonial. William Zak told him that CNB had endorsed the investment and would provide financing for the venture. Although it is unclear whether Rosa provided CNB with a personal financial statement, Truelove gave Rosa a note to sign without discussing its terms. Prior to this transaction, Rosa had never met Truelove nor conducted business with CNB, but told Truelove that he was confident in the investment...

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