Misdeeds at USA Capital Won't Fall to Auditor
(CN) - Deloitte & Touche cannot be held responsible for the misdeeds that bankrupted Las Vegas-based mortgage broker USA Capital, the 9th Circuit ruled.
"No petitions for rehearing and/or rehearing en banc will be entertained," the stern Tuesday decision warns.
USA Commercial Mortgage Co., more popularly known as USA Capital, had described its Chapter 11 bankruptcy filing in 2006 as "a major step toward restoring the confidence of all interested parties that our restructuring efforts will be successful."
The Las Vegas Review Journal subsequently reported that, at the time of the filing, USA Capital had 6,500 investors, and was managing more than $962,000 in investor assets - making it the largest bankruptcy case in Nevada history.
More than that, the bankruptcy revealed a variety of questionable misappropriations made by USA Capital executives Joseph Milanowski and Thomas Hantges.
At the heart of the issue was a "diversified fund" that the fund created in May 2000, two years after the company's founding, to make secured loans to real estate developers, the Las Vegas Sun reported. Interest on the loans was reportedly supposed to go to investors.
Milanowski and his executives allegedly made assurances that no loans would go to company insiders, that no loan would exceed 15 percent of the value of the fund, and that the fund would not loan more than 25 percent of its money to a single borrower.
Prosecutors soon learned, however, that Milanowski had created a loan on April 15, 2002, known as the "10-90 loan," which he used to fund private developments and investment projects for himself and other company insiders and affiliates.
Between March 27, 2003, and Nov. 12, 2004, Milanowski transferred about $22 million to 10-90 Inc. and to another entity he controlled to fund his own development projects - all the while concealing the existence of the fund, the Las Vegas Sun reported.
With the government suspecting that Milanowski was running a Ponzi scheme, the executive claimed that three master-planned communities in Southern California secured the 10-90 loan. Prosecutors soon determined this was not true.
The insolvency did not put an end to the shenanigans, and a bankruptcy judge later found that USA Capital paid a reputed associate of mob boss John Gotti $4 million, wrongfully putting him ahead of its other creditors.
Bankruptcy Judge Linda Riegle ordered Salvatore Reale, the reputed Gotti associate, to return the money to the trustee for the unsecured creditors of the firm.
Milanowski ultimately received a 12-year prison sentence for his activities and was ordered to pay $86.9 million in restitution to more than 1,000 victims for his guilty plea to one count of wire fraud.
The bankruptcy litigation trust established as part of Capital USA's bankruptcy filing blamed the USA Capital's former outside auditor, Deloitte & Touche, for the misdeeds in an April 2008 federal complaint.
Senior U.S. District Judge Philip Pro granted Deliotte & Touche summary judgment, holding that Nevada's "sole actor" rule requires imputing the alleged actions of Milanowski and Hantges to USA Capital.
This is so even in those instances where an agent of a company completely abandons the firm's interest in carrying out his deeds, so long as "the corporation and its agent are indistinguishable from each other," he wrote.
A three-judge panel of the 9th Circuit affirmed Tuesday.
Because Pro properly imputed the misconduct of Hantges and Milanowski to USA Capital, the court also properly granted summary judgment to Deliotte on its motion asserting the trust's claims were time-barred, the ruling states.
"Since knowledge of Hantges' and Milanowski's fraudulent schemes is imputed to USACM, the company would have discovered that Deloitte failed to expose those schemes in its 2000 and 2001 fiscal year audits - in alleged contravention of its contractual and professional obligations - no later than the date Deloitte completed those audits on June 28, 2001 and November 26, 2002," Senior U.S. District Judge Marvin Garbis wrote for the court, sitting by designation from Maryland.
This means that the two-year limitation period for the trust's accounting-malpractice and breach-of-contract claims expired on June 28, 2003, and November 26, 2004 - well before the trust filed its petition.
"With regard to the aiding and abetting breaches of fiduciary duty claim, USACM would have discovered Deloitte's failure to report and/or affirmative cover-up of Hantges' and Milanowski's fraudulent schemes no later than when Deloitte terminated its services with USACM in January 2003," Garbis wrote.
As a result, the three-year limitation of those claims expired in January 2006, again well before the trust's petition was filed.
"The district court correctly decided that there should be no concealment-based tolling of limitations because Deloitte could not have concealed from USACM that which USACM knew based upon the imputation of Hantges' and Milanowski's knowledge to USACM," Garbis wrote.