Butler County Judge Awards $102.7 Million Against Ernst and Young for Accounting Failures Tied to Seven Fields Ponzi Scheme

In the early 1970s, a group of corporations controlled by Thomas Reilly began selling fractional investment interests in townhouse units at Canterbury Village, a real estate development in Seven Fields, Butler County, Pennsylvania. The companies, including Earned Capital Corporation and Managed Properties Inc., promised investors guaranteed annual returns. Instead of funding those payments from rental income, the enterprises relied on money from new investors to pay old ones. By the time the scheme collapsed in 1986, when no new investors were coming in, roughly 2,500 people had been defrauded of tens of millions of dollars. Thomas Reilly was convicted of 23 felony counts in 1992.

When the debtor corporations filed for Chapter 11 bankruptcy in June 1986, the bankruptcy court brought in Arthur Young and Company, which later became Ernst and Young, to examine the books and prepare financial schedules. The firm determined the debtors were insolvent and calculated obligations to investors. On the basis of those findings, a reorganization plan was confirmed in October 1987. Under the plan, investors received stock representing only about 5 percent of what they were owed; the remaining 95 percent was classified as unsecured debt that went largely unpaid.

Barbara Reilly, a 50 percent owner of Canterbury Village stock, filed a civil action against Ernst and Young and the firm's accountant Charles Modispacher in Butler County. Her claims centered on negligence and fraudulent misrepresentation: she alleged that the firm had 'mischaracterized substantial equity as debt' and failed to accurately identify which assets belonged to which of the four debtor corporations. That accounting malpractice, she argued, caused her to lose the full value of her ownership interest and left her without the recovery she would otherwise have received.

The case went to a non-jury trial before a Butler County judge, conducted across August, September, and October 2002. Earlier in the litigation, after Ernst and Young refiled its answers to the plaintiffs' requests for admissions but left off one attorney's verification signature, the trial court imposed a sanction deeming those requests admitted against the firm. On November 19, 2003, the judge entered a verdict for Barbara Reilly of $102,718,989. The court denied relief to Thomas Reilly separately, finding that his own misconduct in running the Ponzi scheme had caused the circumstances underlying his claims. Victor Pribanic of Pribanic and Pribanic was among the attorneys who represented the Reilly plaintiffs at trial.

Ernst and Young appealed to the Pennsylvania Superior Court. In a July 2007 opinion, the appellate panel vacated the verdict and remanded for a new trial. The court held that the discovery sanction, deemed admissions across the board, was disproportionately severe for the violation at issue. What became of the case on remand has not been reported in available public records.