A Johnstown accounting firm is off the hook, for now, in a lawsuit filed by two Fulton County economic development agencies seeking to recover $3.1 million in performance bonuses they claim were obtained fraudulently by their former executive directors.
State Supreme Court Judge Richard Aulisi’s decision removed Dorfman-Robbie Certified Public Accountants and John Olsen, a former partner and owner of the firm, as defendants in the lawsuit filed Sept. 9, 2011, by the Crossroads Incubator Corp. The lawsuit was amended Sept. 29, 2011, to add the Fulton County Economic Development Corp. as a plaintiff and former EDC executive Jeff Bray, former CIC executive Peter Sciocchetti and several other parties as defendants.
In his Nov. 5 ruling, Aulisi said the EDC and CIC failed to properly serve the accounting firm with the original complaint in a timely manner and that they needed the court’s permission to amend it to add new parties to the suit. He called these jurisdictional defects.
Aulisi ruled the EDC and CIC had to serve the defendants with the complaint within 120 days of filing it in court. The agencies had argued they did not need to serve the original complaint because they amended it and the amended documents were served in a timely and proper manner.
The judge’s ruling has, for the moment, no effect on the lawsuit against Bray and Sciocchetti. However, Michael Reese, president and CEO of the Fulton County Regional Center for Economic Growth, said Bray and Sciocchetti may file similar motions seeking dismissals.
Reese said the Center for Economic Growth is reviewing Aulisi’s decision and may file a new complaint against Dorfman-Robbie and the other defendants. The center became the parent corporation of the EDC and CIC earlier this year.
“We believe the complaint has merit, and we are looking at the judge’s decision and weighing our options whether to refile the complaint or appeal the judge’s ruling on this matter,” he said. “We will make a decision soon. We won’t delay.”
The CIC and EDC sued Dorfman-Robbie, which is now part of the Bonadio Group accounting firm, for negligence, malpractice, breach of contract and breach of fiduciary duty. The suit accuses Dorfman-Robbie of not informing the agencies about irregularities auditors found in the executive bonuses obtained by Bray and Sciocchetti. The agencies sought $3 million in damages from Dorfman-Robbie.
In the lawsuit, the agencies claim Dorfman-Robbie committed negligence and malpractice because the firm knew Bray and Sciocchetti were issuing themselves excessive bonuses, unauthorized by the agencies and in violation of their bylaws, and that they could have stopped the loss and helped recover $3.1 million.
The lawsuit contends Dorfman-Robbie breached its contract by “providing incomplete or misleading disclosures in the audited financial statements” regarding bonuses awarded to the executives.
According to court documents, Sciocchetti hired Dorfman-Robbie in June 2008 to determine whether the executives obtained any excess benefit from their bonuses as part of disclosure on the CIC’s IRS Form 990 in 2007.
“Dorfman determined that the bonuses were unauthorized by CIC and rather than communicate the information to the CIC board, Dorfman urged Sciocchetti to schedule a full meeting with the board to explain the correct situation and [Dorfman’s] concerns,” according to the lawsuit.
When Sciocchetti failed to comply, Dorfman terminated its contract through a letter, which was never shown to the board.
The lawsuit states “Dorfman knew or should have know that Sciocchetti and Bray were not acting in the best interests of CIC and were not likely to communicate Dorfman’s withdrawal to the CIC and board.”
Following disclosure of the bonuses, several government agencies began reviews of CIC and EDC, looking for irregularities.
In the same lawsuit against the accounting firm, the EDC and CIC also accused Bray and Sciocchetti of committing fraud, negligence, breach of contract, breach of fiduciary duties and conversion by awarding themselves bonuses without board approval. They are seeking to recover the bonuses, plus an additional $1 million in punitive damages from each man.
Bray served as EDC executive vice president and Sciocchetti as CIC executive vice president from 1999 to 2009. Both were fired in August 2010 following disclosure they awarded themselves bonuses between 2007 and 2009.
The agencies’ lawsuit contends Bray and Sciocchetti never disclosed to their respective boards that they were awarding themselves performance bonuses by signing each other’s bonus checks. They allege that the two men’s employment agreements, as well as their fiduciary obligations to CIC, prohibited unilaterally awarding themselves $3 million in performance bonuses.
The boards of directors of the CIC and EDC formed the Center for Economic Growth in December 2011 as a way to bring better oversight over the operations of both agencies. They established a single board to control both agencies and a single audit and finance committee to oversee all financial transactions of the three entities.
Under the old corporate structure, the EDC and the CIC operated independently of each other. Each had its own board, whose members did not communicate with one another frequently.
The center has since undergone a further evolution. It plans to dissolve both the EDC and CIC and has granted greater operational control to the Fulton County Board of Supervisors in return for receiving $75,000 in public funds for operations. The supervisors will appoint several members to the center board and will require the center to file audited financial statements annually.