Bernard Madoff's investor fraud took the Ponzi scheme to a new level, but it wasn't so long ago that Connecticut had its own infamous fraud case tied to some of Hartford's most well-known real estate: Colonial Realty Co.
And in the two decades since Colonial's collapse, Robert Ficeto's memory of being one of Colonial's 6,800 burned investors is still fresh.
"They were already established, and they had turned real estate deals that had made money," Ficeto said, in a recent interview. "What we found out later, it was only good if they could sell the next deal."
Colonial's monumental unraveling came just one deal after Ficeto took a $50,000 stake in an office building at the corner of Asylum and High streets in downtown Hartford.
"Then came Constitution Plaza that they couldn't sell," Ficeto said. "Then the house of cards came down."
Throughout much of the 1980s, Colonial three partners — Jonathan N. Googel, Benjamin J. Sisti and Frank M. Shuch — sold $350 million worth of shares in various real estate syndication deals. Colonial would purchase the properties with bank financing, then seek investors. In return, investors would earn dividends and, in theory, could sell their shares in a specified number of years.
What investigators later found out was something quite different: The deals were designed to generate commissions and bank loans for Colonial's top brass, but not profits for investors.
Colonial paid too much for the properties, squeezed out too much in fees, borrowed too much from banks — and then kept repeating the pattern to cover other losses. Colonial falsified financial statements and those of its investors to keep the cash flowing.
The investments were never meant to be sold to truck drivers, school teachers and landscapers — or to people like Ficeto, then business manager for Waterbury's school system. Buyers were supposed to have annual incomes of $200,000 and net worths of at least $1 million. But many did not.
Multiple attempts to reach Googel and Sisti for this story were unsuccessful.
In retrospect, Colonial's promises of guaranteed returns of up to 300 percent now sound dubious, Ficeto said. But remember, he says: Donald Trump was among the investors, and Arthur Andersen & Co., then the world's largest accounting firm, deemed the investments reasonable.
"Colonial Realty was king," Ficeto said.
A $1 Billion Real Estate Empire
In the late 1980s, Colonial Realty and its partners became known for their lavish lifestyles, including fancy cars, parties that spared no expense, Italian designer suits and, in Sisti's case, the building of a $2.7 million, 31-room mansion on 21 acres in Farmington. In today's dollars, the Sisti house — now owned by rapper 50 Cent — would have cost nearly $6 million.
Sisti entertained on a 93-foot yacht, named "Family Ties" with four plushy carpeted staterooms, three Jacuzzis and a bar stocked with Dom Perignon champagne. The boat cost $2.5 million.
Beyond real estate, Colonial owned a 37 percent share in the Hartford Whalers hockey team.
Colonial became so high-profile that the city of Hartford closed down Lewis Street during rush hour in 1988 to accommodate the company's annual Christmas party. Colonial needed the street to park "20 or so" stretch limousines to shuttle guests to the now-demolished Parkview Hilton two-tenths of a mile away.
A Hartford real estate broker who attended one of Colonial's Christmas parties described the event as outrageous.
"I've never seen so much food stacked out in my life; it was appalling," the broker told The Courant in 1987. "It must have cost in the six figures."
But what caught the most attention were Colonial's deals.
Colonial purchased One Financial Plaza — the Gold Building — in downtown Hartford for $117 million in 1986, far in excess of what real estate experts believed the city's signature corporate address was worth. Yet, Colonial raised $27 million in 17 days from individuals willing to pay at least $50,000 to own an interest in the Gold Building. Originally, it was supposed to take 60 days.
It was, at the time, the largest private fundraising in the state, accomplished in the shortest amount of time.
And Colonial took about $13 million in fees in the process.
The Gold Building deal, and another one that quickly followed for Metro Center One, also in downtown Hartford, catapulted Colonial's founders into the limelight from the relative obscurity in which they had operated for 21 years. In that time, Googel, Sisti and Shuch had amassed estimated personal fortunes of $75 million and kept iron-hand control over a real estate empire of $1 billion.
In its heyday, Colonial owned 25,000 apartments and 4 million square feet of office, hotel and retail space in 18 states. At that time, chances are if you ever shopped in the Hartford area, lived in an apartment in Connecticut, worked in an office building or parked your car in downtown Hartford, you had been in a project owned by Colonial Realty.
Vacuuming The Hallways
The excesses of Colonial Realty belied the company's modest roots and its legitimacy in the early years.
Googel and Sisti, boyhood friends who delivered newspapers together, bought their first real estate in 1966 — a small apartment building in New Britain where they had grown up — using money borrowed from their families.
They couldn't afford an office, so they hired an answering service which they checked from a telephone booth near an old hotel in downtown New Britain. They vacuumed hallways themselves, and Sisti, with a little background as an electrician, did electrical work. They mowed lawns and plowed snow, collected the rents and leased the apartments.
By the late 1980s, Colonial's founders had moved their offices to West Hartford, employed 600 and purchased the old telephone booth as a souvenir for their new digs.
Shuch joined Colonial in 1981, recommended by his brother-in-law, an accountant at Arthur Andersen. Four years later, Shuch became chief financial officer and partner, a reward for increasingly lucrative real-estate syndication deals in the midst of a booming real estate market.
Ficeto, now 54, said he won't ever forget the party Colonial hosted at a hotel in Southbury for potential investors.
"They rolled out the red carpet," Ficeto said. "There literally was a red carpet. They had the finest food you could think of: caviar, venison, lobster and the best of liquor."
In one room, there was a film recounting the company's story, with footage of Colonial properties shot from helicopters. They threw around names like Donald Trump and Arthur Andersen. The politically connected Colonial executives counted then-Gov. William A. O'Neill, among their friends and investors.
"They knew how to make you comfortable," Ficeto said.
Before Ficeto invested in the partnership that included Capitol Center, at the corner of Asylum and High streets, Colonial pulled out all the stops. How could the building not make money? It is a block from the train station and across from the state Capitol, and its vacancy was in the single digits.
It was not unlike buying a timeshare, Ficeto said.
Ficeto agreed to buy a $50,000 stake, putting up $10,000 to start and agreeing to pay the balance in installments later.
"They operated on a sales technique that before you left, they wanted to get you signed up," Ficeto said. "To the average investor, it looked like they couldn't lose money."
Forced Into Bankruptcy
Colonial acquired Constitution Plaza in 1988, and the following year launched its largest public offering ever. But unlike the rush for the Gold Building, the offering for Constitution Plaza soon ran into trouble.
By November 1989, Colonial missed its projected date for selling $60 million worth of shares in the property, selling only 25 percent of the offering. Interest rapidly piled up on a major bank loan. About the same time, Ficeto and other investors were told that their first annual dividend from their investment in Capitol Center wouldn't be coming — it needed to be reinvested.
"It was a pyramid scheme. They needed fresh money to keep promises," Ficeto said.
A second offering for Constitution Plaza in February 1990 didn't do much better, as the downward spiral of New England commercial real estate picked up velocity. Colonial concealed from investors millions of dollars in revenue shortfalls for the project.
In September, six banks forced Colonial into involuntary bankruptcy, saying they were owed $40 million. A lawyer for one bank said the lender had lost faith in the company and in Colonial's insistence that it wasn't trying to hide assets from creditors.
A month later, Googel told about 1,100 investors gathered at the University of Hartford that Colonial would work through its troubles.
"We're here to let you take a look so you realize we haven't run, we're not hiding, and we want you to experience how hard we are working," Googel told the crowd.
Few investors took solace, The Courant reported. "It was all a show," one investor's representative told the paper. "It wasn't spontaneous and we couldn't get any real answers."
Despite their reassurances to investors, Sisti and Googel were finally forced to give up control of the company, leaving a trustee to sort it all out.
The bankruptcy touched not only investors but rippled far beyond. Towns such as Manchester worried about pension funds invested in Colonial. New Britain was concerned that a joint building project with Colonial could mean the loss of nearly a half million dollars for the city. And employees at the Summit Hotel on Constitution Plaza, closed by Colonial just before the bankruptcy petition, lost severance pay.
The demise of Colonial also deepened a growing banking crisis in New England, led by troubled commercial real estate loans. Close ties to Colonial accelerated the failure of such longtime lenders as Bridgeport-based Citytrust.
Shuch, the chief financial officer, was indicted on 40 counts of misappropriating millions of dollars of Colonial funds, fraud and racketeering. Prosecutors alleged that Shuch fabricated documents to attract more investments and bank loans. He pleaded not guilty.
In 1992, just three months before he was to stand trial, Shuch pulled a plastic bag over his head in his mansion atop Avon Mountain in West Hartford and committed suicide. He had learned that prosecutors, who believed he embezzled $15 million and considered him the principal wrongdoer, would not offer him an attractive plea deal.
"The collapse of Colonial Realty became my collapse, my family's collapse; five or six thousand limited partners stand to lose hundreds of millions of dollars," Shuch said, in an interview with The Courant two months before his death. "There's not much to laugh about anymore."
Cooperation And Prison
In the aftermath, Sisti and Googel were vilified by investors, but to win leniency, they cooperated with everyone — the FBI, IRS, U.S. attorney and the investors.
With Sisti and Googel bankrupt, investors turned their anger over their losses against Arthur Andersen. The firm, which helped Colonial to prepare 18 syndication deals for sale to the public, was accused of misleading them about the soundness of Colonial's investment deals. In effect, they claimed the Hartford office of the firm was a willing accomplice to Colonial.
An investigative series by The Courant exposed unusually close ties between some Andersen consultants and Colonial. It also disclosed that projections for Constitution Plaza were based on fabricated, overly optimistic figures. The series touched off investigations by federal authorities and the state attorney general's office.
The collapse eventually spawned 3,000 lawsuits.
A highly critical report in 1993 by then-Attorney General Richard Blumenthal provided evidence that Andersen failed to adequately apply accounting standards in its work for Colonial and that its independence was compromised by employees who accepted cash, gifts and trips from Colonial's principals.
Andersen agreed to three major settlements in the case over a six-year period, totaling $104.6 million, but did not admit to wrongdoing. The largest was $90 million that returned some money to qualified investors in 1999: 46 cents for each dollar invested.
Sisti's estate in Farmington was auctioned in a foreclosure sale, and the yacht was repossessed. The contents of Colonial's West Hartford offices were sold off as well; the phone booth went for $300.
Sisti and Googel served sentences for fraud. Both entered federal prison in 1995; Googel was released in 1999, and Sisti in 2003.
In 2005, Googel secured a license to sell real estate again in Connecticut. But after a public outcry, he surrendered the license.
Arthur Andersen survived Colonial, but its downfall would come just a couple of years later as auditor for another failed company, Enron, also caught up in a financial scandal.
Ficeto said he was young enough that he recovered from his lost investment. But others, he said, lost savings for college and retirement.
Even now, though, Ficeto is still irked by the fact that Sisti, Googel and Shuch continued their flamboyant lifestyle even when the company was sliding into insolvency.
"We were asked to give back our dividend," Ficeto said. "What did they give back?"Copyright © 2015, CT Now