Home >  Local News >  Neighborhoods

Sunday, August 25, 2002

By Karen Kane, Post-Gazette Staff Writer

Thomas J. Reilly, convicted for his role in bilking thousands of investors in a Butler County real estate scheme, will be back in a courtroom tomorrow.

This time, he won't be sitting in the defendant's chair.

Reilly served about four years in prison in the 1990s for fraud and tax evasion. Now he is the plaintiff in a high-stakes lawsuit targeting the Pittsburgh accounting firm Ernst & Young, which he blames for the bankruptcy of four companies involved or connected with development of what is now Seven Fields Borough.

It is a trial that promises to be unusual both for its high stakes and its length; Reilly is claiming damages of more than $100 million, and the calendar of Butler County Common Pleas Judge Michael Yeager has been cleared for three weeks, with court officials believing that more time may be needed. Testimony begins tomorrow.

Reilly, 63, has spent weeks in courtrooms, both as a criminal defendant during tax evasion and fraud trials and as a civil defendant targeted by those who claimed financial ruin at his hands.

Now he stands on the accusing end.

It's a complex case, and the dozen or so attorneys involved have been ordered not to talk about it outside the courtroom. But the case files -- a nearly 5-foot stack of documents -- can be summarized like this: Reilly blames his companies' old accountant for just about all of his legal troubles.

The case has been brewing since Jan. 8, 1997, when Reilly filed suit. The years since have featured numerous filings and responses, a paperwork battle that will culminate in a nonjury trial before Butler County's newest judge.

The relationship between the accountant and Reilly and his wife, Barbara L. Reilly, began in May 1986, when Ernst & Young was hired by four companies: Earned Capital Corp., Canterbury Village Inc., Management Properties and Eastern Arabian.

The Reillys were principal shareholders in both Eastern Arabian, a firm that owned, bred and trained Arabian horses on the land owned by Canterbury Village Inc., and Canterbury Village Inc., which owned and was developing the 550 acres now known as Seven Fields.

The purpose of Earned Capital Corp. was to raise capital for development of the property owned by Canterbury Village. Management Properties collected rent from townhome dwellers in the burgeoning development.

Ernst & Young officials eventually testified in bankruptcy court that none of the four companies was solvent.

Big mistake, contends Reilly. He says the accounting firm understated the corporations' value and overstated their liabilities.

The result of the bankruptcy proceedings, which began in 1986 and didn't reach a conclusion for nearly 10 years, was a court-ordered consolidation of the four companies and their reincarnation as Seven Fields Development Corp. Ownership and assets of the new corporation were divided among 2,500 shareholders who had invested $57 million in Earned Capital Corp., persuaded by unrealistic promises of big returns.

Reilly, a builder from McKeesport who maintains homes in Cranberry and Florida, lost most of his assets under the bankruptcy reorganization, which he blames on Ernst & Young.

Ernst & Young contends that Reilly released all claims when he signed an agreement to settle a civil suit in federal court in November 1995. Furthermore, the defense contends that the strategy to seek bankruptcy protection for the four companies was decided before Ernst & Young was hired, and that the strategy was drafted by Robert Cindrich, then an attorney for the troubled companies.

Cindrich, now a federal court judge, will testify for Reilly via videotaped deposition.

Though the lawsuit boils down to whether the accountant is guilty of malpractice, Reilly's mottled history is referenced.

Leaping out of the hundreds of pages of court documents is an excerpt of arguments made by James Garrett, a federal prosecutor, in which he describes Reilly as the central figure in a "Ponzi scheme" that operated from 1976 to 1986.

Many of the 2,500 investors were retirees, persuaded to fork over their money in exchange for what they were told would be guaranteed annual returns of up to 13 percent through Earned Capital Corp. While they believed they were investing in townhouses and condos, their "earnings" were actually dollars collected from new investors.

The scheme collapsed of its own weight in 1986, when officials associated with the four Seven Fields companies decided to file for bankruptcy and to report their troubles to the Securities and Exchange Commission.

Criminal investigations ensued and Reilly and several others were indicted. Reilly's first trial, in 1991, ended after 17 weeks with a hung jury. The second trial, in 1992, ended after five weeks with his conviction on 23 felony charges. He was found to have induced investors to file false tax returns and provide the IRS and Pennsylvania Securities Commission with false information and documents.

He was ordered in July 1993 to serve six years for the fraud conviction. A few months later, he was given a five-year sentence for tax evasion after a plea agreement. A portion of the sentences were served concurrently and Reilly was freed from prison in 1997.

He could not be reached for comment, but in interviews at the time of his court cases, he maintained his innocence and insisted that the Seven Fields community was a potential "gold mine" for investors.

Seven Fields Development Corp. recently was dissolved when the remaining undeveloped land in the borough was sold to two other real estate companies. In the end, investors recovered no more than a third of their original investments.

Karen Kane can be reached at kkane@post-gazette.com or 724-772-9180.