Providence County Superior Court
For Plaintiff: Thomas F. Holt, Esq. Joseph J. Rodio, Esq. Christopher J. Valente, Esq.
For Defendant: Robert C. Shindell, Esq. Derek M. Gillis, Esq. Stephen Adams, Esq.
Before the Court for decision is Defendant Restivo Monacelli, LLP's (Restivo) Motion for Summary Judgment pursuant to Super. R. Civ. P. 56 as to Counts I and II of Plaintiff Rhode Island Resource Recovery Corporation's (RIRRC) More Definite Statement (MDS). In its initial Complaint, RIRRC had alleged five counts against Restivo; however, pursuant to an Order of the Court on March 6, 2014, Counts III, IV, and V of the Amended (Restated) Complaint were stricken. Count I of the MDS alleges a cause of action for professional malpractice and Count II alleges breach of contract.
Additionally before the Court are several Motions to Strike filed by each party, respective to the following documents: RIRRC has moved to strike the Affidavit of Kevin Hundley (Hundley), eleven "unauthenticated documentary exhibits, " and certain statements regarding RIRRC's engagement of Carlin, Charron & Rosen (CCR); Restivo has moved to strike the Affidavit of Jerry DeNigris and portions of the Affidavit of Joseph Centofanti.
I Facts and Travel
The basic facts of this matter were previously recounted by this Court in a Decision filed on May 13, 2011 on Restivo's Motion to Dismiss, or in the alternative, Restivo's Motion for More Definite Statement. Accordingly, the Court presents only those facts required for context and supplements those facts as necessary to decide the instant Motions.
RIRRC, formerly known as the Rhode Island Solid Waste Management Corporation (RISWMC), is a quasi-public corporation established by an enactment of the General Assembly in 1974 to operate and manage the Central Landfill in Johnston, Rhode Island. See MDS ¶ 1. On March 13, 2008, the Rhode Island Bureau of Audits (Bureau) issued its Summary of Findings on RIRRC following the Bureau's preliminary forty-five day examination commenced as a result of RIRRC's Chief Executive Officer Michael J. OConnell's (OConnell) letter to Governor Donald L. Carcieri questioning RIRRC's past and present practices with respect to several areas of concern. See Steven P. Wright Aff. Ex. L, Nov. 14, 2014. The Summary of Findings indicated that certain irregularities and appearances of impropriety existed as to the current and former Commissioners and employees of RIRRC and with respect to certain charitable contributions, real estate transactions, and trust fund issues. See id. On September 22, 2009, the Bureau released a more comprehensive report based on a forensic examination of RIRRC concluding that RIRRC, during the relevant time period, engaged in, inter alia, numerous instances of wrongful conduct. See Wright Aff. Ex. M.
In response to the Bureau's findings, RIRRC commenced several lawsuits encompassing a variety of allegations against different entities, including the instant matter against Restivo. Specifically, RIRRC alleges that Restivo breached its professional and contractual duties to RIRRC by failing to, among other allegations, uncover and report RIRRC's alleged violations and other wrongdoing pertaining to three main areas: (a) continued engagement of the Van Liew Trust Company (Van Liew); (b) multiple real estate purchase transactions; and (c) charitable contributions made by RIRRC.
A RIRRC's Agreement with Restivo
According to RIRRC, Restivo, a Rhode Island certified public accounting and business advising firm, was retained to perform the following:
"(1) audit the financial statements and prepare reports for the fiscal years ending June 30, 2006 and June 30, 2007; (2) conduct semiannual reviews and prepare reports for the six months ending December 31, 2006 and December 31, 2007; (3) audit financial statements and prepare reports in connection with RIRRC's Money Purchase Pension Plan for the years ending December 31, 2006 and December 31, 2007; and (4) provide advice, direction, and encouragement to RIRRC's Board of Commissioners and other RIRRC managers and employees with respect to all aspects of RIRRC's finances, internal control, fund and asset management, and business directions." Restivo, 2011 WL 1936010, at *1; see also Hundley Aff. ¶ 2, Oct. 9, 2014.
In August 2006, RIRRC and Restivo entered into a written agreement (Agreement) for Restivo to provide accounting and auditing services to RIRRC for the term of August 1, 2006 to June 30, 2009. See Wright Aff. Ex. S. The Agreement contemplated financial statement audits for fiscal years 2006 and 2007, as well as 2008 at the option of RIRRC; however, Restivo's engagement was terminated on June 24, 2008. See Hundley Aff. ¶ 2; OConnell Aff. Ex. C, Nov. 14, 2014. The Agreement expressly incorporated by reference nine specific documents (collectively, Procurement Documents), which included the initial Invitation for Bids for Accounting and Auditing Services (IFB No. 741) dated May 3, 2006. (Wright Aff. Ex. S at 1). Included within IFB No. 741 was the requirement that the audit be conducted "in accordance with the standards for financial audits contained in 'Government Auditing Standards' issued by the Comptroller General of the United States." Id. at 10. Moreover, the scope of the audit mandated:
"The annual audit of the Agency [to] be conducted in accordance with generally accepted auditing standards [GAAS], as established by the American Institute of Certified Public Accountants [AICPA] and with the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Additionally, the semiannual reviews shall be performed in accordance with Statements on Standards for Accounting and Review Services issued by the [AICPA]." Id. at 11 (emphasis in original).
In correspondence from Restivo to RIRRC, Restivo further stated that it is "familiar with generally accepted accounting principles [GAAP] for state and local government units and with the [GAAS] promulgated by the [AICPA] . . . and will conduct the audit and will report in accordance with those standards." Id. at 120. The correspondence also indicated that Restivo will notify the Auditor General and Director of Administration if it becomes aware of "fraud, abuse, or illegal acts or indications of such acts affecting the agency." Id.
Once retained, Restivo proceeded to provide its auditing and accounting services to RIRRC, including delivering to RIRRC its financial statement audits for the fiscal years 2006 and 2007, each entitled Independent Auditors' Report. See Wright Aff. Exs. T, V. In its reports, Restivo again noted its compliance with the auditing standards generally accepted in the United States and those standards applicable to financial audits in Government Auditing Standards. Id. Exs. T, V. As noted above, Restivo was terminated prior to issuing a financial statement audit report for fiscal year 2008, which was subsequently performed by CCR. See OConnell Aff. ¶ 7, Ex. C.
As explained, there were three main areas of alleged abuses occurring at RIRRC for which Restivo is alleged to be liable based on certain failures. The Court will describe each of those areas in turn.
B RIRRC's Engagement of Van Liew
Van Liew is a Rhode Island corporation that is authorized by the Rhode Island Board of Bank Incorporation to engage in the business of a trust company. See R.I. Res. Recovery Corp. v. Van Liew Trust Co., No. PC-10-4503, 2011 WL 1936011, at *1 (R.I. Super. May 13, 2011) (Silverstein, J.). Van Liew was retained by RIRRC as its investment manager for its trust funds-the Central Landfill Remediation Trust Fund (EPA Trust Fund) and EPA Closure Trust Fund (Closure Trust Fund)-as well as to serve as the pension fund manager for the Money Purchase Pension Plan (Pension Plan). See id. During Van Liew's retention, it was ultimately discovered that John St. Sauveur (St. Sauveur), a member of RIRRC's Board of Commissioners, was also a member of the Board of Directors of Van Liew, thus presenting an improper conflict of interest. See id.; see also Jerome Williams Dep. 53:10-54:18, July 19, 2012. Ultimately, Van Liew was terminated by RIRRC from its roles with the Pension Plan in December 2007 and the EPA Trust Fund in January 2008. See Van Liew Trust Co., 2011 WL 1936011, at *2-4.
According to RIRRC, as set forth in its Second Amended Supplemental Responses to Defendant Restivo's Interrogatory No. 6, Joseph Centofanti (Centofanti), a Certified Public Accountant (CPA) and Forensic Certified Public Accountant (FCPA), is expected to testify regarding Restivo's alleged failures in testing compliance with respect to the management of certain trust funds. See Expert Disclosures 6; see also Centofanti Aff. ¶ 21, Nov. 14, 2014 ("Restivo should have treated RIRRC's compliance with the closure/post-closure trust fund agreements and the investment policy(ies) governing those trusts. Material non-compliance with these audit areas could have had a direct and material effect on the RIRRC's financial statements."). Moreover, RIRRC alleges "[t]esting for compliance with the EPA Consent Decree should have included a review of the trust funds and the related investment requirements, including those contained in RIRRC's investment policies . . . ." (Expert Disclosures 6). Accordingly, OConnell, through affidavit, opined that "[h]ad Restivo informed me of the scope and nature of Van Liew's departure from RIRRC's investment policy, I would have addressed and ultimately ameliorated this non-compliance sooner, thereby preventing further losses." (OConnell Aff. ¶ 12). On the other hand, Hundley, a CPA and a partner in Restivo, averred that Restivo was not engaged to audit the trust funds to conform with EPA Consent Decrees; however, as part of its financial statement audits, did confirm that the EPA Trust Funds were invested in accordance with RIRRC's investment policy in effect during that time. See Hundley Aff. ¶ 7.
RIRRC also contends Restivo was not in possession of any documentation relating to any investment policy, i.e., the Investment Policy – Trust Funds (the Investment Policy) dated June 29, 1999. Centofanti Aff. ¶¶ 22-23; see also OConnell Aff. Ex. D. The Investment Policy allegedly in effect in 2006, as RIRRC notes, required prior approval by the Board of Commissioners to purchase individually selected equity securities, a fact that RIRRC argues should have prompted Restivo to inquire further into Van Liew's engagement. See Centofanti Aff. ¶¶ 24-26. DeNigris stated that, based on a series of contested calculations to be discussed below, Van Liew's allegedly improper departure from RIRRC's investment policy resulted in a loss of $2, 551, 052. See DeNigris Aff. ¶¶ 1-2. But see David Truesdell Aff. ¶¶ 4-5, 11, Oct. 8, 2014 (negating any actual losses caused by Restivo with respect to continued engagement of Van Liew based on alternate theory of calculations of DeNigris' data).
C Land Purchase Transactions
Among the host of issues brought to light in the Bureau's reports regarding RIRRC's alleged improper activity, the Bureau found that RIRRC had purchased several properties at highly inflated prices, over their market values, which led to significant costs associated with the environmental remediation efforts for those properties. See MDS ¶¶ 47-48; see also Wright Aff. Exs. L, M (noting, of the ten properties highlighted in the report, six were purchased at "prices exceeding market comparable statistics, " and the other four required remediation or had questionable appraisal values, which led to those purchase prices being effectively rendered above market comparable statistics). All of these land purchases occurred prior to Restivo's engagement by RIRRC. See OConnell Dep. 142:6-9, May 23, 2012 (hereinafter OConnell Dep. III). In addition, the Bureau discovered, inter alia, several instances of transactional issues regarding conflicts of interest. See Wright Aff. Ex. M at 4, 31-39.
RIRRC, in its Expert Disclosures, alleges "Restivo failed to appropriately test and report the value of the land held for development by RIRRC." (Expert Disclosures 4). According to Centofanti, "[l]and is classified depending on whether it is: (a) used in operations; (b) held for development; or (c) held for sale. This classification, in turn, dictates how the value of the land is reported in the financial statements. The classification also controls the type of audit procedures to be used in testing the carry value of the land reported." (Centofanti Aff. ¶ 28). Accordingly, Centofanti concludes that the land owned by RIRRC was misclassified as land held for development as opposed to land held for sale. See id. ¶¶ 29, 33. This misstatement and misclassification of approximately seventy acres of land, as RIRRC states, resulted in an overstatement of its total assets and net assets. See RIRRC's Obj. and Resp. to Restivo's First Set of Interrog. No. 2 at 16. As stated in CCR's financial statement audit for fiscal year 2008, "[t]he reclassification . . . of land from 'held for development' to 'held for sale' should have been made in FY07, and therefore [RIRRC] has restated and reduced its June 30, 2007 net assets by almost $14 million to reflect the write-down of the land from its cost basis to its net realizable value." (OConnell Aff. Ex. E at 5).
Based on this conclusion, however, Martin W. Terpstra (Terpstra), a CPA and Certified Fraud Examiner, avers that "[a] restatement of land values does not constitute a realized loss." (Terpstra Aff. ¶ 8). Moreover, Terpstra explains that it is the responsibility of management to value the land whereas it is the auditor's responsibility to determine whether that valuation is fairly presented in the financial statements. Id. at ¶ 7. Restivo asserts that such a change in value could have been caused by either changes in market conditions or any other plausible factor.
D Charitable Contributions
As set forth in the MDS, RIRRC, over the course of several years, made a series of charitable contributions that totaled at least $2, 100, 000, of which approximately $585, 000 was donated during Restivo's tenure. (MDS ¶ 23). According to James M. Walsh (Walsh), Controller at RIRRC, in October 2007, OConnell tasked Walsh with a special project to track RIRRC's donations made by the Agency for the past five years. See Walsh Dep. 24:22-25:19, Aug. 28, 2012. Pursuant to that assignment, Walsh recorded all charitable donations and recycling grants made by RIRRC onto a spreadsheet. See id. at 26:2-24; see also Restivo's Ex. Q (listing contributions, donations, and sponsorships made by RIRRC from April 2, 2002 to June 30, 2007). OConnell testified that several prior charitable contributions raised his concern, including contributions for golf outings. See OConnell Dep. 144:20-145:17, Mar. 14, 2012 (hereinafter OConnell Dep. I).
RIRRC's approved budget for advertising and public relations services amounted to at least $1 million per year. See Restivo's Ex. F. According to Hundley:
"All charitable contributions made by RIRRC were approved by the Board of Commissioners in open meetings or RIRRC management or by authorized RIRRC financial personnel in the ordinary course. Each was allocated to internal accounts ordinarily used by RIRRC in the ordinary course of its business and disclosed to its auditors. Charitable contributions approved by the Board in open meetings are transactions in the ordinary course of business and are not signs or indicators of fraud or abuse or illegality." Hundley Aff. ¶ ...