In re Heritage Bond Litigation 01-CV-5752-Fifth Amended Consolidated Class Action Complaint

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT5AC 12-6-04.wpd

BRIAN BARRY #135631JILL LEVINE BETTS #208065KATHLEEN LANGAN #165816LAW OFFICES OF BRIAN BARRY1801 Avenue of the Stars, Suite 307Los Angeles, California 90067Telephone: (310) 788-0831Facsimile: (310) 788-0841

Attorneys for Class Action Plaintiffs[Additional Counsel on Signature Page]

UNITED STATES DISTRICT COURTCENTRAL DISTRICT OF CALIFORNIA - WESTERN DIVISION

IN RE HERITAGE BOND LITIGATION___________________________________

David Sinow, Howard Preston, Langdon Parrill, BarrettAnderson, Laurence Pilgeram, Scott McKenry, and RalphAllman, On behalf of themselves and all others similarlysituated,

Plaintiffs,v.

U.S. Trust Company of Texas, N.A., U.S. TrustCorporation, Jerold Goldstein, Onofrio V. Bertolini,Stephen P. Goodman, Evan Greenspan, Estate of AndrewKornreich, Deceased, Cary Medill, Estate of EmeryRubin, Larry A. Rubin, Herbert Saltzman, Virgil Lim,Clarke Underwood, Donald B. Chalker, Marshall Wexler,Robert Kasirer, Debra Kasirer, Bistra & MunkacsHoldings, Inc., JDDJ Holdings, L.P., Health CareHoldings, LLC, CareContinuum, LLC, Louis Pontarelli,William Filippone, Leo Dierckman, Alan Pollak, GeriOstlund, Richard Kuhl, James E. Iverson, Victor P.Dhooge, John M. Clarey, Edward J. Hentges, Kenneth R.Larsen, Jerome E. Tabolich, Steven W. Erickson, Paul R.Ekholm, Kenneth E. Dawkins, Joel T. Boehm, Sabo &Green, Atkinson, Andelson, Loya, Ruud & Romo, CBIZValuation Group, Inc., CBIZ Accounting, Tax &Advisory, Inc., Capital Consulting, Inc., HFS Consultants,Berman and Bertolini, Inc. aka Berman & Associates,Michael Sobelman, Sobelman Cohen & Sullivan LLP,Mark Roth as Doe No. 4, Century Business Services, Inc.as Doe No. 5 and Does 6-10,

Defendants.

02-ML-1475-DT (RCx)

Consolidated With CaseNos:CV 01-5752 DT (RCx)CV 02-382 DT (RCx)CV 02-993 DT (RCx)CV 02-6484 DT (RCx)CV 02-6841DT (RCx)CV 02-2745 DT (RCx)CV 02-9221 DT (RCx)

Companion CaseCV 02-6512 DT

This Document Relates To:

CV 02-382 DT (RCx)

FIFTH AMENDEDCONSOLIDATED CLASSACTION COMPLAINT

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT5AC 12-6-04.wpd 2

INTRODUCTION

1. Plaintiffs in this action have suffered approximately $100,000,000 in

damages as a result of eleven (11) municipal bond offerings, which raised

$131,500,000 between December 1996 and March 1999. The Official Statement

(“Official Statement” or “OS”) for each offering represented that the monies raised

in each separate bond offering were to be used to acquire, renovate and operate

former hospitals, in either Texas, Florida, Illinois or California, as facilities

(“Facilities”) designed to assist elderly persons (collectively referred to as the

"Heritage Facilities").

2. However, in an elaborate and nefarious Ponzi scheme, proceeds from

subsequent bond offerings were used to cover the cash shortfalls from prior bond

offerings. Under the scheme, devised and implemented by numerous individual

and institutional Defendants as specifically alleged below, inter alia, the

Defendants enriched themselves by:

a. improperly commingling bond funds and diverting bond

proceeds among supposedly independent Facilities;

b. engaging in prohibited related party transactions;

c. paying insiders excessive management and consulting fees; and

d. deceptively undervaluing construction and operating costs and

inflating revenue projections.

3. In addition, Defendants failed to make material disclosures in the

Official Statements including:

a. Robert Kasirer’s background in failed healthcare facilities and

his history of failing to pay for services and/or repay loans;

b. deed restrictions in the properties acquired;

c. related party transactions;

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


d. known risk factors;

e. the underwriter’s (Miller & Schroeder) loan of “seed money”;

f. lack of management experience;

g. prior and existing litigation;

h. reasonable property valuations; and

i. the nature of the construction contracts.

4. Moreover, the Defendants’ acts constituted classic negligence both

before and after the bond offerings:

a. attorneys, appraisers, municipalities and accountants failed to

perform reasonable due diligence and in certain cases de minimus due diligence;

b. Trustee U.S. Trust knowingly approved improper

disbursement requests;

c. Defendants failed to exercise reasonable care in the supervision

of employees and outside contractors;

d. Heritage Outside Directors routinely approved matters

presented to them without question and failed to perform due diligence;

e. architects and Officers of each the Heritage Entities (“Heritage

Entities”) failed to enforce contractual provisions relating to construction budgets

and deadlines; and

f. U.S. Trust failed to enforce bondholders’ rights.

5. Robert Kasirer (“Kasirer”) recruited trusted associates, loyal

employees, and lifelong friends to facilitate the scheme. Kasirer’s associates were

in active collusion to further Kasirer’s contrived scheme. Their various

connections to Kasirer, in addition to the profits they realized, made it less likely

that they would reveal the details of the illegal aspects of the enterprise.

Moreover, those who spoke out were terminated from their employ and

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1 See, Platt litigation discussion, paragraph 160.

2 As a result of his personal bankruptcy filing, Don King is not named inthis action.

3 For example, the General Ledger for Heritage Housing Development(“HHD”) for the period ending October 31, 1996 shows numerous payments toDebra Kasirer, Emery Rubin (“E. Rubin”) and Larry Rubin (“L. Rubin”) for‘consulting fees’ and a $603,573 loan receivable from Kasirer. According to the


ostracized.1

6. At least six of the Defendants (Emery Rubin, Louis Pontarelli, Leo

Dierckman, Don King2, Herb Saltzman, and Jerold Goldstein) participated in

Kasirer’s prior scams. At least four of these Defendants were sued, along with

Kasirer, for their part in these prior scams. In addition, Jerold Goldstein was

defense counsel in at least one of these cases. Significantly, the allegations and

facts of those cases were substantially similar to those of this case.

7. The Heritage Entities and Kasirer typically commingled funds

between the Facilities in the form of “loans,” which were inaccurately accounted

for via improper “advances.” The sum total of the monies that has vanished

through these loans appears to be $21,540,449. Many of these “loans” and

“advances” either disappeared in accounting chicanery or were eventually

reclassified as payments for services never performed. From the beginning, the

accounting firm of Sobelman Cohen & Sullivan LLP (“SCS”) was intimately

involved in helping the Heritage Entities and Kasirer ‘process’ the various

fraudulent fund transfers. SCS actively participated in the scheme to conceal

inappropriate financial transactions so as to allow Heritage to continue its

fraudulent bond offerings. Initially, many of the fund transfers were insufferably

brazen.3 By June 1997, the pilfering of funds became so obvious that SCS

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

HHD 1996-1997 check register for two bank accounts, Debra and her company,Mishkan Healthcare, received $1,385,500, E. Rubin received $631,800 (his wifealso received $38,360), and Kasirer received $125,000.

4 For example, on August 16, 1996, Michael Sobelman of SCS sent a memowherein he asked E. Rubin to explain a check for $198,746 written to cash on June28, 1996 from the Heritage Rancho bank account with a notation in the checkregister solely of “RAK” (Kasirer’s initials). After a discussion with E. Rubin,Sobelman wrote on his accounting work papers which describes the check as“RAK bond draw.” Then, for the period ending August 31, 1996, the adjustingjournal entry re-classified this amount as a “miscellaneous expense.”


reclassified the monies allegedly paid as consulting fees to insiders. For example,

the consulting fees paid to Debra Kasirer and Emery Rubin for illusory services

were reclassified as loans receivable from either them or related parties. However,

rather than require that the monies actually be repaid, SCS would either (1) again

reclassify the amounts due from these parties as due from a different Heritage

Entity (Heritage Housing V) or as a Facility expense, or (2) at a later time deem

the loans paid.4 SCS’s system of reclassifying various fund transfers soon became

commonplace and, in fact, SCS began to instruct Heritage and HCH management

teams on how to hide improper transfers.

8. The steady stream of business generated by the Heritage Entities

fostered complicity among the attorneys employed. Even though they were less

beholden to Kasirer than his other aforementioned associates, the attorneys

nonetheless took direction from Kasirer in their capacities as bond counsel,

underwriter’s counsel, and drafters of the disclosure documents and certain

governmental filings. As a result of Kasirer’s influence, they failed to properly

perform their due diligence and consciously ignored and omitted material

information which allowed the unmarketable bonds to be sold.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


9. Feasibility and marketability studies were unreliable because, either

intentionally or negligently, the compilers of the studies did not adequately

perform due diligence. For example, each feasibility study, for the Heritage

Entities located in Texas, projected that the Facility would earn a net profit per

patient for each day of care ($10 for Houston, $2.34 for Fort Worth, $6.65 for

Austin, and $14.31 for Texas City), while in fact each of these Facilities operated

at a loss per patient each day (-$10 a day for Houston, -$26.61 for Fort Worth,

-$3.16 for Austin and -$9 for Texas City). The marketability studies were

similarly worthless, as evidenced by the Fort Worth study’s inadequate disclosure

of the competitive market in the region (which included a hospital directly across

the street from the Heritage Facility). Both the market and feasibility studies were,

at the very least, negligently prepared.

10. The appraisals assessed “as is” property values which bore no

relation to the actual fair market values and which ignored property conditions and

legal encumbrances. Even now, after several years of unprecedented appreciation

in the real estate market, the Heritage properties are still unable to command the

“as is” value of the original appraisal, despite having been improved by millions of

dollars in renovations. The value of the real property was a material consideration

for the investors because the property was the sole security for the bond

indebtedness. In sum, the appraisers either intentionally or negligently misled

investors.

11. Many insiders engaged in a pattern of related party transactions.

None of these relationships were disclosed in the “Relationship Among the

Parties” section of the Official Statements, and only a few were briefly mentioned

in nearly 200 pages of text. For example, both Emery Rubin and Robert Kasirer

were long time clients of Donald Chalker’s insurance brokerage company, LFC

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Insurance. LFC insurance brokered the insurance policies for all the Heritage

entities during a substantial portion of the relevant time period. Moreover, these

related party transactions violated the rules and regulations of Medicare and the

I.R.S. rules regarding non-profit entities (501(c)(3) entities). Specifically,

Medicare rules require that a related party cannot make a profit from the goods or

services it sells – all related party transactions have to be performed at cost. I.R.S.

rules require that any related party pay an excise tax of 50% on the gross earnings

in the 1st year the related party does business with the non-profit entity, and 150%

in the 2nd year. Many of the Heritage Officers and Directors and the Kasirers sold

goods and provided services to Heritage, and yet they did not comply with these

rules. The HHD General Ledger for the period ending June 30, 1996 showed

Debra Kasirer, Andrew Kornreich, E. Rubin, and L. Rubin receiving numerous

checks totaling hundreds of thousands of dollars for “consulting services.” West

Coast Building Supply, E. Rubin’s company, also received substantial sums for

services allegedly performed for Heritage. Most of the Board members and

executives were profiting from related party transactions: Board member Don

King sold food to the Heritage Facilities through his company King Pak Foods;

Board member Donald Chalker sold insurance to the Heritage Entities through his

company LFC Insurance; Board Member and executive O.V. Bertolini performed

architectural services through his company, Berman & Bertolini; Board member

Herb Saltzman performed financial advisory services through his company

HealthCap Group; Jerold Goldstein, initially an outside attorney for Heritage,

became an executive and continued to perform legal services for Heritage. None

of these insiders complied with the various Federal rules regarding related party

transactions.

12. The Kasirers and the management companies engaged in related party

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

5 As discussed in detail throughout the complaint, Kasirer controlled theHeritage Board of Directors. In effect, the Heritage Entities and the managementcompany functioned as one company controlled by Kasirer. Kasirer was the solesource of business opportunities for Heritage. His ability to funnel theseopportunities to Heritage gave him leverage to appoint or remove Directors andOfficers, and otherwise control and direct its daily operations. The extent of thiscontrol is supported by an e-mail which Pontarelli forwarded to Kasirer on April24, 2000, (originally from Ray Verdugo - head of Finance at Rancho) which statedthat Medicare had taken the position that Heritage and HCH/CareContinuum wererelated Entities. Medicare’s position was supported by the audited financialstatements as well as the personnel at the Hospital “since not many people have atrue understanding of the structures of all the entities.” Therefore, Medicarewould only pay actual costs to the Hospital instead of the fees charged byHCH/CareContinuum.


transactions on a daily basis. Kasirer, who had unfettered control over the

Heritage organization5, made millions by assigning the rights to buy properties

which he had received from Columbia HCA in settlement of a business dispute.

According to tax returns, JDDJ, an entity under Kasirer’s control, received over

$10.815 million as “other income” from the sale of properties which Heritage

bought with the funds raised in the bond offerings. Moreover, Kasirer, through

JDDJ, somehow came to own property located on or adjacent to the Fort Worth

and East Houston Facilities under suspect circumstances. Kasirer then sold these

properties for a $2 million profit. In addition, Kasirer made huge profits as the

manager of the Facilities. According to financial statements prepared by SCS for

“Health Care Holdings and Affiliates” (which includes CareContinuum) the

companies had $9.605 million in gross receipts in 1997-1999. From their

involvement in the Heritage scheme, Kasirer and his entities received well over

$20 million in “other income.” Furthermore, millions of dollars in consulting fees

were paid to Debra Kasirer and many of the Kasirers’ living expenses (Kasirers’

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

6 Debra began receiving these “consulting fees” early on. According to1995 tax returns for HHD, she was paid $75,420 in consulting fees.


car leases and a Hawaiian vacation) were paid by Heritage.6 These transactions

clearly violated Medicare rules and, because no excise taxes were paid to the

I.R.S. on this undisclosed, illegal profit, they violated the IRS rules regarding

Non-Profit organizations.

13. Kasirer’s companies received exorbitant management fees although

he often subcontracted the actual management services for a significantly reduced

fee. In addition, Kasirer arranged for Heritage to pay the salaries and benefits (car

allowances, cell phones) for some of Kasirer’s own management team including,

but not limited to, Louis Pontarelli, Alan Pollack (Kasirer’s nephew), Geri

Ostlund, Richard Kuhl and Blair Stam. In effect, the bond funds were used to pay

multiple and duplicative management fees, including the following: (1) the

purported management fees to Kasirer’s Management companies; (2) management

fees paid to HHD; (3) fees paid to legitimate management companies contracted

by Kasirer to perform actual work, and (4) the fees paid directly by Heritage to

Kasirer’s HCH employees.

14. Additionally, unbeknownst to investors, while insiders were profiting

substantially, each Heritage Facility was failing miserably. Every Heritage

Facility experienced massive renovation/construction cost overruns and delays

which were caused, in part, by:

a. inadequate due diligence;

b. inadequate cost estimates;

c. inadequate or non-existent construction guarantees; and

d. undisclosed changes to the nature of the elder assistance

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

7 Diane Colby, VP of Texas operations, made this remark in her letter ofresignation on September 1, 1999 wherein she also stated that the “disbursementof funds to Rancho, when Mr. Kasirer owes [Ft. Worth] $581,000, made me ill.”

8 In fact, in August 1999, the Texas Department of Human Services(“TDHS”) conducted an investigation into the state of affairs at the HoustonFacility and discovered the following deficiencies, inter alia: (1) food wasimproperly stored, (2) there was no “bladder function program” and residentsrequiring an incontinence program did not receive help; (3) residents were abusingeach other without repercussion; and (4) a raging scabies epidemic was notcontained. Immediately after the inspection, the Facility was placed on“Immediate Jeopardy” monitoring because the Facility’s noncompliance with therequirements of TDHS “has caused or [were] likely to cause, serious harm,impairment, or death to a resident”.


programs at the Facilities.

15. Consequently, the influx of money from patient payments was

delayed. These factors contributed to the overall financial crises experienced at

each Facility and led to what one employee described as an “unbearable” accounts

payable situation.7 During construction and thereafter utilities were cut off,

vendors were not paid, hospital employee pay checks bounced, and eventually, in

one facility, the licenses for Medicare-approved hospital beds (which Heritage had

failed to fill) were sold. Moreover, the level of care at each of the Facilities was

atrocious. For example, throughout 1999-2000, Goldstein and others received

several complaints detailing the sub-par conditions at the Houston facility,

including constant personnel turnover, theft of belongings, unsanitary conditions

such as feces not being cleaned up and general patient neglect. 8

16. Defendant U.S. Trust failed to properly perform its duties as the

Trustee for each of the eleven bond offerings. Among its failures were:

a. honoring facially improper draw requests and knowingly

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


allowing the diversion of bond funds;

b. failing to investigate requisition certificates that were clearly

defective and/or incomplete;

c. participating in the commingling of bond proceeds among

supposedly independent facilities;

d. failing to enforce even minimal disclosure requirements in the

Loan Agreements such as monthly, quarterly or annual financial reports;

e. failing to enforce the default provisions until each business had

deteriorated to the point that any protection available to the bondholders was

economically and legally meaningless; and

f. knowingly permitting offerings to proceed using Official

Statements that failed to disclose a plethora of material facts.

17. Ultimately, the Facilities ran out of money. This fact is even more

egregious in light of the numerous loans and extended lines of credit the Heritage

Entities obtained. Moreover, several of the Heritage Entities fraudulently obtained

reimbursements from the U.S. Government under the Medicare program. In fact,

by early 1998 Rancho Hospital received $2.3 million in Medicare reimbursements

for services rendered on the third floor of the outpatient building adjacent to the

Hospital even though this particular area of the Hospital was never operational.

18. By mid-1999, Miller & Schroeder refused to continue facilitating the

Ponzi scheme, due in part to the fact that the Heritage Entities were not complying

with 17 C.F.R. §240.15c2-12 (by not filing an annual financial report). However,

Miller & Schroeder should have taken this action by at least mid-1998 when they

clearly knew of the co-mingling of funds.

19. In 1999-2000, each of the Facilities went into receivership, except for

Rancho Hospital, which filed for bankruptcy. The Chapter 11 bankruptcy filing

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


by Rancho Hospital was converted into a Chapter 7 proceeding after the

government asserted a $10-20 million Medicare fraud claim.

20. U.S. Trust attempted to insulate itself from liability by falsely

informing the bondholders that it would protect their interests. However, instead

of protecting the bondholders, U.S. Trust entered into a settlement agreement with

the Heritage Entities, Jerold V. Goldstein, Clarke Underwood, Geri Ostlund, and

Virgil Lim. Pursuant to this agreement, no money changed hands, all parties were

released from liability, and all parties agreed not to cooperate with any third party

who filed suit. Despite representations to the bondholders that it would sue all

viable, responsible third parties, U.S. Trust filed suit against only a handful of the

Heritage Directors and Officers. U.S. Trust opted not to sue numerous other

individuals and companies that were involved, because William Barber, the U.S.

Trust executive responsible for the oversight of the Heritage bond funds, was

deeply involved in this scheme from its inception.

21. Due to Defendants’ illegal conduct, the bondholders’ investments

have been squandered. Currently, numerous federal government agencies,

including the Securities and Exchange Commission (“SEC”), the Department of

Justice and the Internal Revenue Service (“IRS”), are investigating this debacle.

The SEC filed an action in June 2004 against Kasirer, Goldstein, Boehm, Iverson

and Dhooge. A number of these defendants have been told by the Department of

Justice that they are, in fact, targets of the DOJ investigation. As a result of the

various governmental investigations, some Defendants have asserted their Fifth

Amendment rights against self incrimination in connection with the instant action

and have refused to respond to discovery and/or to testify in deposition.

22. This pleading is based upon information and belief as to all facts

except those relating to Plaintiffs and those which were derived from their

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


counsels’ good faith investigation which included, the review of over one-million

pages of documents and SEC deposition transcripts, over forty (40) days of

depositions, and discussions with witnesses and/or their counsel.

JURISDICTION AND VENUE

23. This Court has jurisdiction over the subject matter of this action

pursuant to 28 U.S.C. 1331, section 27 of the Securities Exchange Act of 1934

(the "Exchange Act") (15 U.S.C. § 78 aa, et seq.). In addition, Defendants used

the United States mails and instrumentalities of interstate commerce in engaging

in the subject actions or omissions to act. This Court has jurisdiction over

Plaintiffs state law claims pursuant to 28 U.S.C. § 1367.

24. Venue is proper in this judicial district pursuant to Section 27 of the

Exchange Act because material acts occurred in this district. Further, the

Defendants are subject to personal jurisdiction at the time the action is commenced

by reason of their actions, omissions to act and other conduct in this judicial

district.

CHRONOLOGY OF THE HERITAGE BOND OFFERINGS

25. Beginning in 1996, the Defendants financed, structured, offered and

sold the following Heritage bonds:

Offering No. 1 - “Rancho offering No.1"

Municipal Issuer: California Communities Local Public ImprovementsFinancing Authority (“California Communities Municipality”)Private Issuer: Heritage Rancho Healthcare, Inc. (“Heritage Rancho”)Project Name: Heritage Hospital (“Rancho Hospital”)Location: Rancho Cucamonga, CaliforniaAmount: $13,050,000Date of Bonds: February 15, 1996(Plaintiffs are not suing on this Offering since these bonds were redeemed)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Offering No. 2 - “Texas City offering”

Municipal Issuer: Danforth Health Facilities Corporation (“DanforthMunicipality”)Private Issuer: Heritage Geriatric Housing Development VII, Inc. (“Heritage 7Texas City”)Project Name: Danforth Gardens (“Texas City Facility”)Location: Texas City, TexasAmount: $7,295,000Date of Bonds:: December 15, 1996

Offering No. 3 - “Houston offering”

Municipal Issuer: Danforth Health Facilities Corporation (“DanforthMunicipality”)Private Issuer: Heritage Geriatric Housing Development VIII, Inc. (“Heritage8 Houston”)Project Name: Sam Houston Gardens (“Houston Facility”)Location: Houston, TexasAmount: $10,370,000Date of Bonds: March 1, 1997

Offering No. 4 - “Ft. Worth offering No. 1"

Municipal Issuer: Tarrant County Health Facilities Development Corporation(“Tarrant Municipality”)Private Issuer: Heritage Geriatric Housing Development IX, Inc. (“Heritage 9Ft. Worth”)Project Name: St. Joseph Gardens (“Ft. Worth Facility”)Location: Fort Worth, TXAmount: $13,420,000Date of Bonds: May 15, 1997

Offering No. 5 - “Sarasota offering”

Municipal Issuer: City of Mexico Beach, Florida (“Mexico BeachMunicipality”)Private Issuer: Heritage Care of Sarasota, Inc. (“Heritage Sarasota”)Project Name: Heritage House of Sarasota (“Sarasota Facility”)Location: Sarasota, FloridaAmount: $12,305,000Date of Bonds: December 1, 1997

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Offering No. 6 - “Austin offering”

Municipal Issuer: Danforth Health Facilities Corporation (“DanforthMunicipality”)Private Issuer: Heritage Healthcare of America (“Heritage America”)Project Name: Duval Gardens (“Austin Facility”)Location: Austin, TexasAmount: $11,090,000Date of Bonds: July 15, 1998

Offering No. 7 - “Chicago offering”

Municipal Issuer: City of Chicago, Illinois (Chicago Municipality”)Private Issuer: Heritage Care of Chicago, Inc. (“Heritage Chicago”)Project Name: Heritage House of Chicago (“Chicago Facility”)Location: Chicago, IllinoisAmount: $17,275,000Date of Bonds: July 15, 1998

Offering No. 8 - “Rancho offering No. 2"

Municipal Issuer: Desert Hot Springs Public Financing Authority (“Desert HotSprings Municipality”)Private Issuer: Heritage Rancho Healthcare, Inc. (“Heritage Rancho”)Project Name: Heritage Hospital (“Rancho Hospital”)Location: Rancho Cucamonga, CaliforniaAmount: $22,330,000Date of Bonds:: August 15, 1998

Offering No. 9 - “Ft. Worth offering No. 2"

Municipal Issuer: Tarrant County Health Facilities Development Corporation(“Tarrant Municipality”)Private Issuer: Heritage Geriatric Housing Development IX, Inc. (“Heritage 9-Ft. Worth”)Project Name: St. Joseph Gardens (“Ft. Worth Facility”)Location: Fort Worth, TXAmount: $6,855,000Date of Bonds: October 1, 1998

Offering No. 10 - “East Houston offering”

Municipal Issuer: Tarrant County Health Facilities Development Corporation(“Tarrant Municipality”)Private Issuer: Heritage Healthcare of America, Inc. (“Heritage America”)Project Name: Eastwood Gardens (“East Houston Facility”)Location: East Houston, TexasAmount: $11,320,000Date of Bonds: December 1, 1998

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

9 This includes the following Heritage Entities: Heritage RanchoHealthcare, Inc. (“Heritage Rancho”); Heritage Care of Chicago, Inc. (“HeritageChicago”); Heritage Care of Sarasota, Inc. (“Heritage Sarasota”); HeritageGeriatric Housing Development VII, Inc. (“Heritage 7-Texas City”); HeritageGeriatric Housing Development VIII, Inc. (“Heritage 8-Houston”); HeritageGeriatric Housing Development IX, Inc. (“Heritage 9-Ft. Worth”); and HeritageHealthcare of America, Inc. (“Heritage America”).


Offering No. 11 - “Seminole offering”

Municipal Issuer: City of Mexico Beach, Florida (“Mexico BeachMunicipality”)Private Issuer: Heritage Healthcare of America, Inc. (“Heritage America”)Project Name: Heritage House of Seminole (“Seminole Facility”)Location: Seminole, FloridaAmount: $7,230,000Date of Bonds: December 15, 1998

Offering No. 12 - “Brownsville offering”

Municipal Issuer: Tarrant County Health Facilities Development Corporation(“Tarrant Municipality”)Private Issuer: Heritage Healthcare of America, Inc. (“Heritage America ”)Project Name: Valley Gardens (“Brownsville Facility”)Location: Brownsville, TexasAmount: $11,735,000Date of Bonds: March 15, 1999

The Issuer and Facility Location definitions above will be used throughout

the complaint to reference the specific Private Issuer, Municipal Issuer and

Facility discussed.

RELEVANT NON-PARTIES TO THE ACTION

26. All of the Private Issuers (hereinafter collectively referred to as the

“Heritage Entities”) identified above are non-parties to this case as they are, in

essence, defunct Entities.9 Initially, a new Heritage Entity was formed every time

there was a bond offering. However, after the underwriters and the attorneys

involved in the offerings became aware that the bond funds were being improperly

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

10 Bertolini, Kornreich, Wexler, and L. Rubin were on the Board ofDirectors of Heritage Housing Development III. On January 6, 1997, an HHDBoard meeting was held wherein they all resigned from the Board of HHD III sothat HHD could “sever all ties and relationships” with HHD III.


transferred among the Heritage Entities, the attorneys recommended the formation

of a single Entity which would issue bonds pursuant to a Master Indenture

(thereby creating an argument that the commingling of funds between these

Heritage Facilities could be interpreted as legal). Thus, an existing shell

corporation, Heritage Healthcare of America, Inc. (“Heritage America”), was used

as the Private Issuer for four different bond offerings. Heritage America is

currently a suspended California corporation whose agent for service of process

resigned on January 25, 2002. The corporate address was 16133 Ventura Blvd.,

Encino, CA, (hereinafter “16133 Ventura Blvd.”), which is Defendant Jerold

Goldstein’s (“Goldstein”) business address.

27. Heritage Housing Development, Inc. ("HHD")10 was purportedly a

California non-profit corporation based in Los Angeles, California formed on

January 5, 1993 for the purpose of operating hospitals, nursing Facilities,

retirement Facilities, assisted living Facilities, Alzheimer's Facilities and related

healthcare Facilities. According to the California Secretary of State, HHD, whose

agent for service of process resigned in January 2002, is a suspended corporation

with a prior business address at 16133 Ventura Blvd. In essence, HHD was the

parent company of all Heritage Entities and its financial position, although it was

purposefully not disclosed to the investors, was directly tied to the other Heritage

Entities. The tax returns for HHD detail the following information:

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

11 HHD’s tax year ends in June. The other Heritage Entities use the calendaryear for tax purposes.

12 The business address for Heritage America II, an active corporation, isalso 16133 Ventura Blvd and its agent for service of process is Goldstein.

13 According to the California Secretary of State, Heritage Acceptance iscurrently a suspended corporation.


a. In tax year 199711, HHD booked supervisory/management

revenues of $1,078, 952 but had a loss of ($185,365) and a net asset value of

negative ($770,105).

b. In the 1998 tax year, HHD booked $1,342,017 in supervisory/

management revenue and received a $450,000 contribution from Heritage America

II12 in April 1999. Thus, it recognized income for the year totaling $723,500 and

had a net asset value of negative ($46,605).

c. In tax year 1999, HHD had $1,189,409 in program revenues

but had a loss of ($646,196) and a net asset value of negative ($692,801).

d. For the 2000 tax year, HHD again booked $1,189,409 in

supervisory/management revenue, and had a loss of ($646,888), but for some

unexplained reason, the tax return showed a beginning net asset value of negative

($1,777,882) (as opposed to the 1999 return which showed it as being negative

$692,801), leaving the corporation with a net asset value from inception of

negative ($2,424,770).

28. Heritage Acceptance Corporation ("Heritage Acceptance") was a

Delaware corporation formed in 1972 which was doing business in California

through its office at 16133 Ventura Blvd.13 Goldstein was the sole incorporator,

President of, and exercised dominion and control over Heritage Acceptance.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

14 Its function was to "purchase" the accounts receivable from each Heritagefacility, pool them and borrow against the pooled receivables from, among others,DVI Business Credit ("DVI"). Although some of the cash proceeds were returnedto the Heritage Entities that generated these receivables, large amounts were alsodiverted to Heritage Housing Development and other Heritage Entities.

15 Heritage Research & Support Foundation Inc. (“Heritage Research”) wasformed on April 22, 1998, purportedly to develop a national fund raising programfor the research, treatment and cure of Alzheimer’s disease. According to the 1998and 1999 tax returns, Bertolini, Medill, King, Lim, and Saltzman were theDirectors, Goldstein was the President and Goodman was the CFO. Alan J. Pollak(Kasirer’s nephew), signed the 1999 tax returns as Vice President. The 1999 (lastyear filed) tax return lists Robert and Debra Kasirer’s home address of 611 N.Canon Drive, Beverly Hills as the place of business and Debra Kasirer was listedas the person in possession of the company’s 1999 books and records. Accordingto the 1998 tax returns filed for both Heritage Rancho and Heritage Research,


Heritage Acceptance purportedly performed factoring services for various

Heritage Entities. In 1997, Heritage Acceptance was listed as a wholly owned

subsidiary of HHD and the only “for profit” Heritage Entity. It was not mentioned

on tax returns of HHD thereafter, but it entered into at least one (1) transaction

with Heritage Rancho in 1998 and was paid at least $87,815. According to a

memo written by Herb Saltzman in October 1998, it was formed to serve as the

“bankruptcy remote” financing conduit,14 which allowed Heritage to act as a

“larger single borrower,” and also “preclude[ed] the credit granting scrutiny

inherent in single asset start up entities.”

29. Heritage Housing V, Inc. (“Heritage Housing V”) is a suspended

California corporation which was formed on March 14, 1996. The corporate

mailing address is also 16133 Ventura Blvd. and Goldstein is listed as the agent

for service of process. This entity was created to assume the rights Kasirer

obtained from his dispute with Columbia (see below at ¶132).15

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28Heritage Rancho loaned $147,861 to Heritage Research. In the following tax year,this “Loan” was re-classified as a contribution on the tax return.


30. Miller & Schroeder Financial, Inc. ("Miller & Schroeder"), a

Minnesota corporation doing business in California, was the sole underwriter for

all of the Heritage Entities except Heritage Chicago (in which it was co-

underwriter). Miller & Schroeder was also the broker for each named Plaintiff,

and each Plaintiff maintained a separate brokerage account with Miller &

Schroeder. Despite the fact that Miller & Schroeder received well over $6 million

dollars in underwriting fees, it is not named as a Defendant due to its January 2002

Chapter 7 bankruptcy filing in Minnesota.

31. James F. Dlugosch, ("Dlugosch") is an individual and resident of

Minnesota. Dlugosch was at all relevant times the Chief Executive Officer of

Miller & Schroeder, co-chairman and member of Miller & Schroeder’s credit

committee (a.k.a the underwriting committee) with gate-keeper responsibility for

approving the offer and sale of Heritage bonds to the public after reviewing the

Heritage bond due diligence documentation and the Official Statements. The

approval of the Heritage bond offerings required unanimous consent of the credit

committee. He filed for personal bankruptcy in 2003.

32. Iatros Health Network, Inc. ("Iatros") was a publicly traded company.

IHN/Health Services Group, Inc. ("IHN"), a wholly owned subsidiary of Iatros,

was responsible for Facility management for several Heritage Entities until

December 15, 1997. At that time, each existing Heritage Facility terminated its

management contract with IHN and entered into a management contract with

HCH. Robert Kasirer was a Director of Iatros, the managing Director of IHN and

owned approximately 7% of Iatros through HCH. In early 1999, as a result of a

change in control, Iatros moved from Atlanta to Texas and changed its name to

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

16 WRS was paid the following fees: $207,909 from Heritage 7-Texas Cityin 1997; $259,595 from Heritage 8-Houston in 1997; $214,500 from Heritage 9-Ft. Worth in 1997; and $355,515 from Heritage Chicago in 1998.


“The Phoenix Group Corporation.” It filed for Chapter 11 bankruptcy on August

21, 2002 and is not named as a result.

33. WRS Architects, Inc. (“WRS Architects”) is an active Missouri

corporation with a business address of 110 Armour Rd., N. Kansas City, MO.

WRS Architects was listed in at least four (4) of the Official Statements as the

design architect. Its employee, Richard Kuhl, was listed as the Vice-President of

Architecture and Construction for HHD and Heritage America at the time of the

East Houston and Seminole offerings and also was also an employee of HCH

during a portion of the relevant time period.16

34. Affiliated Metropolitan Contractors was the construction company

hired for many of the Heritage projects. It has ceased to exist.

35. Coddington Appraisal Services ("Coddington") was a corporation

located in Alloway, New Jersey which provided appraisals for the Austin, Rancho

No. 2, Ft. Worth No. 2, East Houston, Seminole and Brownsville bond offerings

and a market feasibility study for the Chicago offering. It filed for bankruptcy in

early 2003.

36. The Bank of New York, Inc. (“BNY”) succeeded U.S. Trust as bond

Trustee in November 2001.

37. Danforth Health Facilities Corporation (“Danforth Municipality”)

was the Municipal Issuer for the Texas City, Houston and Austin bond offerings.

38. Tarrant County Health Facilities Development Corporation (“Tarrant

Municipality”) was the Municipal Issuer for the Fort Worth, East Houston and

Brownsville bond offerings.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


39. City of Mexico Beach (“Mexico Beach Municipality”) was the

Municipal Issuer for the Sarasota and Seminole bond offerings.

40. Desert Hot Springs Public Financing Authority (“Desert Hot Springs

Municipality”) was the Municipal Issuer for the Rancho No.2 bond offering.

41. City of Chicago (“Chicago Municipality”) was the Municipal Issuer

for the Chicago bond offering.

42. Fulbright & Jaworski L.L.P. (“Fulbright”) was previously sued as

Doe No. 1 and was underwriter’s counsel for the Rancho Hospital offering and

bond counsel for seven (7) other offerings.

43. Foley & Lardner (“Foley Lardner”) was previously sued as Doe No.2.

Foley & Lardner is an internationally-renowned law firm headquartered in

Chicago, Illinois. Foley & Lardner acted as bond counsel for the Chicago

Offering and was partially responsible for drafting the false and misleading

Official Statement disseminated in connection with the Chicago bond offering.

44. Wildman, Harrold, Allen & Dixon was previously sued as Doe No. 3.

Wildman, Harrold, Allen & Dixon were underwriter’s counsel for the Chicago

Offering and was partially responsible for drafting the false and misleading

Official Statement disseminated in connection with the Chicago bond offering.

45. Donald King (“King”) was a Director of numerous Heritage Entities,

beginning with the Sarasota offering. In the early 1990's, King and Kasirer

acquired control of the Beverly Hills Medical Center (“BHMC”) and were

ultimately sued by one of the former owners of the BHMC for conspiracy to

defraud. On August 18, 1997, King was elected to the HHD Board. King was the

executive of a food and supply company, King Pak Foods, Inc., which profited

from numerous contracts with the Heritage Facilities. In fact, on September 12,

1997, E. Rubin wrote to the purchasing department of Rancho Hospital and

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


demanded that all food purchases be made through King Pak Meats and Food

Services, Inc – “effective immediately.” King was named in the original

complaint filed in this action but has since filed for bankruptcy protection and is

not named as a Defendant in this action as a result.

THE PARTIES

LEAD PLAINTIFFS

46. David Sinow is a natural person and resident of the State of Illinois.

Sinow purchased in excess of $1.6 million of the Heritage bonds.

47. Howard Preston is a natural person and resident of the State of

California. Preston made seven separate Heritage bond purchases, three different

purchases of the Rancho Hospital bonds, and one purchase for each of the

Sarasota, Texas City, Austin, Chicago and East Houston bonds, for a total

investment of just over $800,000.

48. Langdon Parrill is a natural person and resident of the State of

California. Parrill made fourteen separate purchases of the Heritage bonds for a

total investment of over $675,000.

49. Barrett Anderson is a natural person and a resident of the State of

California. Anderson made five separate bond purchases, two different purchases

of the East Houston bonds and one purchase of each of the Texas City, Chicago

and Sarasota bonds, for a total of over $360,000.

ADDITIONAL CLASS REPRESENTATIVE PLAINTIFFS

50. Laurence Pilgeram is a natural person and a resident of the State of

California. Pilgeram made six separate bond purchases, one purchase of each of

the Austin, Brownsville, Chicago, Texas City, Houston, and Sarasota bonds, for a

total of $275,000.

51. Scott McKenry is a natural person and a resident of the State of

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


California. McKenry made eleven separate bond purchases, two different

purchases of the East Houston bonds, two different purchases of the Brownsville

bonds and one purchase of each of the Texas City, Sam Houston, Fort Worth,

Seminole, Austin, Rancho Hospital, and Chicago bonds, for a total of

approximately $290,000. McKenry sold most of these bonds in November of

2001 for $10, 098.

52. Ralph Allman is a natural person and resident of the State of

California. Allman made three separate bond purchases, two different purchases

of the Rancho Hospital bonds and one purchase of the Sarasota bonds, for a total

of over $103,000.

DEFENDANTS

U.S. TRUST

53. U.S. Trust Company of Texas, N.A. ("U.S. Trust Texas") is a banking

association with its principal place of business in Dallas, Texas, and is a wholly

owned subsidiary of Defendant U.S. Trust Corporation. U.S. Trust Texas acted as

trustee pursuant to the Indentures for all of the Heritage bonds at issue in this case.

54. U.S. Trust Corporation is a national banking association with its

principal place of business in New York, New York. U.S. Trust Corporation

merged with Charles Schwab Corp., an NYSE company, on or about May, 2000,

and is now a wholly owned subsidiary. In June, 2001, U.S. Trust Corp. sold the

assets of its trust division to Bank of New York for $273 million. Of this amount,

$233 million was a pre-tax gain.

55. U.S. Trust Corporation and U.S. Trust Co. of Texas, N.A. are jointly

referenced as "U.S. Trust" because the former is merely the alter ego of the latter.

U.S. Trust Corp. controlled and dominated the business affairs and operations of

U.S. Trust Texas, such that no separateness exists between them. By its own

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

2817 This statement was made in the 10Q filed on May 10, 2002 by Charles

Schwab Corp. with the Securities and Exchange Commission.FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 25

admission, “U.S. Trust Corporation is a wealth management firm that through its

subsidiaries also provides fiduciary services and private banking services with 34

offices in 12 states.”17 Moreover, upon information and belief, during the relevant

time period, U.S. Trust Texas only had a nominal number of employees and was

incapable of managing the Heritage bond funds without the assistance of the U.S.

Trust Corp. It appears that these two corporations had identical equitable

ownership, use the same office locations, employed the same attorneys, and have

confusion of records. During the relevant time period, U.S. Trust Texas was so

inadequately capitalized that its capitalization was illusory. Thus, U.S. Trust

Corp. disregarded U.S. Trust of Texas’s corporate form, thereby relegating the

later’s status to a mere conduit of the former. Allowing the two entities to remain

distinct would result in inequity because the corporate trust division of U.S. Trust

Corp. has been sold and there is no way to determine if the funds remain in the

possession of U.S. Trust subsidiaries or if these funds have been taken by the

parent corporation and/or the ultimate parent, Charles Schwab Corp.

HERITAGE OFFICER & DIRECTOR DEFENDANTS

56. Jerold Goldstein ("Goldstein") is an individual and resident of Los

Angeles County, California. Goldstein, directly or indirectly, exercised dominion

and control over the Heritage Entities in his capacity as outside counsel, President,

Chief Operating Officer, and/or General Counsel. As noted above, Goldstein was

the President of Heritage Acceptance and Heritage Research, the agent for service

of process of Heritage Housing V, and was a party to the settlement agreement

with U.S. Trust. Goldstein caused or allowed to occur and actually or

constructively knew about improper transfers of bond monies including direct or

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

2818 According to the Official Statement disseminated in connection with the

second Ft. Worth bond offering.FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 26

indirect transfers to himself. Goldstein’s positions of control can be delineated as

follows:

a. Initially, Goldstein was outside counsel to the Heritage

Entities. In August 1997, as outside counsel, he was given the power to break a tie

vote of the Board of Directors. In April 1998, Goldstein became the General

Counsel of HHD and the Heritage Entities.18 The Official Statements

disseminated in connection with every offering, except Brownsville (the last one),

list Goldstein as counsel to each Heritage Entity. He received fees for legal

services in 1997 and 1998 as counsel to the Heritage Entities. In addition,

Goldstein was paid fees as tax counsel and/or zoning consultant for each of the

bond offerings, which total at least $490,000.

b. In April 1998, Goldstein became Chief Operating Officer of

HHD and the Heritage Entities. Goldstein was next elected President of HHD and

each Heritage Entity on August 18, 1998. He executed the OS for the last three

bond offerings (East Houston, Seminole and Brownsville) in his capacity as

President and he maintained this position through 2000. In 1998, HHD paid him

a salary of $261,354 as an Officer of HHD. In 1999, HHD paid him a salary of

$300,000 as an Officer of HHD. Although, according to the 2000 HHD employee

roster, his annual salary for his services as CEO and President was $257,500,

HHD paid him a salary of $271,771.

57. Onofrio V. Bertolini ("Bertolini") is an individual and resident of Los

Angeles County, California. Bertolini directly or indirectly, exercised dominion

and control over the Heritage Entities through his capacity as Chairman of the

Board. Bertolini caused the improper transfer of bond monies, including direct or

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


indirect transfers to himself and his company. He became Chairman of HHD on

August 16, 1996. He was listed as Chairman in each Official Statement, except

for the last one, and executed the Official Statements for all but the last three (3)

Heritage bond offerings. In January 1998 he became an employee of HHD for

$120,000 a year, holding the position of Chief Operating Officer, and later Vice-

President of Architecture and Construction of HHD. Bertolini is also a Principal

of Berman and Bertolini, Inc. (AKA Berman & Associates), which purportedly

performed architectural inspection services for all Heritage Entities (see below).

In 1998 and 1999, HHD paid Bertolini at least $50,000 and $130,000,

respectively. Berman and Bertolini, Inc. was paid as the inspecting architect for

most of the bond offerings.

58. Emery Rubin (“E. Rubin”) was a resident in Los Angeles County but

is now deceased and is, therefore, named as the Estate of Emery Rubin. The

Official Statements disseminated in connection with the Texas City, Houston and

Ft. Worth bond offerings list E. Rubin as a consultant. The 1997, tax returns for

HHD and each of the Heritage Entities, list him as a Director. On August 18,

1997, he was elected President and Secretary of the Board of HHD. In addition,

he was the President and Director of Heritage Sarasota at the time of the Sarasota

bond offering. On February 18, 1998, he ostensibly “resigned” from all positions

at all Heritage Entities. In truth, Kasirer arranged for E. Rubin to be ousted by the

Board of Directors because E. Rubin was seeking a larger cut of the monies being

diverted.

a. Kasirer arranged for a “payment” to E. Rubin in exchange for

his silence regarding the ongoing fraud. This payment consisted of the forgiveness

of amounts previously paid to Emery, and/or his wife Marion, and/or Emery’s

companies, Marion Healthcare and West Coast Building Supply. In fact, SCS

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


internal documents show that in fiscal 1997 HHD paid Emery and Marion

Healthcare a total of $528,078.77 for consulting (it appears that this figure does

not include salary payments to E. Rubin but does include $23,630 paid to his wife

Marion). An adjusting journal entry reclassified $291,078.77 of this amount as a

loan receivable from E. Rubin “per MAS conversation with Emery Rubin,”

leaving a total payment to Emery Rubin for consulting of $237,000 for fiscal

1997. According to HHD tax returns, for fiscal 1997 (ended June 30, 1997)

HHD paid him $71,250 in salary as President and $349,817 as a “consultant.”

Thereafter, the HHD adjusted trial balance for the period ended December 31,1997

shows the related party receivable from E. Rubin begins as $307,878.77, is

increased via two adjusting journal entries by $24,738 and then offsets $237,000

in a different adjusting journal entry, leaving $95,616.77 owing. Then, the

$109,116.77 listed by HHD as a “due from” Emery Rubin in the adjusted trial

balance of June 30, 1998 was credited by HHD in 1998, which resulted in Emery

Rubin recognizing this amount as “other income” in his personal 1999 tax return.

b. Another SCS document shows that HHD also paid $16,800 in

mortgage payments in 1997 for E. Rubin, and wrote off a $52,787 loan receivable

from his company West Coast Building Supply. E. Rubin’s tax returns for 1998

state that he received only $11,250 in wages from Heritage.

59. Larry A. Rubin (“L. Rubin”), the son of E. Rubin, is a resident of Los

Angeles County. L. Rubin was the Secretary/Treasurer of HHD and Heritage 7-

Texas City, Heritage 8-Houston, and Heritage 9-Ft. Worth at the time of those

offerings. In addition, L. Rubin became the Secretary/Treasurer of Heritage

Rancho on August 16, 1996 and remained in that position for 1997 and part of

1998. L. Rubin resigned from the Board of all Heritage Entities except for

Heritage Care, Inc. on August 18, 1997. He was also listed as the Vice-President

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


of construction for HHD and Sarasota at the time of the Sarasota offering. He was

fired by Kasirer shortly after his father “resigned” in early 1998. According to the

HHD 1997 tax return, L. Rubin was paid $25,250 as Secretary/Treasurer of HHD,

and another $17,154 in consulting fees. According to SCS documents, in July

1994-January 1998 he received over $75,778 in consulting payments, cosigned a

check for $10,000 written to another person, and, according to an internal

memorandum from Kasirer to Goldstein, he was overheard billing his wedding

related travel expenses to E. Rubin’s HHD credit card.

60. Virgil Lim (“Lim”) resides in Los Angeles County. Lim was the

controller of HHD from July 1998 through March 1999 and the controller of

Heritage Sarasota at the time of the offering through 1999. He was also a

Director of Heritage 7-Texas City from 1997 through 1999. On August 18, 1997,

Lim was elected Secretary/Treasurer of HHD. Thereafter, he was the

Secretary/Treasurer for each of the Heritage Entities at the time of the next six

bond offerings and is listed as the Secretary/Treasurer in each 1998 and 1999 tax

return filed by all of the Heritage Entities, except Heritage 7-Texas City. He was

paid $49,094 in salary in 1998 by HHD and $46,000 in 2000. He signed and

submitted to U.S. Trust, numerous requisitions attaching fraudulent “dummy”

invoices, and co-authorized fund transfers (along with Geri Ostlund of HCH,

discussed below) among the various Heritage Entities. He was also an employee

for a number of Kasirer’s companies. For example, he worked for and was paid a

salary by JDDJ and was an Officer of Mishkan Healthcare, Debra Kasirer’s

company.

61. Stephen P. Goodman (“Goodman”) is an individual and resident of

Simi Valley, California. Goodman became Chief Financial Officer (“CFO”) of the

Heritage Entities after he spoke with his friend, Sobelman, about potential

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


employment opportunities. According to the tax returns and other documents,

Goodman was the CFO for HHD and each of the Heritage Entities from November

9, 1998 until August 1999. Goodman was the CFO of HHD and Heritage America

at the time of the East Houston, Seminole and Brownsville offerings. Goodman

was paid approximately $40,000 as salary for the first six months of 1999.

Immediately upon leaving Heritage, he went to work for HCH, and was paid

$32,615 in salary in 1999 by HCH.

62. Clarke Underwood (“Underwood”) resides in Los Angeles County.

Upon Goodman’s departure in August 1999, Underwood took over as the CFO of

HHD and each of the Heritage Entities. In addition, in 1999, Underwood was the

Secretary/Treasurer of Heritage Rancho. According to tax returns filed with the

Bankruptcy Court in connection with the Heritage Rancho Hospital bankruptcy,

HHD paid Underwood paid $55,237.30 in salary for the last 5 months of 1999.

According to the 2000 HHD employee roster, Underwood was receiving an annual

salary of $125,000 for his corporate management services as Senior Vice-

President of Finance and CFO. However, according to tax returns, HHD paid him

a total of $119,837 in salary for his position as CFO in tax year 2000 and his

earnings statement for Rancho Hospital, filed with the Bankruptcy Court in

support of an Application to Pay Insider Compensation to himself, Goldstein and

Lim, shows that he received $118,322.46 in compensation for the first eight

months of tax year 2000. Moreover, Underwood gave himself a bonus and raised

his own salary for one month prior to the Rancho Hospital bankruptcy filing. As

noted below, despite personally writing a memo to Ostlund (with a copy to Kasirer

and Goldstein) which indicated that inter-company transfers were not allowed

under the terms of the bond offerings, Underwood personally approved and/or

requested such transfers on a regular basis.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


63. Herbert Saltzman (“Saltzman”) is an individual and resident of

California. Saltzman has a business address at HealthCap Group, Inc., 6167

Bristol Parkway, Culver City, California 90230-6610. On August 18, 1997,

Saltzman was elected to the Board of HHD and the affiliates. He became

Chairman of the Board on January 1, 1999. Thus, Saltzman was a Director of

HHD and Sarasota at the time of the Sarasota offering. He was Vice-Chairman of

HHD and each of the Heritage Entities at the time of each subsequent offering

except the Brownsville offering (March 1999) at which time he was the Chairman

of the Board. He resigned from the Board of Directors for all Heritage Entities on

May 1, 1999.

a. Saltzman was privy to information regarding the massive inter-

company transfers and, in fact, he authorized some transfers himself. For

example, on or about July 1, 1998, an “Inter-company Transaction Request” form

was executed whereby $100,000 was to be wired from the operating account of

Heritage Rancho to Affiliated Metropolitan Contractors as payment for

construction work done on the Sarasota Facility. This request was initiated by

Bertolini, approved by Saltzman and processed by Lim. However, handwritten

notes on the form indicate that the transfer was later reclassified as payment for

work done on the Ft. Worth and Houston Facilities. Moreover, on September 3,

1998, a summary of all inter-company transfers through July 31, 1998 was sent to

Lim, Goldstein and Saltzman for review. He was also copied on two separate

“Intercompany Fund Transfer Request” forms, signed by Ostlund and Lim,

whereby $1.4 million was transferred first from Heritage Acceptance Corp to

Rancho Hospital, then to HHD and then the funds were divided and transferred to

Texas City, Houston, Ft. Worth, and Sarasota. Neither fund transfer form

indicated the reasons for the transfers. Saltzman was also copied on the fund

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

19 According to tax returns filed by the Heritage Entities, DVI was owed thefollowing amounts under the equipment lease: In 1998: Heritage Rancho($1,786,744); Heritage Sarasota ($647,187); Heritage 9-Ft. Worth ($769,915);Heritage 8-Houston ($538,979); and Heritage 7-Texas City ($628,734). In 1999: Heritage Rancho ($2,681,667); Heritage Sarasota ($726,237); Heritage 9-Ft.Worth ($640,201); Heritage 8-Houston ($513,344); Heritage 7-Texas City($484,511); and Heritage America ($535,198).

20 The tax returns show the following fees: Heritage Sarasota paid $36,158in 1998; Heritage Rancho paid an unknown amount in 1997, $55,000 and $40,000in 1999; Heritage 8-Houston paid $20,000 in 1998; and Heritage 9-Fort Worthpaid $48,000 in 1998. However, according to the Declaration of Virgil Lim filedin Bankruptcy Court in connection with the Rancho Hospital bankruptcy,“Saltzman regularly negotiated the contracts for acquisition of furniture, fixturesand equipment[]” and received commissions far in excess of $40,000 for theRancho Hospital contracts. The Declaration further states that the excessive


transfer requests wherein $770,000 in Operating Deficits Account (“ODA”) funds

were transferred out of three separate Heritage Entities to JDDJ, Heritage V and,

ultimately, Debra Kasirer.

b. Saltzman was involved with Kasirer in a number of ways. For

example, he “borrowed” over $85,000 from KYH on August 26, 1998, which he

has yet to pay back, and he was on the Board of Directors of Mishkan Healthcare.

c. Saltzman regularly engaged in related party transaction with

the Heritage Entities for which he was paid hefty fees. For example, the Heritage

Entities entered into numerous medical equipment leases and receivables

financing deals with a number of lenders. Saltzman was a major shareholder of

HealthCap Group (“HealthCap”), the company that brokered the equipment leases

primarily through DVI Financial Services (“DVI”)19. According to the Heritage

Entities tax returns, HealthCap was paid various brokerage fees in connection with

these equipment leases.20 HealthCap was paid for “financial management

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

commission was simply added onto the purchase/lease price which HeritageRancho then became obligated to pay.

21 It is worth noting that Saltzman's fees were based upon the total amountfinanced, and were paid to him notwithstanding the fact that the loans rapidlydefaulted and/or were replaced with new sources of liquidity, generatingadditional fees for Saltzman.


services” performed (or estimates of fees for work in progress) as follows: (1) in

1998, HealthCap received $317,295 in fees from Heritage related transactions. (2)

for the first two months of 1999, HealthCap had already been paid $23,948 in fees

for completing three financial transactions worth under $1 million and Saltzman

anticipated that another $21.5 million in various equipment/receivables

transactions would be processed during the remainder of 1999.21 In addition,

Saltzman’s other company, MedPay.com, which billed itself as an online medical

solutions company, was paid $117,495 for developing a web site for Heritage.

Saltzman was to receive a 2% fees for all other transactions with Medpay.

However, the fee was often substantially more than the stated 2%. For example, in

one instance, Saltzman, via MedPay, received a fee of $19,000 on a $250,000

lease agreement.

64. Andrew Kornreich (“Kornreich”) was an individual and resident in

Los Angeles County but is now deceased and is, therefore, named as the Estate of

Andrew Kornreich, deceased. Kornreich had an address at 16245 Meadowridge

Way, Encino, California 91436. Kornreich initially became CEO of HHD on

August 16, 1996. On August 18, 1997, Kornreich was elected Vice-President of

HHD. He was the President of Heritage 7 Texas City, Heritage 8 Houston,

Heritage 9 Ft. Worth and V.P. of HHD and Heritage Sarasota at the time of those

respective offerings. The 1997 tax returns for each of these Heritage Entities list

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Kornreich as a Director. In 1996-1997 he received at least $20,000 in consulting

fees from HHD. Kornreich knew E. Rubin from their childhood in

Czechoslovakia.

65. Cary Medill (“Medill”) is an individual and resident of California

whoi resides at 2983 Deep Canyon Drive, Beverly Hills, CA 90210. On August

18, 1997, Medill was elected to the Board of HHD and the affiliates. Beginning

with the Sarasota offering, Medill was listed in each Official Statement as a

Director of HHD and each of the Heritage Entities. He became Chairman of the

Board of HHD on May 1, 1999 when Saltzman resigned.

a. Prior to becoming a Director of HHD and its affiliates, Medill

had a personal/social relationship with the Kasirer family. Moreover, Medill was

on the Board of Directors of Mishkan Healthcare, Debra Kasirer’s company.

According to the JDDJ General Ledger for 1997, JDDJ owed Medill $100,000

(per notes from an SCS accountant, Medill had extended a loan to JDDJ).

Therefore, the section in the Official Statements entitled “Relationship Among the

Parties” which claimed there was no direct or indirect relationship between the

Heritage Officers and Directors and the Management team was clearly false.

b. Although Medill sat on the Board of Directors for HHD and its

affiliates for over two (2) years, during which time, eight bond offerings were

consummated, he testified that he had no knowledge of the corporate structure of

the Heritage organization and never looked at an Official Statement for any of the

bond offerings. In addition, he testified he had no idea of whether the Operating

Deficits Agreements were funded even though each OS specifically discussed the

ODA’s and managements obligations under the same. Medill never reviewed the

construction contracts which related to the renovation of the Heritage projects and,

despite the fact that he knew of the massive cost over runs and delays in

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


construction, he never took any action to correct the situation or notify the

bondholders of the problems in future Official Statements. Instead, he testified

that he simply assumed that those in charge “knew what they were doing” so he

relied on their “expertise” without any independent analysis of the actions which

Heritage was undertaking or their effect on the Heritage entities and others.

c. Recently, Medill was indicted for tax fraud. He plead guilty to

the charges and was sentenced to three years probation. As a result, he has been

disbarred. During his deposition in the instant action, Medill asserted his Fifth

Amendment right against self incrimination and refused to answer a majority of

the questions posed relating to his tenure on the Board of Directors of HHD and its

affiliates. Upon information and belief, in 1999, Medill fraudulently transferred

ownership of his $3.5 million dollar Beverly Hills home to his wife so that

potential liability in the instant action and/or to the IRS (relating to the above

noted tax fraud) could be avoided.

66. Donald B. Chalker (“Chalker”) is an individual resident of California

with an address of 10375 Wilshire Blvd., Apt. 14AC, Los Angeles, California.

Chalker was a Director of HHD and three Heritage Entities (Heritage 7-Texas

City, Heritage 8-Houston and Heritage 9-Ft. Worth) at the times of those offerings

and remained so until his resignation on August 18, 1997. After his resignation

from Heritage, Chalker joined the Board of Directors of Marion Healthcare, the

entity Emery Rubin formed in early 1998 after he was ousted from the Heritage

organization, which went on to conduct other bond offerings.

a. On or about June 1996, Chalker became a Director of Heritage

at the request of Emery Rubin. According to testimony provided by Chalker, he

joined the Heritage Board purely as a favor to Emery Rubin so that there would be

a quorum of the Board. Although Chalker sat on the Heritage Board for more than

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


a year, during which time three bond offerings were consummated, Chalker

testified in deposition that he believed he had absolutely no responsibilities as a

Director. Although he knew the Heritage projects were financed through bond

offerings, Chalker testified he: (1) never saw or reviewed any of the Official

Statements, Indentures, or any other material connected with the Offerings; (2)

never reviewed any financial information regarding the Heritage entities; (3) never

knew who the Trustee or the underwriters were; (4) had no obligation or

responsibility to oversee the affairs of Heritage; and (5) “didn’t give any real

thought to who were buying [the Heritage bonds].” Despite the admitted fact that

Chalker never obtained information about the workings of the Heritage entities,

their financing structure, or the track record of prior Heritage projects, Chalker

attended a number of Heritage Board meetings and blindly approved a number of

actions and resolutions without investigating their propriety or effect on Heritage

or others.

b. Emery Rubin was Chalker’s friend and a long time client of

Chalker’s insurance brokerage company, LFC Insurance (“LFC”). In fact, prior to

Chalker’s involvement with Heritage, LFC provided insurance for Emery Rubin

and his companies for many years. Upon information and belief, LFC provided

insurance for Emery Rubin’s non-profit corporation, United Community and

Housing Development Corp. (“United Community”). As discussed below in detail

at ¶¶122-126, in the early 1990's United Community and Robert Kasirer were

involved in bond offerings which resulted in a law suit alleging fraud and

misappropriation of bond funds. As such, Chalker clearly had knowledge of

and/or access to information regarding the ultimate demise of the Untied

Community bond projects. Despite this fact, no information on the United

Community projects was included in any OS.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


c. Robert Kasirer was a long time personal client of LFC. In fact,

LFC provided Kasirer with insurance for the Beverly Hills Medical Center, the

genesis of the Heritage bond deals. Therefore, the section in the Official

Statements entitled “Relationship Among the Parties” which claimed there was no

direct or indirect relationship between the Heritage Officers and Directors and the

Management team was patently untrue. Clearly, Chalker had a prior direct

relationship with Robert Kasirer which should have been disclosed in the Official

Statements.

d. Chalker’s insurance brokerage company, LFC, wrote numerous

insurance policies for Heritage through which it received substantial fees from

Heritage. Prior to Chalker’s appointment to the Heritage Board, Mike Checca, an

employee of LFC, was a Director of Heritage. According to deposition testimony

given in the instant action, Checca was asked to resign because he attempted to

convince the Heritage Board to purchase additional insurance policies through

LFC. Chalker was appointed to the Board after Checca’s resignation and LFC’s

business relationship with Heritage continued. After Chalker’s resignation,

Goldstein corresponded with LFC on numerous occasions regarding the policy

limits, premiums, and fees charged by LFC. In April 1998, Goldstein wrote a

letter to Chalker’s wife, Mary Anne Chalker, complaining about the various

unauthorized “professional fees” paid to LFC and $35,000 in fees for “Risk

Management Services” in 1997. Attached to Goldstein’s letter were statements

showing fees of $17,000 and $18,000 paid to LFC on January 21, 1997 from the

Texas City bond proceeds and on March 13, 1997 from the Houston bond

proceeds. Goldstein stated that Heritage had no documents justifying such fees,

nor a statement describing what services were rendered. Goldstein went on to say

that Heritage’s new insurance broker saved over $100,000 in premiums and,

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

22 By way of example, Chalker and Wexler are sued in connection with thefirst three offerings and the time period from the first offering to their resignations.Greenspan is only sued in connection with the Brownsville offering and the timeperiod thereafter. Goodman is only sued for the events when he was CFO,including the offerings that took place when he was CFO.


unlike LFC, did not charge either “Risk Management fees” nor “professional

fees.” LFC’s profit on its business transactions with Heritage clearly violated IRS

and Medicare rules regarding related party transactions with non-for-profit

entities.

67. Marshall Wexler (“Wexler”) is an individual resident of California

with an address of P.O. Box 570833, Tarzana, California 91357. He was vice-

chairman of HHD and three Heritage Entities (Heritage 7-Texas City, Heritage 8-

Houston and Heritage 9-Ft. Worth) at the times of those offerings and remained so

until his resignation on August 18, 1997.

68. Evan Greenspan (“Greenspan”) is an individual with a business

address at Evan M. Greenspan Inc. Musical Services, 11846 Ventura Blvd., Suite

140, Studio City, California 91604-2620. Greenspan was a Director of HHD and

Heritage Healthcare of America at the time of the Brownsville offering.

69. These individuals are, at times, collectively referred to herein as the

“Heritage Officer & Director” Defendants. Each of the Heritage Officer &

Director Defendants are only sued for the time periods where they were Officers

or Directors of one or more of the Heritage Entities.22

KASIRER DEFENDANTS

70. Robert Kasirer ("Kasirer") is an individual and a resident of Beverly

Hills, California. Kasirer graduated from St. John’s Law School in 1973 and

worked with Golden State Health Centers, Inc. from 1975 to 1982 (a company

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

23 In the early 1990’s, Kasirer, in conjunction with Don King, acquiredcontrol of the Beverly Hills Medical Center. Dierckman and Pontarelli were thesenior managers of the facility, which ultimately failed. This business ventureresulted in at least three lawsuits, one alleging fraud and two for nonpayment ofmonies owed.


with which his father is affiliated). He was also Of Counsel to Manatt Phelps

Rothenberg & Phillips until 1986. From 1988-1991 he developed retirement

housing and healthcare facilities. He was involved in numerous business

ventures involving the sales of municipal bonds which resulted in litigation and

allegations of improper conduct (see below).23 From 1995 to 1997, he was

associated with Iatros, where he was managing Director of one of its subsidiaries

and a member of the Board of Directors. By November 1996, he was the Director

of Business Development and owned slightly over 1 million shares of Iatros, or

6.72%. The shares were held by Healthcare Holdings L.P., a limited partnership

of which Kasirer was the General Partner. In September 1998, a federal tax lien of

$594,441 was asserted against Kasirer and his wife. However, this information

was never disclosed in any Official Statement. He was a control person of HCH,

CareContinuum, JDDJ and BMH (as defined below) and the Heritage Entities.

Kasirer caused improper transfers of bond monies among the various Heritage

Entities, to himself, his wife and/or his companies. He was paid a salary of

$919,152 by HCH and CareContinuum in 1997-2000.

71. Debra Kasirer, wife of Robert Kasirer, resides in Beverly Hills,

California. Plaintiffs have sued Debra Kasirer for obtaining monies from the

Heritage Entities by fraudulent means. Total funds advanced to Debra Kasirer

(either directly or through her company, Mishkan Healthcare) are in excess of $6

million dollars. Although neither she nor her company performed any services for

the Heritage Entities, these amounts were typically accounted for as “salary” or

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

24 JDDJ was connected to and/or employed various Heritage insiders. OnApril 5, 2000, Lim, who was employed by JDDJ, faxed to SCS the yearly cashreceipts, disbursements records and bank statements for JDDJ. At least one JDDJbank account used Goldstein’s office for its address.


“consulting fees.” Heritage Rancho, for example, paid her a salary of $1,127

every two weeks during a portion of 1996-97, and her personal automobile was

leased for her by Heritage Housing Development.

72. Bistra & Munkacs Holdings, Inc., ("BMH") is an S corporation of

which Robert Kasirer was the sole shareholder in 1998. It was formerly know as

BHMC Corp. BMH is the general partner of JDDJ, owning 10% in 1998. At

some point in time, the ownership of BMH may have been transferred to Kasirer’s

four children. Debra Kasirer wrote a check in September 1999 for $7,004 from

her personal bank account to the Franchise Tax Board for BMH’s 1998's taxes.

73. JDDJ Holdings, L.P. ("JDDJ"), a limited partnership, was originally

called BHMC L.P., but its name was changed to CareContinuum L.P. and in

1997,when CF Holdings LLC was renamed CareContinuum LLC, its name was

changed to JDDJ. The general partner of JDDJ is BMH, which, as discussed

above, is wholly owned and operated by the Kasirers.24 Kasirer is the limited

partner of JDDJ according to the Official Statements and, according to the JDDJ

1998 tax return, BMH’s share of JDDJ was 10%, Robert owned 80% and his four

children owned the other 10%. The financial history of JDDJ is as convoluted as

the history of its name.

a. In 1996, BHMC L.P. (JDDJ’s predecessor) recognized a loss of

$1,431,797 because the building it owned, the Beverly Hills Medical Center, was

foreclosed upon and it took $9,557,868 in grand total depreciation. In 1995, this

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

25 In 1998, JDDJ wrote the following checks: CareContinuum for $75,000;HCH for $140,000; Heritage Chicago and Austin for $250,000 each; $109,935 toRobert Kasirer; and $100,000 to KYH.


building was listed as an asset worth $10,963,060, but at the end of 1996, BHMC

L.P. had assets of only $4,030.

b. In 1997, JDDJ received $3.8 million in “other income.”

c. In 1998, JDDJ had “other income” of $4.150 million, it

distributed $4,620,183 - ($600,000 to BMH, $3,380,183 to Robert Kasirer, and

$160,000 to each of Kasirer’s four children) but it had a loss for the year.

Handwritten notes from an SCS accountant state “Per Virgil-Robert received the

following [other income] in 1998": $4.2 million total ($1,326,812.50 and $36,000

on January 5 and January 6, 1998 from Florida deal and $2,837,636.81 on July 23,

1998 from Chicago deal).

d. In 1999, Heritage paid JDDJ $773,169.83 for East Houston,

$670,101.25 for Seminole, and $1,162,444.90 for Brownsville. Moreover, JDDJ

received another $352,969.72 from the sale of three acres of land which,

unbeknownst to investors, was part of the East Houston Facility prior to the sale to

Heritage but was “given” to JDDJ when the Heritage transaction took place.25 In

1999, per the tax return, JDDJ had “other income” of $2,865,000, it distributed

$2,736,097 ($2,189,079 to Robert Kasirer, $273,510 to BMH and $68,377 to each

of his four children) but it had a loss for the year.

e. It appears the loss from the foreclosure of the Beverly Hills

Medical Center in 1996 allowed SCS to report a net loss for JDDJ in its 1997-

1999 taxes. The result - no taxes were paid on the $10.815 million JDDJ

received as “other income” from the sale of properties to Heritage that

Heritage bought with the funds raised in the bond offerings!

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


MANAGEMENT COMPANY DEFENDANTS

74. Health Care Holdings, LLC ("HCH") is a Nevada limited liability

corporation (first known as UCHDC Notes L.P., which became HCH L.P. in

1996/1997, and was converted into an LLC in 1998), which purportedly provided

Facility management to all of the Heritage Entities. Kasirer was a majority

member (former general partner), Chairman and Chief Executive Officer of HCH,

and through his majority interest and executive position exercised dominion and

control over HCH. In 1997-1999 HCH had $4.428 million in gross receipts. In

1998 Kasirer owned 10% and his four children owned 90% of HCH. In 1999,

when the company started losing money, Kasirer owned 93% and the children

owned only 7%.

75. CareContinuum, LLC ("CareContinuum"), a California limited

liability corporation (formerly CF Holdings LLC), purportedly provided

management of all of the Heritage Entities' outpatient programs. At all relevant

times, Kasirer was the Chairman and Chief Executive Officer of CareContinuum,

and exercised dominion and control over CareContinuum, although he owned 10%

and his children owned 90%. CareContinuum had $4.476 million in gross

receipts for 1997-1999. According to financial statements prepared by SCS for

“Health Care Holdings and Affiliate” (which includes CareContinuum) had $9.605

million in gross receipts in 1997-1999.

76. HCH, CareContinuum, IHN and Iatros are sometimes collectively

referenced as "Kasirer's Management Companies."

77. Louis Pontarelli (“Pontarelli”) was the Director of Outpatient

Programs and/or the Director of California Health Systems for HCH during the

relevant time period. In this capacity, he was responsible for the creation,

implementation and oversight of outpatient programs. Pontarelli was the listed

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


agent for service of process for the following corporations related to the Heritage

Entities: Heritage Purchasing Alliance; Heritage Health Partners, Inc.; and

Heritage Physicians Network IPA, A Medical Corporation. In addition, after

Kasirer acquired control of Beverly Hills Medical Center in the early 1990’s,

Pontarelli was the hospital administrator, and was sued, along with Kasirer and

others, by one of the former owners of the hospital for engaging in a conspiracy to

defraud. Although Pontarelli was purportedly part of Kasirer’s management

company, he personably received a salary of $124,412 in 1998 and $123,110 in

1999 directly from Heritage Rancho for managerial services. Pontarelli also

received over $200,000 in marketing expenses as an employee of Heritage Rancho

in a 1 ½ year period. Louis Pontarelli approved the purchase of $9,000 in Dodgers

season tickets for himself and was the signatory on behalf of Heritage Rancho for

a “loan” of $15,000 to another Health Care Holdings employee - both with funds

from the Heritage Rancho coffers .

78. William Filippone (“Filippone”) was the President and Chief

Operating Officer of HCH as of July 1998. In this capacity, he was responsible for

the development and coordination of all policies and procedures throughout HCH.

79. Leo Dierckman (“Dierckman”) was the Vice-President of Finance of

HCH during the relevant time period. He was responsible for the oversight and

coordination of Project financing activities, contractual review and other

development activities for HCH. Prior to joining HCH, he was affiliated with

Iatros. In addition, Dierckman was substantially involved in drafting large

portions of the Official Statements, marketability studies and financial feasibility

studies disseminated in connection with all of the bond offerings.

80. Alan Pollak (“Pollak”) was the Director of Behavioral Care Programs

and/or the Director of Outpatient Programs of HCH during the relevant time

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


period. He is Kasirer’s nephew. He was responsible for designing, implementing

and coordinating all outpatient and behavioral care programs at HCH managed

Facilities. In addition, Pollak was the Vice President of Heritage Research,

described above. In 1999, Pollak individually received a salary of $103,842 from

Heritage Rancho. In January 2000 he began billing HHD as a consultant, billing

$8,500 in January alone.

81. Geri Ostlund (“Ostlund”) was the Controller of HCH from December

1997 through the remainder of the relevant time period. She was purportedly

responsible for developing all accounting policies and procedures, establishing

systems for financial reporting of monthly and year end statements, formulating all

budgets and pro-forma’s of current Facilities, analyzing the financial

consequences of potential acquisitions and assisting in the recruiting of all Facility

accountants. Ostlund drafted and/or executed many of the improper requisition

certificates and facility fund transfer authorizations that resulted in improper fund

transfers. She is one of the parties to the settlement agreement entered into with

U.S. Trust. According to the 2000 HHD employee roster, Ostlund received an

annual salary of $77,000 for her services as “business manager of the Fort Worth

Regional Office.”

82. Richard Kuhl (“Kuhl”) was the Vice President of Architecture &

Construction of HCH during the relevant time period. Kuhl was also the Vice

President of Architecture & Construction for HHD and for Heritage America

during 1998. According to the 2000 HHD employee roster, Kuhl received an

annual salary of $90,000 for his “corporate management” position as the

construction supervisor.

83. The Defendants listed in this section are sometimes hereinafter

referred to as the “Management Company Defendants.”

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


MILLER & SCHROEDER DEFENDANTS

84. James E. Iverson ("Iverson") is an individual and resident of San

Diego County, California. Iverson was at all relevant times an Executive Vice

President of Miller & Schroeder and the branch manager of Miller & Schroeder’s

Solana Beach office. He supervised all underwriting at this office for the Heritage

bonds and was thus involved in performing due diligence and preparation of the

Official Statements. He also supervised, approved and/or ratified the work of his

subordinate, Victor P. Dhooge.

85. Victor P. Dhooge ("Dhooge") is an individual and resident of San

Diego County, California. Dhooge was at all relevant times the lead investment

banker for Miller & Schroeder in connection with the Heritage bond offerings. As

the lead investment banker, Dhooge participated in the due diligence investigation,

structuring, financing, marketing, and concealment of cumulative problems

regarding the Heritage bonds, preparing the Official Statements, summary term

sheets, presentation to the credit committee at Miller & Schroeder, and was lead

presenter in sales meetings at the offices of Miller & Schroeder with respect to

marketing of the Heritage bonds.

86. John M. Clarey ("Clarey") is an individual and resident of Minnesota.

Clarey was at all relevant times an Executive Vice President and the Chief

Operating Officer of Miller & Schroeder, and was co-chairman of Miller &

Schroeder’s credit committee, with gate-keeper responsibility for approving the

offer and sale of Heritage bonds to the public after reviewing the Heritage bond

due diligence documentation and the Official Statements. The approval of the

Heritage bond offerings required unanimous consent of the credit committee.

87. Edward J. Hentges ("Hentges") is an individual and resident of

Minnesota. Hentges was at all relevant times an Executive Vice President and

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Chief Compliance Officer and Vice President of Miller & Schroeder with

responsibility to ensure compliance with the securities laws in connection with the

financing, structuring, marketing, and continuing disclosure (including of

cumulative problems) regarding the Heritage bonds.

88. Kenneth R. Larsen ("Larsen") is an individual and resident of

Minnesota. Larsen was at all relevant times the Chief Financial Officer of Miller

& Schroeder, and Vice President of Miller & Schroeder with knowledge and

ability to influence corporate affairs in connection with the financing, structuring,

marketing, and concealment of cumulative problems regarding the Heritage bonds.

89. Jerome E. Tabolich ("Tabolich") is an individual and resident of

Minnesota. Plaintiffs are informed and believe that Tabolich was at all relevant

times an Officer of Miller & Schroeder, and a member of Miller & Schroeder’s

credit committee, with gate-keeper responsibility for approving the offer and sale

of Heritage bonds to the public after reviewing the Heritage bond due diligence

documentation and the Official Statements.

90. Steven W. Erickson ("Erickson") is an individual and resident of

Minnesota. Plaintiffs are informed and believe that Erickson was at all relevant

times an Officer of Miller & Schroeder, and a member of Miller & Schroeder’s

credit committee with gate-keeper responsibility for approving the offer and sale

of Heritage bonds to the public after reviewing the Heritage bond due diligence

documentation and the Official Statements.

91. Paul R. Ekholm ("Ekholm") is an individual and resident of

Minnesota. Ekholm was at all relevant times a Senior Vice President of Miller &

Schroeder, and a member of Miller & Schroeder’s credit committee with gate-

keeper responsibility for approving the offer and sale of Heritage bonds to the

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


public after reviewing the Heritage bond due diligence documentation and the

Official Statements.

92. Kenneth E. Dawkins ("Dawkins") is an individual and resident of

Minnesota. Dawkins was at all relevant times a Director of Miller & Schroeder,

and a control person of Miller & Schroeder.

93. Iverson, Dhooge, Clarey, Hentges, Larsen, Tabolich, Erickson,

Ekholm, and Dawkins are collectively referenced as "Miller & Schroeder

Principals."

ATTORNEY DEFENDANTS

94. Joel T. Boehm ("Boehm") is an individual and resident of San Diego

County, California. Boehm, as an employee of Sabo & Green and later of

Atkinson Andelson, was at all relevant times the principal attorney for Miller &

Schroeder in connection with the Heritage bond offerings. He drafted and co-

authored substantial portions of the Official Statements.

95. Sabo & Green is a California law firm, currently called Green de

Bortnowsky & Quintanilla, that employed Boehm and acted as Miller &

Schroeder’s underwriter’s counsel for the Texas City, Houston, Ft. Worth No.1,

Sarasota, Austin, and Chicago offerings. Sabo & Green received over $653,904 as

the underwriter’s counsel for these bond offerings. Charles Green, a partner of

Sabo & Green, was the City Attorney for the City of Desert Hot Springs at the

time of the Heritage Rancho No. 2 offering and received fees as the Municipal

Issuer’s counsel and special counsel for the offering. Charles Green was the

previous agent for service of process for Health Care Holdings, LLC and Sabo &

Green was included on the service list for much of the correspondence regarding

the drafting of the Official Statements. Charles Green is also the current agent for

service of process for HealthCarecontinuum, LLC, a California Limited Liability

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

26Although not disclosed in the Official Statements, in January 1997, CapitalValuation had appraised the Sarasota Facility at $5.5 million on an “as is” basis. This value was over $500,000 lower than VC’s appraisal in November 1997. Similarly, Capital Valuation’s “as is” appraisal of the Chicago Facility was over$400,000 lower than that of VC. See ¶¶ 202, 257.


Company formed on April 6, 1998 by Robert Kasirer. In 1998 both Sabo &Green

and Joel Boehm paid Kasirer money, calling it a “finders fee,” but in reality was a

kickback for the work they received relating to the Heritage offerings.

96. Atkinson, Andelson, Loya, Ruud & Romo (“Atkinson Andelson”) is a

law firm, located in San Diego County, which employed Boehm after he left the

employ of Sabo & Green. Atkinson Andelson acted as underwriter’s counsel for

the Ft. Worth No. 2, East Houston, Seminole and Brownsville offerings and

received fees well in excess of $350,000. The firm gave Kasirer kickbacks.

Boehm is currently employed by Atkinson Andelson.

97. Boehm, Sabo & Green, and Atkinson, Andelson, Loya, Ruud &

Romo, are sometimes collectively referred to herein as the “Attorney Defendants.”

APPRAISER/FEASIBILITY DEFENDANTS

98. Defendant CBIZ Valuation Group, Inc. was formerly known as VCGI

Acquisition Corp., Valuation Counselors Group, Inc., and CBIZ Valuation, Inc.

(together, "Valuation Counselors" or “VC”). CBIZ Valuation Group, Inc. is a

wholly owned subsidiary of defendant Century Business Services, Inc (“CBIZ ”)

(see ¶100, below).

a. VC performed the property appraisals for the Sarasota and

Chicago bond offerings after earlier appraisals performed by Capital Valuation

came in too low.26 These appraisals set forth the “as-is,” “upon completion,” and

“upon stabilization” values for each subject facility. These values were then

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

27 The Sarasota facility was purchased for $1.3 million and appraised “as-is”

at over $6 million only ten months later. The Chicago facility was appraised “as-is” at over $4.2 million, which constituted a 70% appreciation over what Heritageactually paid for the property. Furthermore, despite spending millions of dollars torenovate these facilities, today, they are unable to command their original “as-is”appraisal values (much less anywhere close to the “upon completion” values),even in the midst of healthy appreciation in the surrounding real estate.

28 Early appraisals were completed for $6,500 or less, but the fees quicklyramped up to $20,000 or more. This jump in fees occurred despite the fact that thelater appraisals contained a large amount of material copied verbatim out of earlierappraisals.

29 The “upon completion” and “upon stabilization” values managed to trumpthe “as-is” values by up to 100% or more. The Sarasota facility was appraised “as-is” at over $6 million, at $12.88 million “upon completion” and at $15.25 million“upon stabilization.” Despite these lofty projections, Sarasota ended up selling fora mere $4.2 million (20% less than its original “as-is” value). See ¶ 202. TheChicago facility was appraised “as-is” at over $4.2 million, at $17.3 million “uponcompletion” and at nearly $20.5 million “upon stabilization.” After over $8


quoted in the Official Statements as independent and unbiased reflections of what

each subject facility was worth. Together, these valuations were presented as the

most accurate measure of the value of prospective bondholders’ collateral. The

“as-is” appraisal value quoted in the Official Statement should have constituted

the worst-case scenario and the “upon completion” value should have reflected the

most likely value. Unfortunately, VC was unduly influenced by Heritage

management, and overly dependent on the continuing flow of business from

Heritage, providing management with highly overblown “as-is” valuations27 in

exchange for ramped-up appraisal fees and a guaranteed flow of business.28

Moreover, while the “as-is” valuations bore little, if any, relation to reality, the

“upon completion” and “upon stabilization” valuations appear to have been drawn

out of thin air,29 solely for the purpose of enticing prospective bondholders.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

million was invested in construction and rehabilitation of the Chicago facility,remains unsold with the most recent offer of $3.3 million having been pulled. See¶ 257 below. Moreover, the fact that the “upon completion” values always camein very close to the dollar amount of the bond offering is particularly suspect.

30Moreover, early on, Columbia took the position that many of the programsHeritage intended to operate would violate these deed restrictions. Despite thisfact, the Market Studies continued to describe these programs as being key to thesuccess of projects.


b. Finally, the appraisals assumed title to the property was

owned free and clear, without any restrictions or encumbrances. Thus, the

appraisals did not take into account the deed restrictions of record which forever

prohibited these properties from being operated as hospitals – the purpose for

which they had originally been constructed.30 It is difficult to justify this omission

given the plain language of the appraisal; both appraisals described the analysis

utilized to determine “highest and best use” as an analysis of four factors, with the

second being “Permissible Use (Legal) - Uses permitted by zoning and deed

restrictions on the site in question.” The Sarasota appraisal actually goes on to

note “[a]n existing covenant on the property forbids it from being used as a

diagnostic imaging center, acute-care hospital, or surgery center.” Therefore, VC

clearly knew that their “as is” valuation was based on a false assumption. While

the appraiser, in recent deposition testimony, rationalized this decision on the

‘assumption’ that the seller of the land, Columbia/HCA, was “unable” to operate a

hospital profitably, there has never been any suggestion that this was Columbia’s

motivation in shutting these facilities down in the first place. In fact, Columbia

imposed the restriction because use of the property as a hospital would present

potential competition for Columbia’s existing facility in the area; there was never

any suggestion that the operation of a hospital was “nonviable”. In light of the

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

31 Any potential adverse condition is to be accounted for under the nationalguidelines for appraisers. See Uniform Standards of Professional AppraisalPractice, Standards Rule 1-2.


fact that the deed restrictions encumbered the only hard security available to

bondholders, any potential adverse impact they had on the value of the land was

material and should have been addressed, particularly in the “as is” value, which

dealt with liquidation value.31

c. Defendant VC also provided market feasibility studies for the

Official Statements disseminated in connection with the Austin, Fort Worth No. 2,

Rancho No. 2, East Houston, Seminole and Brownsville offerings.

i. VC’s market feasibility reports were appended to, and

incorporated as part of, the Official Statements. An examination of these market

feasibility studies reveals that they are taken virtually word for word from a

market feasibility study prepared several years earlier by Capital Valuation for

Sarasota, which was in turn copied from an earlier study conducted by

Zelenkofske. So identical are these reports that entire detailed accounts of

conversations with local market experts and local area professionals are

reproduced, word for word, for completely unrelated projects located in Texas,

California and Florida. Moreover, VC’s working files are largely devoid of any

notes or other evidence to suggest that these conversations ever took place. Given

the foregoing, only one conclusion is reasonable: as far as VC’s own diligence

goes, these discussions with local area professionals are pure fiction. Similarly,

references to certain regulatory matters in Texas find their way into the studies

conducted for Rancho II (in California) and Seminole (in Florida).

ii. The reports also fail to address key areas of local competition,

and market areas are obviously gerrymandered to maximize the target population

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


and minimize competing facilities. A close examination of the Brownsville

market area map, for example, clearly shows a combination of two very distinct

market areas – Brownsville itself, a thinly populated downscale border town with

a number of existing facilities, and Harlingen, a more upscale and more populous

community some 25 miles away, also having existing facilities. Other reports

limit the realistic market area to a 10-mile radius, which, if applied to Brownsville,

would result in a thinly populated area with half the market in Mexico.

iii. Nationwide statistics, which should, in theory, remain constant

in all reports, vary from report to report depending on the size, shape and location

of these gerrymandered market areas. For example, while most VC market studies

used a purported “nationwide” standard primary market area for a successful

facility as “within a 10-mile radius of the facility,” the Brownsville market study

alters this “nationwide” standard to “throughout the county” – and Brownsville

itself sits on the very edge of the county, on the U.S./Mexico border.

iv. In other cases, the assumptions on which marketability is based

are beyond ludicrous, such as the use of private-pay reimbursement rates to

demonstrate the fiscal viability of facilities which will be overwhelmingly

dependent on Medicaid reimbursement -- although Medicaid reimbursement is

always significantly lower than private-pay, and Texas, in particular, has one of

the lowest Medicaid reimbursement rates in the country. In fact, although the

reports acknowledge most facilities would be highly dependent on Medicaid

patients, the projections are all keyed off of the much higher private-pay rates;

nowhere are Medicaid rates even disclosed.

v. Known concerns of the VC personnel (as voiced in notes and

memos) are omitted entirely from these reports, such as the absence of trained

professionals available to staff a local facility, the local risk posed by

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


undocumented aliens seeking treatment (for which no Medicaid reimbursement

would be available), or the difficulty of meeting costs with a patient mix of

mostly Medicaid patients.

vi. Significantly, the Market Studies repeatedly stress that success

of the facilities was dependent on “sophisticated” management. Yet, nowhere is

management’s minimal and poor track record discussed. Also not discussed or

acknowledged in the studies is the fact that management had, with one exception,

never opened many of the programs described in the marketing studies. A VC

employee testified that these programs provided the basis for VC’s opinion that

these facilities would be successful.

vii. The seemingly endless list of VC’s failures in preparing the

market studies include, inter alia: using outdated demographics to calculate patient

fill-up rates; using the same potential patient population for calculations in two

distinct programs (“double-dipping”); disregarding the well-known fact (in the

elder-care/ nursing industry) that the conversion of hospitals, which are by nature

short-term stay institutions, into residential based facilities is rarely done because

it is extremely costly; failing to consider the effect home-care and turn-over rates

would have on patient fill-up rates; failure to analyze whether there was any actual

need for a number of programs Heritage intended to run (PHP, CORF, Senior Care

programs); and failure to determine if Heritage had actually opened these

programs at earlier facilities. The failure of VC to engage in these most basic

analyses when preparing these studies clearly indicates its negligence. However,

the fact Diane Colby and Filipone (the main operations personal in Texas) and

Bertolini (the President/Chairman of the Heritage entities), stated that they were

never contacted by any VC personnel, indicates that the omissions from VC’s

analyses were intentional.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


99. Defendant CBIZ Accounting, Tax & Advisory, Inc. was formerly

known as Zelenkofske, Axelrod & Co., Ltd., ZA Business Services Inc., and CBIZ

Business Solutions, Inc. (together, "Zelenkofske" or “ZA”), and is a corporation

located in Jenkintown, Pennsylvania. Zelenkofske provided the financial

feasibility and market assessment studies for Rancho No. 1, Texas City, Houston

and Ft. Worth No. 1 bond offerings. Its reports were appended to and incorporated

as part of the Official Statements.

a. Zelenkofske was paid at least half a million dollars by the

Heritage entities for its work. According to a letter written by Goldstein on July

22, 1997, Zelenkofske “threatened that the report would not be issued if they were

not assured of receiving” other work. Goldstein also stated in this letter that

“every day a new issue arose or a new crisis of some sort was created, causing

delivery of the study to be delayed.”

b. Andrew Zelenkofske (who later became Vice President of

defendant CBIZ upon its acquisition of Zelenkofske) was the principal executive

of both Zelenkofske and to a company named Century Financial Group. Century

Financial Group was a separate company being run out of the same office as

Zelenkofske Axelrod in Jenkintown, PA. Although there is no proof Century did

any work for Heritage, it received money from the Sam Houston and Texas City

bond closings as part of the initial requisition certificate, totaling some $88,000.

Then, in an attempt to hide the blatant improper transaction, Century Financial

gave kickbacks of $25,925 to Debra Kasirer in 1996 and $25,000 to one of the

Kasirers’ companies in 1997. Debra Kasirer testified that she never performed

services for Century Financial.

c. A witness in this case, Dan Gottlieb, testified that Steve

Fishman of Zelenkofske was tied in with Kasirer and Iatros. Gottlieb testified that

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Fishman had some fairly significant position with Iatros, perhaps some kind of

business relationship and equity interest. Gottlieb also testified that Fishman and

Kasirer knew each other quite well. In the transactions involving both Gottlieb

and Heritage, Gottlieb stated that he came to question the independence of

Zelenkofske. Gottlieb stated that, in one instance, he reviewed the income cash

flow analysis projection by Zelenkofske, which he relied on to his detriment, and

found there were numerous discrepancies. Thus, he began to doubt either

Zelenkofske’s objectivity or their thoroughness. Gottlieb further testified that the

fact the numbers never came to fruition caused him to suspect that Fishman was

“too tied in selling deals rather that doing the proper due diligence from an

accounting level . . . He’d become what I think could be referred to as a deal

junkie, rather than a real accountant who really worked on the transaction. He was

more into doing deals and getting them done. He began to lose his objectivity.”

Gottlieb recounted a representation made to him by Jim Sherman of Zelenkofske,

regarding the Maryland Gardens facility in Phoenix.

d. In addition, in 2001, Kasirer (through KYH) and Fishman’s

current company, ZA Consulting, engaged in a number of transactions, including

the installment sale of a parking garage next to the Ft. Worth facility for $1 million

that Kasirer took ownership of in the Ft. Worth deal, for virtually no money, and a

simultaneous investment by KYH in ZA Consulting.

100. Defendant CBIZ, sued herein as Doe no. 5, is a publicly traded

professional services firm with 5,000 employees, generating annual revenues in

excess of $500 million, operating from offices throughout the United States.

Plaintiffs are further informed and believe and on that basis allege that defendants

Zelenkofske and VC were, and at all times herein mentioned are, the alter ego of

defendant CBIZ, and there exists a unity of interest and ownership among these

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

32 Assuming (as Class Plaintiffs argue) that CBIZ bears liability on an “alterego” basis, these liabilities could be satisfied regardless of the limits set byinsurance. CBIZ’s own annual report acknowledges, in a “risk factor,” that CBIZmay bear liability for the errors and omissions of its business divisions wherethose liabilities exceed the amounts covered by insurance.


defendants, and each of them, such that any separateness between them has ceased

to exist.

a. CBIZ acquired defendant Zelenkofske’s financial consulting

business for $6.2 million in cash plus 922,172 shares of common stock in June of

1997. As part of this transaction, Zelenkofske was divided into three entities.

Two of the three were spun off as separate companies, leaving Zelenkofske with

the financial consulting business, including the business of preparing marketing

and feasibility studies. Upon being acquired by CBIZ, Zelenkofske was renamed

ZA Business Services Inc., CBIZ assumed the liabilities of Zelenkofske, and

Zelenkofske’s Managing Director, Andrew Zelenkofske, was named Vice

President of CBIZ. Later that year, in September 1997, CBIZ acquired VC in a

similar transaction for a purchase price of $6.75 million plus 864,197 shares of

common stock.

b. Once these two companies were brought into the larger CBIZ

enterprise, CBIZ immediately caused them to enter into a financing transaction

that had the effect of sacrificing their separateness, independence and viability,

for the benefit of CBIZ and the larger enterprise. This capitalization structure so

severely constrained VC’s and Zelenkofske’s ability to finance their own

operations, satisfy their own liabilities and make their own independent ordinary

business decisions, that to this day they remain unable to satisfy any significant

liability to Class Plaintiffs beyond that which is covered by insurance.32 The

transactions involved Zelenkofske and VC executing guarantees on a $50 million

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

33 Although CBIZ has maintained a single credit relationship with its agentbank and lenders since 1997, these credit agreements have been, at various times,amended, restated, and refinanced. The terms outlined herein are based on theinformation reflected in CBIZ’s most recent SEC filings, however the parametersand limitations appear to be consistent over the course of the past seven years. Inits August 11, 2004 press release, CBIZ announced that the line of credit had beenincreased from $73 million to $100 million. The updated credit document has notyet been filed with the SEC or posted online.


line of credit on which CBIZ (at that time named International Alliance Services,

Inc.) was the sole borrower. The guarantees were (and are) secured by

substantially all of the assets of CBIZ and its subsidiaries, including both VC and

Zelenkofske. The CBIZ credit line has, at times, been increased to a high of

$250,000,000 for the stated purposes, among others, of: funding $73,000,000 for

the repurchase of CBIZ’s own shares; funding further CBIZ acquisitions; and

funding CBIZ’s own operating expenses and corporate expansion. According to

CBIZ’s press release of August 11, 2004, this credit facility now stands at

$100,000,000 with an option to increase to $125,000,000.33

c. Neither VC nor Zelenkofske has ever received any direct or

indirect consideration in exchange for this upstream guaranty collateralized by

their assets. Furthermore, the credit facility imposes such severe constraints on

what CBIZ may permit its subsidiaries to do, that CBIZ must essentially override

completely the authority of VC and Zelenkofske to make ordinary business

decisions. As a result, VC and Zelenkofske have been deprived of the ability to

satisfy any liability they may independently incur to the Class Plaintiffs. As noted

above, all or substantially all of VC and Zelenkofske’s assets are subject to the

lenders’ first priority security interest. Additional constraints on VC and

Zelenkofske include: the subsidiaries’ receivables being subject to the lenders’

lien, for which the agent bank maintains the right to obtain payment directly from

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


VC and Zelenkofske’s own clients to satisfy CBIZ’s obligations; general

prohibition on VC and Zelenkofske creating liens on their property (subject to

limited company-wide exceptions); general prohibition on VC’s and

Zelenkofske’s disposition of assets; general prohibition on VC’s and

Zelenkofske’s incurrence of debt; and a prohibition on VC and Zelenkofske

branching out into additional business lines. Any attempt by VC or Zelenkofske

to disavow the guarantees or the security interests is an event of default under the

credit facility, and any voluntary or involuntary bankruptcy or insolvency

filed by or against any subsidiary (or written admission of insolvency),

defaults the entire credit agreement, terminates the individual obligation of

each and every member of the lending syndicate to make advances, and

accelerates all outstanding advances, loans and letters of credit -- and this

occurs automatically and without need for any action whatsoever on the part

of the agent bank or the lenders (individually or collectively).

d. Due to this and other actions on the part of CBIZ, defendant

CBIZ controls and dominates the business affairs and operations of both VC and

Zelenkofske such that no separateness exists between them and CBIZ. Both VC

and Zelenkofske report directly to CBIZ’s President and Chief Operating Officer.

CBIZ maintains a centralized computer database of client files which include files

of all subsidiaries’ clients, including the client files of VC and of Zelenkofske,

commingled for the benefit of CBIZ and its other practice groups, and CBIZ

markets its financial consulting practice as a single division with a single national

marketing strategy. In fact, even CBIZ’s own website advertises CBIZ’s expertise

in valuation of Alzheimers’ facilities and assisted-living centers, with no mention

made of these services being performed through independent subsidiaries. In sum,

CBIZ acts towards VC and Zelenkofske as simply a part of CBIZ, with CBIZ

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


serving as the headquarters and controlling body for all or substantially all of the

various divisions, including its financial consulting business. CBIZ controls,

directs and dominates the affairs of its purported subsidiary entities or divisions

for the benefit of CBIZ.

e. By reason of the manner in which CBIZ operates, there is such

unity of interest, ownership and control that no separate personalities exist as

between the two subsidiary entities, on the one hand and CBIZ, on the other; and

to treat these subsidiaries as “separate and distinct” from CBIZ disregards the

ownership structure between the entities, the failure of CBIZ to adequately

capitalize its subsidiaries, the failure to maintain an arms length relationship (as

demonstrated by the upstream guarantees and collateralization of subsidiary assets

for the benefit of CBIZ), and the centralization of operations which allow CBIZ to

dominate and control the affairs of VC and Zelenkofske. Finally, the

undercapitalization of VC and Zelenkofske was intended to deprive VC and

Zelenkofske of the means to satisfy Plaintiffs’ claims hereunder, and to permit

CBIZ to “cherry pick” these financial consulting businesses for some $12.95

million in cash and 1,786,369 shares of common stock, to accept an upstream

guaranty of between $100,000,000 and $250,000,000 from each of these

businesses, secured by the assets of those businesses, without adequate

consideration, and to enter into transactions on terms that essentially bar these

subsidiaries from satisfying their own liabilities – in essence, to permit the parent

company to obtain financing through the collateralization of subsidiary assets,

but deny these subsidiaries the benefit of the very financing transaction they

themselves guaranteed and collateralized -- and finally then turn around and

allow CBIZ to insulate itself from liability of the business it has acquired, would

lead to an inequitable result.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

2834 It was sued erroneously as Capital Consulting Group Inc. in the prior

complaints. FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 60

101. Capital Consulting Inc. ("Capital"), is a corporation located in

Newark, Delaware.34 Capital Consulting Inc. was formed in 2001 by the owner of

Capital Valuation Group Inc., Mark Roth, in attempt to avoid liability for the

Heritage offerings. Under the name Capital Consulting Group, it had provided a

marketability study for the Sarasota bond offering. Under the name Capital

Valuation Group Inc. it provided appraisals for the Texas City, Houston, and Ft.

Worth No.1 bond offerings. It also did appraisals for Chicago and Sarasota,

however these appraisals were rejected in favor of higher appraisals done by

Valuation Counselors. Capital Valuation’s appraisals for Texas City, Houston

and Fort Worth I were cited in the Official Statements and the market feasibility

study was incorporated as part of the Sarasota Official Statement.

102. Mark Roth, sued herein as Doe No. 4, is the owner of Capital and was

the owner of Capital Valuation Group Inc. According to an Affidavit filed with

this Court in this case, in 1998 Mr. Roth’s partner left Capital Valuation and took

most of the employees with him. Thus, from 1998 to present, Capital Valuation,

(and later Capital Consulting) were both small companies, operated by Mr. Roth

and two others. At the time he formed Capital Consulting in 2001, the lawsuits

relating to Heritage had been filed and he was attempting to evade service. At that

time, Capital Valuation consisted only of Mr. Roth, a full time assistant, and a part

time employee. The newly formed entity, Capital Consulting, continued to do the

exact business Capital Valuation had been doing, using the same office and

telephone number. There exists at all times mentioned herein, a unity of interest

and ownership between Mark Roth and both Capital Valuation and Capital

Consulting. This unity is such that any individuality and separateness between the

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


individual defendant and the corporate defendants has ceased and each corporate

defendant is the alter ego of individual defendant Mark Roth and of the other

corporate defendant. Mark Roth used and controlled the assets of each

corporation for his personal use and caused assets to be transferred to himself

and/or between the corporate defendants without adequate consideration, and

Mark Roth further withdrew funds from each corporate entities’ bank accounts for

personal use. Plaintiffs are further informed and believe and on that basis allege

that corporate defendants Capital Consulting and Capital Valuation were, and at

all times herein mentioned, the alter ego of the individual defendant Mark Roth,

and there exists a unity of interest and ownership among these three defendants,

and each of them, such that any separateness between them has ceased to exist. At

all times herein, Mark Roth was and is the agent, servant, employee, or

representative of both corporate entities. Plaintiffs are further informed and

believe and thereon allege that individual defendant Mark Roth completely

controlled, dominated, managed and operated each of Capital Valuation and

Capital Consulting, and intermingled assets of each to suit his convenience by

placing various assets of Capital Valuation into the name of Capital Consulting in

order to avoid payment of obligations or creditors of Capital Valuation.

Adherence to the fiction of separate existence of corporate defendants Capital

Valuation and Capital Consulting from individual defendant Mark Roth would

permit an abuse of corporate privileges and would sanction fraud and promote

injustice, in that Mark Roth has benefitted from the transaction which is the

subject of this Complaint. He would have been negligent in his duties, as

discussed below, and yet would be allowed to escape liability by virtue of the

sham and fraudulent existence of the corporate entities.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


103. HFS Consultants, f/k/a Healthcare Financial Solutions Group, Inc.

(“Healthcare Financial” or “HFS”) is a corporation located in San Francisco,

California. Healthcare Financial provided financial feasibility studies for the

Sarasota, Austin, Chicago, Rancho No. 2, Ft. Worth No. 2, East Houston,

Seminole and Brownsville offerings (the last eight offerings). HFS’ reports were

appended to and incorporated as part of the Official Statements. HFS prepared a

standard introductory letter for inclusion in the Official Statements immediately

preceding the actual feasibility studies. The letter stated: “The study was

undertaken to evaluate the ability of the Corporation . . . to meet its operating

expense, working capital needs, and other financial requirements[.]” The letter

also noted that, in formulating the feasibility study, HFS had analyzed the

“[p]roject background, objectives, timing, and financing” and the “[a]cquisition,

renovation, and equipment costs[.]” The letter further stated: “[HFS] participated

in gathering other information, assisted the Manager in identifying and

formulating its assumptions, and accompanying financial forecast based upon

those assumptions. The accompanying financial forecast . . . is based upon

assumptions that were provided by, or reviewed with the approval by, the

management of the Corporation and the Manager[.]”

104. These Defendants are collectively referenced as the

"Appraiser/Feasibility Defendants."

OTHER DEFENDANTS

105. Berman and Bertolini, Inc., AKA Berman & Associates, is a

California corporation, with offices in Los Angeles County. Berman and Bertolini

served as “inspecting architect” for each project up to and including Chicago, and

was “responsible for inspecting each project on behalf of the bondholders as

renovation progressed, and responsible for authorizing the distribution of funds for

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

35 At a minimum, Berman and Bertolini were paid the following fees:$11,000 from Heritage Sarasota in 1998; $5500 from Heritage Chicago in 1998;$10,000 from Heritage Rancho in 1998; $32,000 from Heritage 7-Texas City in1997; $4483 from Heritage 9-Fort Worth in 1998 and an unknown amount fromHeritage 8-Houston and Heritage 9-Fort Worth in 1997. In addition, it received$10,000 from HHD for services performed in connection with “abandonedprojects.”


renovation.” In August 1997, Berman and Bertolini’s role was expanded to

include post-completion review of structural and/or maintenance problems with

each building. The firm was responsible for approving all payments to the

construction companies and received fees from many of the Heritage Entities for

this work.35

106. Michael Sobelman (“Sobelman”) is an individual resident of

California with a business address at Sobelman Cohen & Sullivan LLP (“SCS”),

21031 Ventura Blvd., No. 409, Woodland Hills, CA. At times relevant hereto,

Sobelman was the managing partner of SCS, the primary Certified Public

Accountant for all Heritage Entities. Sobelman was fully aware of the rampant

fraudulent conduct within the Heritage Organization and assisted in the

concealment of such conduct from the bondholders by, inter alia, fraudulently

reclassifying fund transfers, making improper changes to the financial books and

records of the Heritage Entities, and giving “accounting” lessons to the Heritage

Management team so that they could help maintain the status quo of accounting

anarchy.

107. SCS was the main accounting firm for all the Heritage Entities during

the relevant time period. SCS was involved with the Heritage Entities since, at the

latest, early 1996 when they audited the disbursements for Rancho Hospital after

the first offering. SCS prepared the tax returns for all the Heritage Entities,

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

36 Much like the irreconcilable tax returns prepared by SCS, SCS’sresponses to the Plaintiffs’ Interrogatories regarding fees paid to the firm from theHeritage Entities do not correspond to the information they included on the taxreturns. For example, the tax returns state that SCS was paid $109,459 in 1998and $79,641 in 1999 by Rancho Hospital. However, the Interrogatory responsesshow these figures to be $104,518 and $66,955, respectively.


including HHD, and performed audits for many of the Heritage Entities, including

Rancho Hospital. An SCS partner, Helene Cohen, was the primary preparer of the

Heritage Entities tax returns and another partner, Ada Lee Sullivan, was involved

in the annual audits. From 1997 through 2001, SCS billed Kasirer and his

companies and all the Heritage Entities $ 935,348.00.36 For this same time period,

they collected fees in excess of $800,000!

DOE DEFENDANTS

108. **Plaintiffs do not know the names of Defendants sued herein as

Does 6-10, or know their identity but at this time are ignorant of facts which could

render them liable, all of whom were acting at all times herein as agents,

employees, Principals, partners, business associates, co-conspirators, aiders and

abettors, successors, or alter egos of the named Defendants and who committed

acts in furtherance of the scheme to defraud alleged herein.

CLASS ACTION ALLEGATIONS

109. Plaintiffs bring this class action pursuant to FRCP 23 and this Court’s

Order granting class certification on behalf of any person who purchased or

otherwise acquired Heritage Bonds at any time, but excludes the following: (I) any

Person otherwise qualifying for inclusion in the class who makes a timely and

valid request for exclusion from the Class; (ii) the Settling defendants, or their

immediate families, (iii) any Person (and, in the case of a natural person, any

member of his or her immediate family) that is or at any time has been a defendant

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


in this Class Action; (iv) any entity in which a current or former defendant in this

Class Action has a controlling interest; (v) any person who, as of the date that

notice is sent to the Class of the pendency of the this Class Action, has recovered

in excess of $2000, whether via settlement, judgment or toherwise, in any

Individual proceeding; and (vi) any Person who, as of the deadline for opting out

of the Class, files or maintains an Individual Proceeding.

110. The Class is composed of persons dispersed throughout the U.S., the

joinder of whom in one action is impracticable. The disposition of their claims in

a class action will provide substantial benefits to the parties and the Court.

111. There is a well-defined community of interest in the questions of law

and fact involved in this case. The questions of law and fact common to the

members of the Class which predominate over questions which may affect

individual Class members include the following:

a. Whether certain Defendants violated Federal Securities laws;

b. Whether certain Defendants violated the California securities

laws;

c. Whether certain Defendants breached their common law duties

owed to the Class members; and

d. The extent of damage sustained by Class members and other

appropriate measure of damages.

112. Plaintiffs will adequately protect the interests of the Class. Plaintiffs

have retained counsel experienced in class action securities litigation. Plaintiffs

have no interests which conflict with those of the Class.

113. A class action is superior to other available methods for the fair and

efficient adjudication of this controversy.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

37 See Shores v. Sklar, 647 F.2d 462 (5th Cir. 1981); Dingler v. T.J. Raney &Sons, Inc., 708 F.Supp. 1044 (W.D. Ark. 1989); Kirkpatrick v. J.C. Bradford &Co., 827 F.2d 718 (11th Cir. 1987); Wiley v. Hughes Capital Corp., 746 F.Supp.1264 (D. N.J. 1990); Bank of Denver v. Southeastern Capital Group, Inc., 763F.Supp.1552 (D. Col. 1991); In re American Continental/Lincoln S&L Sec. Litig.140 F.R.D. 425 (D. Ariz. 1992) (holding fraud created the market where “anenterprise is so laden with fraud that its entire public image is distorted”).


114. The prosecution of separate actions by individual Class members

would create a risk of inconsistent and varying adjudications. Plaintiffs’ claims

are typical of those of the Class because Plaintiffs and all other Class members

purchased one or more of the Heritage bonds on a bond offering. Additionally, the

entire Class sustained damages as a result of Defendants' conduct that shall be

measured under the same formula.

PRESUMPTION OF RELIANCE

115. Reliance should be presumed in this action for any claim asserted

which requires a showing of reliance. Plaintiffs are entitled to a presumption of

reliance under each of the following theories.

116. Fraud Created the Market – the “fraud-created-the-market” doctrine

permits a plaintiff to maintain an action under section 10(b) by showing that the

Defendants’ fraud allowed securities that otherwise would have been

unmarketable to come into and exist in the market.37 Plaintiffs contend that these

bond offerings were a Ponzi scheme. Specifically, but for the Defendants’ fraud

the bonds would not have been offered for sale. Plaintiffs relied upon the

availability of the bonds in the market as an indicator of the bonds’ lawful

issuance. Defendants knew or should have known that if the truth had been

disclosed, these bonds would have been unmarketable because:

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


a. The bonds were economically unfeasible because the means by

which the Issuer intended to service and retire the bonds had no chance of success.

b. The bonds were legally unmarketable for at least four reasons.

First, the Heritage Entities were not valid non-profit Entities. Rather, numerous

insiders received substantial monies from the Heritage Entities but did not pay the

excise tax, in violation of IRS rules. Second, numerous insiders were making

profits from selling goods and services to Heritage, in violation of the Medicare

laws, which require that goods and services sold by related parties be sold at cost.

Third, at the time of the issuances, Miller & Schroeder did not meet the SEC-

mandated net capital requirements for brokerage firms to underwrite municipal

bond issuances. Thus, it fraudulently underwrote the bonds. Fourth, the bonds

were issued in violation of Rule 15c2-12 which requires the underwriter to ensure

that the Issuer and/or the Indenture Trustee comply with the SEC rules which

require annual financial information be filed with nationally recognized municipal

securities information repositories. In addition, these same repositories were to be

notified of any failure to provide the annual financial information and/or notice of

any derogatory events such as non payment related defaults and unscheduled

draws on debt service reserves (both of which happened here).

117. Fraud on the Regulatory Process - This theory was created by the 9th

Circuit in Arthur Young and Co. v. United States District Ct., 549 F.2d 686 (9th

Cir.1976), cert. denied, 434 U.S. 829 (1977). As discussed above, the fraud on the

Plaintiffs was also a fraud on numerous regulatory agencies, including the Internal

Revenue Service, the National Association of Securities Dealers, the Securities

and Exchange Commission, and the Dept. of Health and Human Services

(Medicare).

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


118. The Affiliated Ute Presumption - in cases where the allegations of

wrongdoing are primarily concerned with omissions, the presumption established

by the U.S. Supreme Court in Affiliated Ute Citizens v. United States, 406 U.S.

128 (1972) applies. The allegations in this case taken as a whole, primarily allege

the omission of numerous material facts. As the Supreme Court explained,

requiring plaintiffs to describe how they would have behaved had the omitted

information been disclosed places an unrealistic burden on plaintiffs.

119. The Indirect Reliance Doctrine - California law has a well recognized

“indirect reliance doctrine” that also supports class treatment for the state and

common law claims. See, Vasquez v. Superior Court of San Joaquin County, 4

Cal.3d 800 (1971), Occidental Land, Inc. V. Superior Court of Orange County, 18

Cal.3d 355 (1976). If the court finds that a reasonable man would have relied

upon the alleged misrepresentations, an inference of justifiable reliance by each

class member would arise. The facts of this case justify such a presumption.

BACKGROUND REGARDING THE PRINCIPALS

120. According to the Proxy Statement filed by Iatros on November 20,

1996 with the SEC, Kasirer graduated from St. John’s University School of Law in

1973 and became a member of the New York bar. He practiced law until 1986,

but was also affiliated with his father’s company, Golden State Health Centers Inc.

from 1975-1982. From 1988-1991 Kasirer developed retirement housing and

healthcare facilities, which resulted in allegations of improper conduct and,

ultimately, litigation. From 1991-1994 he was the CEO of KingCare Respiratory

Services Inc. During this time period, a lawsuit filed against Kasirer alleged fraud

in connection with his acquisition of the BHMC, which failed shortly after Kasirer

acquired it.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


121. The Official Statements disseminated in connection with each bond

offering, purposefully excluded these prior allegations of fraud levied against

Kasirer as well as his common practice of defaulting on loans and failing to pay

for contracted services. These facts constitute material omissions from the

Official Statements, as it is highly doubtful that any monies would have been

raised had full disclosure occurred.

122. In an effort to increase his personal wealth, Kasirer has repeatedly

engaged in schemes, described by the Internal Revenue Service ("IRS") as “illegal

arbitrage game[s]," wherein he manipulated the market for bonds. As a result of

his various schemes and methods of defrauding investors, Kasirer has reached a

certain level of notoriety in the bond community. According to an article entitled

"IRS Opens Second Colorado Bond Issue for Review," appearing in the June 6,

2001 edition of The Bond Buyer, a nationally-recognized publication of bond-

related issues, the IRS determined that Kasirer used privileged insider information

in 1990 to purchase $6.59 million of zero-coupon revenue bonds in connection

with the development of a Colorado nursing home project known as Liberty

Heights. According to the article, the IRS determined that Kasirer took part in the

risky investment because “a means had been devised to secure the bonds and make

them attractive for resale." The IRS also found that "[t]he establishment of a

defeasance was the only way to pay the bonds; there is no evidence of any other

source of payment . . . This was not a mystical happening. The results were

planned from the start[.]”

123. The Liberty Heights scheme resulted in at least one civil action,

captioned National Fire Ins. Co of Hartford, et al. v. Robert A. Kasirer, et al,

District Court, El Paso County, Colorado Case No. 93 CV1319, filed June 23,

1993. The action, brought by a group of insurance companies who lost over

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


$20,000,000, alleged that Kasirer, E. Rubin and companies controlled by them

committed fraud by:

a. making material misstatements and omissions in the OS;

b. diverting funds from the projects to Entities they controlled;

c. causing companies controlled by Kasirer to abandon their

responsibilities as property manager;

d. causing companies controlled by Kasirer to receive improper

management fees;

e. failing to uphold construction guarantees;

f. causing their companies to sell the subject property to the bond

issuer at an inflated price; and

g. using insider information to defease and resell non-recourse

subordinated debt (which was represented in the Official Statement as having a

subordinate interest to the bonds).

124. According to the lawsuit, these actions allegedly resulted in: (1) $4

million being paid to Kasirer, E. Rubin and their companies out of bond funds that

should have been used for the project; (2) $5.5 million being withdrawn by Kasirer

and his company as payment for the land and lease costs (which was represented

as subordinate to the bond payments in the Official Statements); and (3) $3.5

million in profits for Kasirer from the three (3) defeasance transactions. Goldstein

was the defense attorney for one of the named Defendants in the case.

125. According to an article entitled "Zero-Coupon Cases Reach Penalty

Time - IRS to Act Under Section for Fraud," appearing in the July 11, 2001

edition of “The Bond Buyer,” Kasirer repeated his arbitrage scam in connection

with two Illinois bond deals in the early 1990s. As the article states, "in both

deals, Robert Kasirer appears to have purchased the bonds, and then arranged for

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


the defeasance and remarketing.” Litigation against Kasirer, his company, and E.

Rubin resulted from these deals as well (see below). Recently, Kasier entered into

a settlement agreement with the IRS relating to these actions.

126. According to an article entitled "N.Y. Agency: IRS is Investigating

Our Zero-Coupon Bond Issue," appearing in the July 17, 2001 edition of “The

Bond Buyer,” Kasirer repeated his arbitrage scam in connection with a Glen Cove,

New York bond deal. Kasirer allegedly purchased $4.2 million in subordinate

bonds that he then defeased and remarketed "at a significant profit." The article

explains that the IRS considers this "an illegal arbitrage game that violates the tax

law because the bonds are not repaid with project revenues, but rather by a

separate high yielding investment.” The Glen Cove, New York bonds were

ostensibly issued to assist United Community and Housing Development Corp.

("United Community") in building a 96-unit retirement housing complex. United

Community is a suspended California corporation which has offices in Beverly

Hills. The article identifies Goldstein as counsel to United Community.

127. In the last eight years several lawsuits have been filed alleging

wrongful acts, including fraud, against Kasirer and his companies. Many of these

lawsuits have resulted in substantial debts and liabilities. As set forth below, the

judgments and liens pending during the Heritage bond offerings totaled nearly

$5,000,000. None of these lawsuits, the allegations therein, nor the liabilities were

mentioned in any Heritage Official Statement:

a. ABSTRACT OF JUDGMENT - issued November 28, 1994 for

$125,235.21. Los Angeles Superior Court Case No. BC 088680, against

Defendants Congrecors Retirement Corporation, Maple Realty Corporation and

Robert Kasirer, in favor of DMS Health Care Services Inc. DMS was hired in

April 1992 to provide housekeeping and food service services to the Beverly Hills

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Medical Center hospital. Pontarelli was the hospital administrator and Dierckman

held a position with the hospital as well. Pursuant to the agreement with DMS,

DMS was to be payed bi-weekly, but by March 1993 DMS was owed $136,229 for

services rendered. Thus, Dierckman negotiated an agreement whereby the

hospital would make scheduled payments until the amount was paid off. On

March 22, 1993, in accordance with the negotiated agreement, Kasirer signed a

promissory note in favor of DMS. As of August 1, 1993, the payments had

defaulted and DMS sued and obtained the above noted judgment.

b. ABSTRACT OF JUDGMENT issued April 20, 1995 for

$63,875.75, Los Angeles Superior Court Case No. SC 029672, against

Defendants Robert Kasirer and Congrecare Retirement Housing Corp., in favor of

Resch, Polster, Alpert & Berger. This lawsuit was brought against Kasirer and his

company for failure to pay his lawyers. According to the retainer agreement, the

law firm was retained in March 1992 to represent Kasirer “in connection with the

purchase of certain property in Lincolnwood, Illinois and its eventual development

through a bond financing…” The lawsuit alleged that Kasirer had a practice of

incurring significant legal fees, failing to pay such fees, and then fraudulently

inducing other law firms to work for him.

c. ABSTRACT OF JUDGMENT - issued August 22, 1995 for

$157,500, Los Angeles Superior Court Case No. EC 046443, against Defendant

Robert Kasirer, in favor of Stanley Z. Diller, et al. This lawsuit was filed against

Kasirer, King and Pontarelli. The Plaintiff in the lawsuit was one of the former

owners of the Beverly Hills Medical Center. He alleged that, he sold his

ownership share of the company that owned the hospital as a result of a conspiracy

to defraud by his former partners Kasirer and King. The Plaintiff further alleged

that immediately upon acquiring control of the hospital in December 1991, despite

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


having agreed in writing to honor all vendor and employee claims and all

outstanding checks, Kasirer closed the hospital (although it was profitable) so he

could avoid paying the hospital’s vendors.

d. WRIT OF ATTACHMENT - issued January 26, 1996 for

$4,440,448.76, Los Angeles Superior Court Case No. EC 121802, against Robert

Kasirer, in favor of Johnson & Johnson Finance Corporation (“J&J”). This case

also revolved around the Beverly Hills Medical Center. In 1992, J&J loaned

Kasirer $3 million, which was secured by the hospital and guaranteed by Debra

and Robert Kasirer, and Congrecare Retirement Housing Corp. (by Kasirer as

President). In May 1993, Kasirer defaulted on payments. J&J filed suit in

February 1995. In January 1996 the writ of attachment was obtained. Eventually,

Kasirer settled the case by agreeing to make payments to J&J totaling $300,000.

One of those payments was made with funds taken from the Heritage 9-Ft. Worth

Facility account, and booked as a loan to Kasirer, which was allegedly repaid but

in reality was not. The money to repay the loan came out of bond funds raised in

the next offering;

e. ABSTRACT OF JUDGMENT - March 13, 1996 for

$94,402.22. Los Angeles Superior Court Case No. EC 036948, against Defendant

Robert Kasirer, in favor of Shetsky & Froelich. This lawsuit was originally filed

in Illinois against Kasirer, Congrecare of Illinois, Congrecare Retirement Housing

Corp., Lincolnwood Retirement Housing, Emery Rubin, E. Rubin’s company -Los

Angeles Builders, and others. A judgment was obtained in March 1995, and in

December 1995 the Plaintiff filed an application to convert it into a sister state

judgment against the Defendants.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

38 Interestingly, in February 1993, Saltzman, who was already associatedwith Kasirer on a number of deals, received a letter from Stewart Kahn on behalfof Johnson & Johnson wherein Kahn discussed the fact that Kasirer usurped J&J’s loan funds which were earmarked for construction work at the Beverly HillsMedical Center. The letter went on to state that the lenders’ confidence in Kasirerwas “eroding.”

39 A similar version of this memo was sent to the IRS in January 1998 byHenry in response to questions from the IRS regarding the application for 501-c-3status for the Chicago Entity. Tellingly, Henry’s “notes to the file” state “Heritageshould get a legal opinion that this arrangement will not effect its tax exemptstatus.”

40 Kasirer purposefully changes the name of the corporate entities hecontrols routinely and uses similar sounding names in an effort to confuse.


KASIRER HATCHES A PLAN TO ISSUE THE HERITAGE BONDS

128. Kasirer was the creator of the scheme, which was born from a

business dispute with Columbia HCA Healthcare Corporation (“Columbia”), a

large public company. As discussed above, Kasirer had borrowed $3 million from

J&J in connection with the Beverly Hills Medical Center.38 He then entered into a

long-term lease agreement with Columbia whereby Columbia was to lease 80% of

the Facility for ten years at a cost of $2.3 million per year. In addition, Columbia

agreed to provide $12 million of tenant improvements to the Hospital. Columbia

backed out of the lease shortly after signing it.

129. According to a December 22, 1996 memo to the file by Wayne

Henry39, an attorney at Kutak Rock, BHMC L.P. (later to become JDDJ) was a

California L.P. which was comprised of Kasirer as the limited partner and BHMC

Corp. (later to become Bistra & Munkacs Holdings, Inc.) as the general partner40.

This memo was sent to Charles Green, Goldstein, Boehm, Kasirer and E. Rubin on

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

41 The reason behind this condition was as follows: Columbia typicallypurchased more than one hospital within a service area and the “less desirable” hospitals would then be closed. In anticipation of the closings, Columbia wouldwrite off the properties for accounting and Medicare purposes. Therefore, the costbasis in these properties was very low. If the settlement reflected a higher costbasis than was reflected in Columbia’s books, they would face potentialfinancial/Medicare problems.

42 As noted above, Emery Rubin and Kasirer were both Defendants in thelawsuits related to the Liberty Heights and Lincolnwood projects. Additionally,Goldstein represented a Defendant in the lawsuit related to Liberty Heights.


December 30, 1996. BHMC L.P. was the legal entity through which Kasirer had

entered into the Columbia lease. Claiming breach of the lease, BHMC, L.P.

demanded $25 million (the entire amount of rent due for the full 10-year term) as

compensation. Columbia countered with an offer to transfer properties with a total

cost basis not to exceed $7 million.41 Because Kasirer believed that he could flip

these properties to Heritage for a significant profit, he accepted Columbia’s offer.

130. Kasirer brought his scheme to his old buddies E. Rubin and

Goldstein, people he knew since at least 1993 from prior unsavory projects.42

According to the Kutak Rock memo, Kasirer had “worked closely with Heritage as

the manager of its facilities for a number of years and hoped to continue that

relationship in the near future.” Therefore, Kasirer offered the deal to Heritage.

BHMC L.P. reviewed the properties and concluded they were worth $25-40

million. Heritage concluded that the value was in the $30-40 million range.

131. According to the memo, Kasirer was concerned about “phantom

income,” which would result in a taxable event. Therefore Kasirer had Heritage V

purchase the Beverly Hills Medical Center in return for a $20 million note from

Heritage V to BHMC L.P. Heritage V had no intention of doing anything with

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

43 It should be noted that on November 21, 1997, Goldstein wrote to E.Rubin, with copy to Kasirer and Sobelman, and requested that this BoardResolution be signed because it had never actually been signed by L. Rubin.


the building other than forfeiting it to creditors and, in 1996, it was foreclosed

upon. The deal was done simply to give Heritage V the rights to the claim that

BHMC L.P. had against Columbia. This created a huge loss carryforward for

BHMC L.P. which allowed it to avoid paying taxes on over $10 million of the

“other income” BHMC L.P. (then called JDDJ) received from the sale of the

facilities Heritage purchased with the bond monies. On September 19, 1996, a

Resolution of the HHD Board, which provided for the foregoing transaction, was

purportedly executed by L. Rubin.43

132. Kasirer claimed that he was willing to leave "some extra dollars on

the table" for Heritage. Accordingly, Heritage V was to pay BHMC, L.P. 80% of

the fair market value of each property, as established pursuant to an appraisal

controlled by Kasirer. This amount was significantly higher than the amount

Kasirer (through Heritage V) was offsetting against the Columbia claim.

133. There was no disclosure to investors of the enormous windfall profit

Kasirer would reap if and only if the transactions (including the bond financing)

was consummated. For example, the Ft. Worth OS stated that the property would

be purchased for $3.8 million. However, documents indicated that Heritage V

purchased the property for $1.2 million. On the same day, Heritage V sold the

property to Heritage Ft. Worth for $5 million. In reality, the $3.8 million was

the profit that Kasirer made! Each defendant participating in the

preparation of the Official Statements was aware of (1) the general terms of

this settlement with Columbia, (2) the extent of Kasirer’s windfall, and (3) the

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


extent to which the financial terms gave him control over Heritage. However,

they chose to remain silent.

134. The properties received from Columbia pursuant to the settlement

agreement were transferred subject to deed restrictions. These deed restrictions

forever prohibited the properties from being used for certain enumerated purposes,

effectively barring any owner from competing with Columbia’s hospitals nearby

which offered similar medical services. These deed restrictions encumbered the

only hard security available to the bondholders and were never disclosed in any

Official Statement. Conversely, the appraisals presented to the bondholders

expressly assumed that the properties were being transferred free and clear of liens

and encumbrances. The existence of these restrictions was known to, or should

have been easily discoverable by, all Defendants involved in the preparation of the


135. On February 6, 1997, Green sent Boehm a memo which stated that,

per the meeting he had in October 1996 with Sabo, Kasirer, Goldstein and Wayne

Henry (the Kutak attorney), “we now wish to proceed with the bond financing and

a first, integral step” was to apply for non profit status for the Heritage Entities

from the IRS. Wayne Henry was to take care of the nonprofit application but he

stated that “some disclosure of the Heritage/Columbia/ Kasirer settlement needs to

be made.”

136. In addition to obtaining the non profit status for the entity that was to

be formed to purchase the Columbia facility, a municipality or municipal agency

had to be recruited to act as the Municipal Issuer. However, the Municipal Issuer

would have little involvement in the preparation of the Official Statement and

would attempt to disavow all liability for payments on the bonds by inserting an

exculpatory clause into the Official Statements. Instead, pursuant to Securities

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

44 The Chicago offering was the last offering which listed Berman &Bertolini as the Inspecting Architect and Bertolini was no longer listed asChairman in the final offering (Brownsville).


and Exchange Commission Rule 131, the bonds would be structured as “conduit

financing” whereby the obligation of the Municipal Issuer would be assigned to an

entity borrowing the bond funds. This borrowing entity would be considered a

“Private Issuer” pursuant to Rule 131. The Private Issuer would be a newly

formed, wholly owned subsidiary of HHD, incorporated as a purported non-profit

company - the Heritage Entities. The money would then be transferred from the

Private Issuer to the Trustee and the Trustee would make the interest payments to

the bondholders, and would be responsible for disbursing money to the Heritage

Entity to pay the bills for the renovation and operation of the elder care Facility.

137. Kasirer, Goldstein, and Emery Rubin recruited Bertolini, and

together they decided to use HHD as the "master" corporation. Bertolini was the

Chairman of each Heritage Entity and his firm was the Inspecting Architect for

most of the projects.44 Goldstein initially served as outside counsel to HHD and

the other Heritage Entities and then became an Officer of HHD and all Heritage

Entities. All Defendants profited handsomely from the scheme.

138. Kasirer had the Columbia properties appraised at values far in excess

of their true value. Of course, Kasirer’s massive profits from the sale of the

Facilities were not disclosed in the Official Statements. In addition, Kasirer

further profited from his scheme by establishing his companies as the manager of

the Facilities via long-term contractual arrangements with the Heritage Entities,

which provided for excessive management fees. Since the management contracts

afforded him virtually unfettered access to the proceeds of the bond offerings, he

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


was able to divert substantial portions of the monies to himself and his associates

via advances, supposed loans, and excessive fees.

139. The bond Trustee would be responsible for the disbursement of bond

proceeds to the Private Issuer pursuant to a Loan Agreement and as trustee in

connection with a (supposed) first deed of trust securing bond payments.

Investors would be provided assurances that the structure of the investment and

offering would provide adequate security for the repayment of the bonds. Among

the reassuring features described in the Official Statements were:

a. the bond Trustee would ensure that the bond proceeds would

only be used for purposes listed in the Official Statements;

b. security for the payment on the bonds pursuant to (i) a Loan

Agreement with the Private Issuer/owner; (ii) a first deed of trust on the real estate

with covenants for (a) debt service coverage ratio; (b) days cash on hand, trade

payable and occupancy levels, to be certified on a quarterly basis; (iii) a first

priority security interest in the personal property and revenues; (iv) a security

interest in the project fund in favor of the bondholders to be held by the bond

Trustee;

c. a debt service reserve fund to be established with the Bond

Trustee;

d. a renewal and replacement fund with the bond Trustee;

e. a bond fund and operating reserve fund for working capital

purposes to be deposited with the bond Trustee;

f. a subordination agreement between the owner/Private Issuer

and the Facility manager (a Kasirer company) with respect to management fees;

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 45 However, Kasirer never pre-funded the amounts due under the ODA.FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 80

g. an operating deficits agreement (“ODA”) whereby the Facility

manager (a Kasirer company) would be obligated to provide for operating deficits

up to a pre-determined amount (usually $250,000)45;

h. construction contract guarantees with fixed prices, completion

deadlines, and performance bonds in the event the project was late and/or over

budget; and

i. the requirement that the Heritage Entities provide certain

financial reports and certifications on a monthly, quarterly and annual basis to the

bond Trustee.

140. Each Indenture provided that the money deposited to the Project Fund

would be held in trust and, except in connection with an event of default,

disbursed only upon receipt of a requisition certificate substantially in the

form required by the Indenture, accompanied by required supporting

documents, such as invoices.

141. In all cases, the bonds were payable solely from the revenues derived

by the Municipal Issuer pursuant to the Loan Agreement(s) with the respective

Heritage Entity or from other amounts available under the Indenture(s). Under

each Loan Agreement, the Heritage Entity was solely obligated to repay all

principal, interest and any premium on the bonds. Each Municipal Issuer assigned

to the Trustee (without recourse) substantially all of its rights and obligations

including its right to receive payments and obligation to use those payments to pay

the bondholders.

142. The next step in the scheme was to engage a broker-dealer to act as

the investment banker and underwriter of the bonds. Iverson and Miller &

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Schroeder, long time participants in the municipal bond industry, were recruited.

Iverson directed Dhooge to act as the primary investment banker for the offerings.

It was decided that each offering should be conducted as a “firm commitment”

underwriting whereby Miller & Schroeder would purchase 100% of the bonds

being offered and resell them to their clients at par. Miller & Schroeder would

receive an underwriter’s discount. At the time of the bond offerings, Miller &

Schroeder did not meet the SEC-mandated Net Capital Requirements for

brokerage firms to underwrite municipal bond issuances. In order to meet these

requirements, Miller & Schroeder manipulated the financial books and records of

its separate subsidiaries in order to give the appearance of adequate capital.

143. Although the bonds would be unrated, they were to be marketed as

"municipally approved" and fulfilling an important "charitable" purpose. The

"charitable" purpose would be the establishment and maintenance of geriatric

Alzheimer’s healthcare facilities. Aging "baby boomers," and donors to

Alzheimer’s disease research and other geriatric causes would be specifically

targeted as potential investors. Thus, the bonds would appear to be a safe

investment for a worthwhile cause. Moreover, each Loan Agreement between the

Municipality and the Heritage Entity stated that the Heritage Entity would be

required to make an annual disclosure under Rule 15(c)(2)-12 to a municipal

repository.

144. The next cog required for successful completion of the plan was an

accounting firm. SCS was officially hired to perform the mandated audits of the

Heritage Entities and to complete the corporate tax returns. Unofficially, SCS was

hired to perform various acts of accounting wizardry in order to cover-up a variety

of illegal fund transfers.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

46 Boehm was the primary drafter of each of the Official Statements (exceptRancho) while he was employed by Sabo & Green and then by Atkinson,Andelson, Loya, Rudd & Romo.


145. Complicit attorneys were the final requisite element needed to

complete this plan. Kasirer found several:

a. Fulbright & Jaworski acted as bond counsel and, ultimately,

worked on drafting the Official Statement for the Rancho Hospital second

offering. Fulbright performed a substantial amount of the due diligence on the

Heritage transactions and prepared much of the disclosure materials. Foley &

Lardner participated in both drafting and review of materials drafted by others, for

disclosure to investors in the Chicago bond offering.

b. As discussed above, the law firm of Sabo & Green functioned

as Underwriters’ Counsel. Boehm, an employee of the firm, was primarily

responsible for drafting the Official Statements.46 Kutak Rock was also enlisted as

tax counsel. Both Boehm and Charles Green, founding partner of Sabo & Green,

had full knowledge of the BHMC L.P./Columbia/Heritage deal and were involved

in the transaction from the beginning.

c. Moreover, the attorneys assisted in the solicitation of the

Municipalities. Green doubled as the city attorney for the City of Desert Hot

Springs and he convinced the City to issue bonds in the Rancho No. 2 offering.

Boehm also helped solicit Municipalities. For example, on December 18, 1995 he

wrote to a City of Rancho Cucamonga employee to thank him for meeting him a

few days before and to discuss an upcoming public hearing to authorize the bond

issuance. He assured the City that it would not have any liability in connection

with the issuance of the bonds. John Orr of Fulbright & Jaworski personally met

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


with the Mayor of Texas City in order to convince the Mayor to allow the first

offering to go forward.

146. At this point, Kasirer had established a steady source of property

investment opportunities. He also had an unquestioning purchaser (Heritage),

staffed and controlled by people he had personally selected. He had most of the

key players directly or indirectly sharing in the spoils. The remainder of these

players - the accountants, underwriters, attorneys and Trustee - would be pliable

and willing to overlook their own doubts and suspicions for the promise of easy

money (and later, out of fear that their own roles would come to light). Assembly

of the plan was complete.

147. Iverson, Dhooge, Boehm, E. Rubin, Goldstein and Bertolini were

aware of the past history of Kasirer and allegations of wrongdoing which had been

made against him. Boehm interviewed Kasirer prior to the first offering regarding,

among other things, the Liberty Heights lawsuit. Boehm also became aware of

certain judgments and liens and a writ of attachment obtained by J&J against

Kasirer when he performed a litigation search regarding Kasirer. Boehm had a

discussion with Kasirer with respect to his litigation history and Kasirer confirmed

the judgments and liabilities he was facing, including the $4.4 million writ of

attachment. Despite the substantial negative information concerning Kasirer, the

Principals determined that this information should be concealed. Instead, the

fraudulent impression that Kasirer had a successful track record and was qualified

to be a manager of the Facilities was presented in each Official Statement.

148. The Official Statements were false and misleading because they

contained numerous untrue statements and omitted material facts, including, but

not limited to, the following:

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

47 This is proved by the fact that after the Facilities were put intoreceivership, the Brownsville Facility had mechanics liens that were, contrary tothe representations in the Official Statement, superior to the bondholders interestin the first deed of trust.


a. They omitted entirely information concerning the true

background and experience of Kasirer;

b. They omitted the financial terms and significance of the

Columbia settlement agreement, including Kasirer’s enormous profits;

c. They did not disclose that funds were going to be and/or were

currently being commingled among projects;

d. They falsely represented that the construction contract

guarantees and performance bonds would protect against cost overruns and failed

to disclose the prior overruns;

e. They did not disclose the restrictive covenants in the deeds;

f. They misrepresented the security for the bonds;47

g. They did not disclose the financial stake held by the

underwriters by virtue of the outstanding “seed money” loans; and

h. They omitted entirely the critical risks and significant conflicts

of interest which were easily foreseeable during the preparation of the Official

Statements.

149. The information in the Official Statements purposefully gave the

impression that the Heritage Entities had a system of checks and balances in

place which would ensure the success of the endeavors and secure the

bondholders investment. This was blatantly false because no one involved in

the scheme was opposed to pilfering the bond funds.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

48 In fact, in April 1996, Kasirer, through Iatros, billed Heritage HousingDevelopment $1,000,000 for services performed during 1995. Notably, theservices identified included the preparation of “feasability studies.”


150. The Official Statements contained financial feasibility studies and

marketability studies and summarized the findings of the appraisals that Kasirer or

people working for his management company, such as Leo Dierckman, essentially

prepared48 and which were known by them to be false and misleading. The

Appraiser/Feasibility Defendants also knew the projections and estimated values

of the Facilities were unreasonable, but issued the reports anyway. Moreover, the

Official Statements for the later offerings deliberately failed to disclose known

problems at the earlier Facilities and lawsuits that were filed against Kasirer and

Heritage Rancho which contained allegations of improper conduct. Of course, the

fact that the operating Heritage Facilities were routinely committing Medicare

fraud and violating Medicare and IRS rules regarding related-party transactions,

was not disclosed.

151. The "brilliance" of the plan was its underlying simplicity. All of the

offerings would be underwritten by the same investment banker (Miller &

Schroeder). Each project would be overseen by the same trustee (U.S. Trust)

pursuant to either a "master" Indenture or substantially similar Indentures. The

Official Statements and other offering and promotional documents would likewise

be similar. In addition, each project would be managed by a company controlled

by Kasirer (HCH and CareContinuum, or IHN). The same architect (Bertolini’s

firm) would provide renovation consulting and inspecting. Legal services would

come primarily from the same firms: Heritage’s corporate counsel (Goldstein), the

underwriter’s counsel (Boehm), Kutak Rock (tax counsel) and bond counsel

(Fulbright). Sabo & Green also made an appearance as Special Counsel for

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Desert Hot Springs Municipality in the Rancho No. 2 offering and as counsel

involved in obtaining title insurance in the Brownsville offering. Each Heritage

Entity would have substantially the same Officers and Directors. The appraisals,

marketability studies and feasibility studies would be formulated primarily by

Kasirer and Dierckman (or someone under Kasirer’s control). Each study would

supposedly be issued by independent firms and based upon the Facility-specific

information but, in reality, they would be substantially similar in content. Except

for the legal description of the property and the name of the municipality, the

offerings and the Official Statements would be almost identical in form and

content.

THE PLAN IS SET IN MOTION

152. Kasirer, Dierckman, Goldstein, E. Rubin, and Bertolini worked

closely with Dhooge, Iverson, Fulbright and Boehm in structuring and promoting

the Heritage bonds. Documents demonstrating their participation include, but are

not limited to, the following:

a. A May 31, 1996 letter from Boehm to an attorney for Miami

Beach, states: "This letter is a brief summary of what Emery Rubin, Robert Kasirer

and I are trying to accomplish in the state of Florida in connection with financing

Alzheimer’s and Assisted Living health care projects with tax exempt bonds."

The letter further stated:

Heritage, along with the various attorneys and consultants working oneach project, will assure that full and complete disclosure is made topotential investors with respect to each project in accordance withapplicable legal standards." Because each project will be a “newFacility” none of the bonds will be rated by any national ratingagency and will be sold to individual investors on a retail basis. . .[We wish to emphasize that the members of the Miami Beach Issuerwould not be guaranteeing or endorsing the financial feasibility of theMiami Beach Center or any other project. All documents will clearlystate that neither the Miami Beach Issuer nor any of its Directors,Officers or employees are in any way promising that the bonds will be

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


paid or that the projects will be carried out as described in any suchdocuments.

b. A September 6, 1996 memorandum from Boehm to Dhooge

stated: "Pursuant to our conversation and to give your salespeople some idea of

timing, Robert Kasirer and I project the following for Marketing (assuming the

IRS and various issuers cooperate). . . ".

c. Dhooge’s handwritten notes showed that he had numerous

conferences beginning in 1996 with Kasirer about how to promote the Heritage

bonds, even before Miller & Schroder was retained as the underwriter.

d. A September 13, 1996 memorandum from Boehm to Dhooge,

Emery Rubin and Kasirer, with an attached draft of the seed money loan and

guaranty pursuant to which HHD borrowed $500,000 from Miller & Schroeder.

The loan was to be guaranteed by Iatros. On October 7, 1996, the HHD Board of

Directors passed a Resolution wherein the Miller & Schroeder loan was approved.

The Resolution was signed by Bertolini and L. Rubin as Chairman and Secretary,

respectively. In early 1998, an Agreement to Expand Management Services was

entered into between HCH and Heritage, which was created, in part, due to the fact

that HHD was not repaying this note. Therefore, pursuant to the expanded

management agreement, a “lock box" was created on a portion of the bond

proceeds raised thereafter to ensure repayment of the loan. This loan, which gave

Miller & Schroeder a direct financial interest in the success or failure of the

offering, was material to each of the subsequent offerings but was never disclosed

in any Official Statement. The “lock box” portion of the Agreement to Expand

Management Services was also not disclosed, thereby causing all of the Official

Statements disseminated after the execution of the Agreement to be misleading.

e. Correspondence from bond counsel, Fulbright & Jaworski,

requested that Kasirer and Goldstein review and approve draft agreements related

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


to the Heritage bonds, as evidenced by bond counsel’s letters of December 11, 23,

and 26, 1996, among others.

f. Fulbright solicited the Mayor of Texas City regarding the

proposed Texas City offering. John Orr (“Orr”) of Fulbright then wrote a seven

(7) page letter dated May 15, 1996 thanking the Mayor for spending time with

himself, Kasirer, and Emery Rubin. The letter proceeded to outline the proposal,

explaining why he thought the project would benefit Texas City. Orr wrote,

“Heritage is currently planning projects similar to the Danforth Center in Houston,

Fort Worth, Conroe, Denton and other areas in Texas. If these projects proceed,

we could be requesting the cooperation of the Texas City Issuer in as much as

$100 million in financing.” Orr also noted in the letter that the Issuer of the

bonds received a “closing fee” of .25 of 1% , and an annual fee of one eighth of

1%, and that Texas City was “free to direct the Texas City Issuer to use that money

in any way determined by the City.” Orr also noted that in connection with the

purchase of the proposed facility, Heritage would acquire a storage building which

it did not intend to use and would provide to the City at no cost. Orr promised that

reserves would be established to insure that “proper funds are available during the

start up period of each project,” that the Texas Attorney General would have

available to him monthly balance sheets and audited financial statements and, “As

required by federal securities laws, updated financial information and

operating data will be provided to certain national informational vendors, as

well as to the Trustee and the City. Also, notices with respect to certain events

will be provided to such vendors, the Trustee and the City in accordance with

such federal securities laws.” (Emphasis added). Orr further stated, “Finally, we

wish to emphasize that neither you nor the members of the City Commission

would be guaranteeing or endorsing the financial feasibility of the Danforth Center

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

49 Except for the City of Chicago.

50 In addition to utilizing the Official Statements for sales at the time of theinitial offering of that particular Heritage bond, the Official Statements wereutilized in connection with sales of Heritage bonds in secondary or non-issuertransactions by Miller & Schroeder.


or any other project. All documents will clearly state that neither the City nor any

of its officers or employees are in any way promising that bonds will be paid or

that the projects will be carried out as described in such documents.” This

document was faxed to Goldstein on May 21, 1996. However, updated financial

information was never provided to any “informational vendors.”

g. Distribution lists from Boehm show that Kasirer, Dierckman,

Goldstein, Bertolini, U.S. Trust, and representatives of each Municipal Issuer and

counsel for each Municipal Issuer, received preliminary and final drafts of the

Official Statements and/or appraisals and feasibility studies for their review,

comment, and approval prior to publication. Bertolini signed each Official

Statement for all of the Heritage offerings, except the last three, which Goldstein

signed. Representatives of each Municipal Issuer also signed the Official

Statements.49

153. The Official Statements for the Heritage bonds were distributed to the

brokers employed by Miller & Schroeder for their use in soliciting purchases of

Heritage bonds. Miller & Schroeder sent the Official Statements for the subject

offerings to all prospective purchasers, as required by law.50 Dhooge solicited lists

of prospective investors for Miller & Schroeder’s sales force to cold call. For

example, Dhooge wrote a letter dated March 21, 1997 to a San Diego local

Alzheimer’s Association stating:

To assist in this worthwhile effort Miller & Schroeder wouldlike to acquire the donor list from the Alzheimer’s Association.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

51 This amount includes $12,030,000 in series “A” tax-exempt bonds and$1,020,000 series “B” bonds. All offerings were structured so that the majority ofthe bonds were issued as tax-exempt series “A” and the series “B” bonds werewhat is commonly referred to as the “taxable tail”. From here on, this Complaintwill not delineate the distinction between the series “A” bonds and the series “B”bonds in each offering.


The donors would only be solicited on the upcoming tax-exempt issue that will finance the [Ft. Worth] Long Term CareFacility in Fort Worth, Texas.

154. Miller & Schroeder brokers were encouraged to aggressively market

the Heritage bonds. Among the methods employed were telephonic solicitations of

existing clients, cold calls, newspaper advertisements, and television advertising.

Additionally, commercials featuring broker Mark Augusta appeared on the

financial cable television network CNBC. The brokers employed written

advertisements approved by the Legal Department of Miller & Schroeder. The

advertisements stated that a copy of the Official Statement could be obtained by

contacting the broker at Miller & Schroeder. The advertisements also stated:

This is neither an offer to sell nor a solicitation to buythese securities. Such offering is made only by means ofthe Official Statement, subject to prior sale and change inprice in such jurisdiction as they may be legally offered.

THE INITIAL RANCHO OFFERING

155. The first bond offering, in February 1996, was for the Rancho

Hospital Facility. The Official Statement was drafted in substantial part by

Boehm. A total of $13,050,000 in bonds were issued by a California

municipality.51 The municipal issuer loaned the bond funds to the Private Issuer,

Heritage Rancho, purportedly to finance the acquisition, renovation and operation

of the Rancho Hospital.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


156. While the agreement between Kasirer, Heritage and Columbia was

being negotiated, Kasirer found another opportunity, Rancho Hospital. He could

not profit from the Hospital transaction without the use of a non-profit entity and

the issuance of bonds for the renovation and purchase. Thus, Kasirer offered

Rancho Hospital to Heritage. This building and land were originally purchased by

G&L Realty Corp. (“G&L”) in March 1995 pursuant to an agreement with Kajima

Development Corp. G&L assigned its interest to Heritage Rancho in November

1995, purportedly for $6.3 million cash and a $1.2 million subordinated note.

Gottlieb then kicked back 30% of this $1.2 million to Kasirer (although Kasirer

tried to get more).

157. Per this scheme, the $1.2 million note was broken into 2 notes,

$840,000 to G&L and $360,000 to Debra Kasirer, which are listed in the 1996

Heritage Rancho tax return in Statement 8. These notes were then sold to investors

by Miller & Schroeder at 80 cents on the dollar, and in fact Statement 8 of the

1997 Heritage Rancho return now lists $1.2 million owed to Miller & Schroeder

note holders. None of this information was disclosed to investors in future

offerings, although the latter Rancho offering lists the repayment of this $1.2

million note as one of the uses of proceeds.

THE PLATT LAWSUIT AND OTHER FISCAL PROBLEMS

158. In October 1996, IHN faxed a memo to Kasirer and E. Rubin wherein

SCS’s audit of cash disbursements from Rancho Hospital from inception through

August 31, 1996 were discussed. According to the memo, a number of

disbursements totaling $1,663,264.47 were not recorded in the Hospital’s check

registry. The Chief Executive Officer of Rancho Hospital David Platt (“Platt”)

was copied on the fax.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


159. Also in October 1996, Platt told his superiors, including Kasirer and

L. Rubin, that $1,900,000 of bond funds, which were to be used to acquire needed

equipment for the hospital, had disappeared! Platt employment was quickly

terminated. By firing Platt shortly after he reported the misappropriation, the

Defendants demonstrated the intent to deliberately conceal the misappropriation.

160. Platt filed a lawsuit for retaliatory termination on August 7, 1997.

According to court records, Kasirer, Kasirer’s management companies, Iatros and

IHN, Heritage Rancho and HHD were Defendants. Goldstein represented

Heritage Rancho and HHD. The lawsuit detailed Platt’s account of the $1,900,000

misappropriation and his subsequent termination. Platt stated in his sworn

declaration filed on April 27, 2000 in Platt v. Iatros Health Network, et al., San

Bernardino Superior Court Case No. 29430, "I reported the discrepancy to my

superiors. . . and was told it was not my concern and none of my business. I was

shortly thereafter terminated as CEO of [Rancho Hospital].” The lawsuit placed

the Defendants on further actual notice of the misappropriation.

161. The Heritage Director and Officer Defendants’ consistently failed to

disclose any information about the misappropriation or the lawsuit in the eleven

(11) subsequent Official Statements.

162. In addition to the Heritage Director and Officer Defendants, the

Kasirer Management Company Defendants, the Attorney Defendants, the Miller &

Schroeder Principals, Sobelman, and SCS were also aware of the $1,900,000

misappropriation.

163. Boehm was monitoring the Platt litigation and reporting the

developments to Iverson. This is proven by the August 31, 1999 letter from Tim

Sabo to Boehm (who was now working at Atkinson, Andelson), which refers to

Platt’s allegations that bond proceeds were misused at Heritage Rancho. Sabo

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


stated: "it appeared to us to be simply the claim of a disgruntled ex-employee.

Had we known of the discussions between you and Jim Iverson, we might have

taken a different view of that case."

164. $700,000 of the missing $1.9 million appears to be comprised of

payments for consulting fees to Debra Kasirer or her company, Mishkan

Healthcare.

165. Additional problems also surfaced at this time. Near the end of 1996,

Defendants were well aware that the operating results for Rancho Hospital were

considerably lower than the figures projected in the feasibility study. An outside

operations analyst conducted a study of the Facility and listed the following

outstanding problems in operations:

a. Due to the cash problems at the Facility, accounts receivable

balances were being factored immediately. It should only be done for non-

Medicare receivables and, ultimately, should not be done.

b. Length of patient stay was critically low and patients were

discharged too early because staff did not have experience with long term acute

care case management.

c. Payroll checks frequently bounced and employees were asked

to hold off on cashing checks for 3-4 days. Invoices on goods and equipment were

past due. Payroll tax and workers compensation accounts were paid late which

resulted in further penalties.

d. Public perception of the Facility was poor. Completion dates

for construction of the ICU unit and other renovations, inadequate resources to

provide necessary equipment for scheduled surgeries, and knowledge of the

Hospital’s financial problems had led to rumors in the community that the hospital

was going bankrupt and would soon close.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

52 The address used for HCH was in fact Kasirer’s home in Beverly Hills.

53 This is the first offering for which Plaintiff and the Class claim damagesas the first Rancho Hospital bonds were redeemed with proceeds from the secondRancho Hospital bond offering.


166. In an attempt to remain financially viable, Heritage Rancho borrowed

from an interest reserve fund dedicated to making interest payments to the

bondholders. A memorandum dated February 11, 1997 from Dhooge of Miller &

Schroeder to Bob McAdam of Miller & Schroeder in Minneapolis discusses the

borrowing from the Capitalized Interest Reserve Fund.

167. Seven months later, these problems were again referenced in a letter

dated September 12, 1997 from Joseph Luder of First Trust (the Trustee for the

First Rancho Offering) to Kasirer and HCH.52 That letter, copied to Dhooge,

discussed the fact Heritage Rancho was past due on its monthly payment for

Installment Purchase Payments and that a “Lockbox Trigger Event” shall occur for

failure to make a monthly installment. The letter stated such an Event could be

invoked at present but deemed it in all parties best interest not to.

THE TEXAS CITY FACILITY OFFERING53

168. On October 28, 1996, HHD held a Board meeting which was attended

by Kasirer, Bertolini, L. Rubin, E. Rubin, and Goldstein. The Board discussed the

status of the Texas Facilities and hired Valuation Counselors to perform all

“appraisals on each project involved in the Columbia transaction.” On December

23, 1996, the Board of Heritage Geriatric Housing Development VII held a special

meeting which was attended by Bertolini, Kornreich, L. Rubin, Chalker, Wexler,

and E. Rubin. At the meeting, the Board passed a resolution wherein it approved

the plan of finance whereby $7.295 million in bonds would be issued for the

financing of the Danforth-Texas City facility. In addition, despite the fact that the

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


preliminary OS did not contain a substantial amount of material information, the

Board approved and ratified the dissemination of the preliminary OS and

authorized and approved the preparation and distribution of the final OS in

connection with the Texas City bond offering.

169. The Official Statement for the Texas City bond offering claimed that

$7.295 million was to be raised for the acquisition, renovation and operation of the

Texas City Facility. The issuer of the Texas City bonds, which were dated

December 15, 1996, was the Danforth Municipality. These bonds were issued

pursuant to an Indenture and Trust and Security Agreement (the “Indenture”) with

U.S. Trust acting as bond trustee for the benefit of the bond purchasers. On

November 8, 2004, just prior to the issuance of these bonds, E. Rubin wrote to

Mark Hammermesh of G&L, regarding problems with certain loans from G&L to

Heritage relating to the Rancho Hospital and three early Heritage projects

(Maryland Gardens in Phoenix, the Phoenix in Kansas, and St. Thomas Moore in

Maryland). The November 8th letter (copied to Bertolini, Wexler, Kornreich, L.

Rubin, Chalker, Goldstein, and Steve Fishman of ZA) detailed the serious

financial problems Heritage was experiencing on these early projects. Ultimately,

these projects were abandoned after Heritage defaulted on the G&L loans.

Despite the Board’s notice of the massive financial problems on these early related

projects, no such information was included in the OS for the Texas City offering.

Instead, the OS listed these projects as up and running without mention of the

imminent failures.

Material Omissions From the Texas City Official Statement

170. The Official Statement for the Texas City offering was false and

misleading as it omitted the following material facts and circumstances:

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

54 Furthermore, the loan evidences a potential conflict of interest on the partof the underwriter because, in promoting the bonds, Miller & Schroeder was "notdisinterested" but had an undisclosed interest in selling the bonds.


a. The Indenture was of the “stand alone” variety, whereby the

security for the bond payments only related to the Texas City project. The Official

Statement described how proceeds from the offering were to be used. Specifically,

the OS included a table that set out the “Estimated Sources and Uses of Funds”

which accounted for 100% of the bond proceeds raised. Bond purchasers were

expressly assured that their investment dollars would be used for these specified

purposes which related only to the Texas City Facility. Nowhere in the Official

Statement were investors told that bond proceeds would be or could be disbursed

to other Heritage Entities. Moreover, none of the funds were earmarked for other

Heritage projects or "inter-company loans.” Nonetheless, Defendants diverted

monies from this offering to other projects. For example, within the first few

weeks after the offering, nearly $550,000 was used to pay down the line of credit

for Rancho Hospital.

b. The Official Statement makes no mention of the $500,000 loan

from Miller & Schroeder to HHD to pay for costs associated with the issuance.

The obligation to repay Miller & Schroeder's loan ultimately reduced the amount

of bond funds available for the stated purposes of the offerings. Thus, it

materially impacted the financial viability of the Texas City Facility, and should

have been disclosed.54 The failure to disclose the $500,000 loan to HHD was

intentional. Had this loan been disclosed, investors would have had grounds to

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

55 The under-funding of the Texas City Facility is proven by the fact thatHeritage 7-Texas City borrowed in excess of $1 million from First ProfessionalBank and granted a lien on its accounts receivable as security. In the foreclosureaction, First Professional Bank asserted its lien. This loan was never disclosed inany future Official Statements, nor on the Texas City tax returns.


suspect that the bond projects were under-funded from the outset and would not

have invested in the bond offering.55

c. The Official Statement included a section entitled

"Relationships Among The Parties.'' In each case the Official Statement

represented: "There is no direct or indirect relationship between any of the

Officers or Directors of the Company and the Officers or Directors of the Facility

Manager." The Miller & Schroeder Principals, Boehm, and the Heritage Directors

and Officers knew the above representation was false and misleading. They knew,

for example, that Kasirer was actually part of the Heritage organization and was

actively promoting the Heritage bonds, even though he was putting forth a facade

of independence from the Heritage organization. In particular, the Official

Statement failed to disclose the genesis of the plan (the Kasirer-Columbia dispute

and resolution), which gave rise to the Heritage scheme, as discussed above.

Kasirer, through his access to the Columbia properties, was the sole and exclusive

source of investment opportunities for Heritage. Thus, Kasirer had effective

control over the Heritage Entities. In addition, Kasirer had control over other

parties identified in the Official Statement as being independent of Heritage but

who depended on Heritage's continued business. Indeed, the Heritage Entities and

Kasirer's management companies were so intertwined that, for practical purposes,

there was no "separateness" whatsoever. This omission of relevant information

was material because "separateness" between the Heritage Entities and

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

56 The section, which remained unchanged in subsequent offerings, wasalso materially misleading in that it omitted to discuss relationships among otherparties (besides the Facility Manager), such as Bertolini serving simultaneously asChairman of each Heritage Entity and principal of the inspecting architect;Saltzman being under contract to receive fees for consulting services; Chalkerreceiving fees for insurance related services; King receiving Heritage contracts forfood service; Kuhl serving as Vice-President of Architecture and Construction forHHD and Heritage America while simultaneously working for WRS Architects,the design architects of most of the projects; and numerous other instances ofHeritage Officers and Directors receiving consulting or other fees.

57 In fact, the insurance carrier for HCH denied coverage for the claimsasserted herein against Kasirer on the grounds that the policy is null and voidbecause of “fraud in the issuance.” The fraud is the failure of Kasirer to disclosehis past lawsuits in the application for the insurance. This is proof of themateriality of this non-disclosure.


management implied that the management contract was negotiated at arm's length,

assured investors of management’s integrity, and reaffirmed the purported

separateness of each Heritage Entity.56 Additionally, Kasirer has prior long time

business and/or social relationships with both Emery Rubin and Chalker, among

others.

d. Additionally, the Official Statement for the Texas City offering

omitted material facts regarding Kasirer’s past indiscretions in other bond

offerings and the many lawsuits, judgments and liens against Kasirer and his

companies.57

e. Furthermore, in a section labeled “The Manager,” the Texas

City Official Statement misrepresented the background and experience of Kasirer

and his management company/employees. This section described how

IHN/Health Services Group Inc., a subsidiary of Iatros and publicly traded

company on NASDAQ, would be hired to be the manager. The Official Statement

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

58 In addition, Kasirer’s management company entered into a contractualagreement with each Heritage Entity for each Facility wherein the company wasobligated to perform a variety of functions and maintain a certain level ofprofessionalism.


notes that Iatros “currently provides management services to over 50 Facilities

representing over 6000 beds.” The Official Statement’s unqualified description of

Kasirer’s and Iatros’s management expertise and reputation were materially false

and misleading because it omitted known facts concerning the limitations of

Kasirer and Iatros to effectively manage the Texas City Facility, as the problems at

Rancho Hospital exemplified. The quality of management was a material

consideration for Heritage investors. That is because repayment of the bonds

depended on operating revenue, and the generation of operating revenue in turn

depended on the quality of management. In fact, the Official Statement has a four

page list of the responsibilities of the manager.58 Without a well-qualified and

reputable Facility manager, investors would have little assurance, if any, that the

proposed project would be developed, operated, and valued as represented in the

Official Statement. The Defendants were therefore careful to describe

management, particularly Kasirer, in the best light possible. Had the investors and

the marketplace known the truth, these bonds would not have been marketable.

f. The Official Statement noted that since the formation of HHD

in January 1993, six (6) affiliated Entities had been formed, including Rancho

Hospital. Although the figures presented in the Official Statement gave the

impression that these Facilities were operating successfully, there was no

disclosure of the fiscal problems at the Rancho Hospital, the Phoenix, Maryland

Gardens, or St. Thomas Moore. In particular, there was no mention of the fact that

at Rancho, management had borrowed money from the interest reserve fund, or

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

2859 Of course, there was no mention of the ongoing Medicare fraud at Rancho

Hospital.FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 100

that the Rancho Hospital was intending to borrow money from the Texas City

Facility after the offering was completed. Nor was the imminent failure of these

three other projects discussed. These omitted facts materially impacted the

potential risk associated with investments in new projects.59 Had such information

been disclosed, it would have prevented the bonds from successfully being

marketed.

g. According to the Official Statement and pursuant to the

Management contract, the Manager was required to loan money ($250,000 in most

instances) to the Heritage Facility pursuant to an Operating Deficits Agreement

(“ODA”) prior to the bond offering. The amounts loaned were to be used solely

for operating expenses or debt service on the bonds. The loan was subject to the

subordination agreement with the Management company. The loan would

terminate when it became clear that there would be no event of default and the

Facility was financially sound (as measured by the bond coverage ratios, days cash

on hand, and trade payables). However, the Official Statement failed to disclose

that fact that Kasirer never funded the ODAs but instead would offset the amount

he owed per the ODA against fees allegedly owed to him.

h. The Official Statement contained a section for disclosing

pending or threatened litigation. The Official Statement represented that no

litigation was pending or threatened. The Official Statement states:

The Company has advised that no litigation orproceedings are pending, to its knowledge, threatenedagainst it or the Facility or the transactions describedherein or which might have a materially adverse effecton it or the Facility or the transactions described herein.pg. 61.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Contrary to this representation, the Platt allegations of $1.9 million of bond funds

disappearing had already come to light, but were not disclosed. This omission

prevented investors from discovering the systematic misappropriation of funds and

mismanagement of the Heritage projects. Had investors discovered or suspected

such facts, the market for Heritage bonds would likely have been nonexistent.

This omission fact was clearly deliberate.

i. The Official Statement represented that the Texas City Facility

would be affiliated with the University of North Texas Health Science Center so

that the Facility would not have to comply with the requirements that it have an

85% occupancy percentage in order to receive Medicare reimbursement.

Moreover, just days prior to the bond offering, Hillary Young of Fulbright &

Jaworski sent a letter to the Texas Department of Human Services wherein “a

waiver of moratorium on the Medicaid certification of nursing beds” was

requested because of the Facility’s participation in the Alzheimer’s research

program at U. of North Texas. This letter was copied to numerous individuals

including Barber, Boehm, Dierckman, Dhooge, Goldstein, Iverson, Kasirer, and E.

Rubin. In reality, the ‘affiliation’ with the University of North Texas was illusory

and thus, the 85% requirement should have been met.

171. In short, had full and fair disclosure been made regarding, among

other things, Kasirer's limitations as a manager, his involvement in similar bond

transactions which resulted in allegations of fraudulent conduct, the IRS

allegations, the fraud allegations in the BHMC and J&J lawsuits, Platt’s

allegations, the ongoing Medicare fraud, the violations of IRS and Medicare rules

regarding related party transactions, and the massive problems at Rancho Hospital

and the other three facilities, Plaintiffs would have had ample reason to doubt the

ability and integrity of all involved and would, therefore, have avoided investing

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


in the Heritage bonds. Because the viability of Heritage as an “ongoing Entity"

depended on the marketability of its bonds, the Defendants did not disclose the

information. Thus, when Kasirer, Goldstein, Bertolini, Emery and Larry Rubin,

Boehm, Dhooge, Iverson and others reviewed and approved preliminary and final

drafts of this and all future Official Statements, they knew the documents were

false and misleading.

Appraisals and Viability Studies of the Texas City Facility

172. Included in the Official Statement was a representation of the

appraised fair market "as is" value of the real property to be renovated. The value

of the real property was a material consideration for investors because the property

secured the bond indebtedness. Thus, the higher the property's value, the safer the

investment. HHD hired Capital to appraise the Texas City Facility. On February

19, 1996, Heritage 7 Texas City acquired the Facility for approximately $850,000,

including closing costs. On November 1, 1996, Capital valued the Texas City

Facility “as is” at $5,200,000 as of May 1, 1996. This constituted an appreciation

of 512% in less than 3 months! It further stated that the market value upon

completion of the renovation as of August 1997 would be $8 million and upon

stabilization of occupancy as of August 2000 the market value would be $10

million. There was no reasonable basis for these appraisals. In fact, according to

the “1998 Texas Nursing Facility Cost Report” Texas City filed, the value of the

land and building at $3.215 million. The figure provided in the OS was merely

conjured up by Kasirer. Capital did little to no work in verifying the veracity of

the estimate. Moreover, the appraisal was based upon the property being acquired

in fee simple, free of liens and encumbrances. Because the property was

transferred subject to a significant deed restriction, the appraisal was materially

misleading.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


173. Zelenkofske provided a financial feasibility study and market study

for Texas City which was totally unrealistic. In fact, the feasibility figures were

provided by Kasirer, Dierckman and other management company executives and

merely plugged into the studies submitted by Zelenkofske. For example, various

correspondence in early June 1996 show that Kasirer was dictating the figures

Zelenkofske put into the feasability study. In one instance, Kasirer instructed

Mike Launtensack of Zelenkofske the following: “See my corrections. Also, I

would like to see larger contingency, capitalized interest and working capital

bringing the issue back up to $6,250,000.” In addition, Zelenkofske approved

(and included in its feasability study) the daily fee figures calculated by projecting

that the Facility would fill 35 assisted living beds out of a total of 134 beds. This

figure was outrageous given the fact that notes from a December 31, 1998 meeting

of the Miller & Schroeder credit committee, show that the assisted living program

at the Texas City Facility “didn’t work” because the geographic area was “too

small.” The guesswork figures for assisted living beds effected the bottom line to

a dramatic extent because assisted living beds were more often private pay beds

and not subject to payment via Medicare. Therefore, the income from these beds

should have been stable and not subject to government approval for

reimbursement and/or policy change. In reality, Texas had the lowest Medicaid

pay rates in the country and the Medicaid beds at the facility made up a majority of

the facility’s population. In concrete terms, the projections in the feasability study

showed a net profit per patient per day of $14.31, but in reality, they were losing

$9 a day!

174. Moreover, the feasability study projected $841,000 in 1999 in

operating income and net income of $5,000. Based on mid-year 1999 actual and

projected results, the operating loss was going to be $341,441, a swing of $1.182

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


million, and the net loss was $1.640 million! Had Zelenkofske done any

legitimate due diligence regarding the viability of these projections, they would

have realized that the Facility was anything but feasible. Significantly, the

feasibility study failed to address the fact that Heritage was experiencing massive

problems at existing Heritage entities and the management team was not capable

of operating the facilities profitably. Given the fact that Steve Fishman of ZA was

copied on E. Rubin’s November 8th letter, which detailed the serious financial

problems Heritage was experiencing on the early projects (discussed above at ¶

169), the failure of ZA to address the current financial crisis Heritage was

experiencing and the clear inability of the management team to operate the

facilities profitably, was undoubtedly intentional.

Construction Delays and Cost Overruns at the Texas City Facility

175. The Official Statement contained a section entitled "Construction

Contract and the Contractor" which stated that Heritage 7 Texas City had

contracted with Commercial Finish Group, Inc. ("Commercial Finish") to

complete the renovation of the Texas City Facility by September 1, 1997 for a

maximum contract price of $2.5 million. The Official Statement also represented

that if there was a construction delay due to government permit requirements, the

investors and Heritage would be protected by a performance bond obtained by the

construction company. If there were renovation delays caused by other factors,

the contract amount would be reduced by $615 a day, pursuant to the liquidated

damages clause. Thus, based upon the express representations in the Official

Statement, Plaintiffs and the other bond purchasers were assured that Heritage 7-

Texas City would be opened on time and operating within budget.

176. Despite these “protections,” Texas City (and almost every Facility

thereafter) went over-budget and construction was delayed. As a result, Heritage

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

60 The Official Statement noted that a partner of Berman & Bertolini was theChairman of HHD and Heritage 7-Texas City. However, this same relationshipwas omitted from the section purporting to disclose all conflicts of interest andinterested party transactions --"Relationships Among the Parties."


ended up paying more than the guaranteed construction price on virtually every

project and there were no payments or offsets pursuant to the “protections.” In

fact, according to the 1997 Tax Returns for Heritage 7-Texas City, Commercial

Finish was paid $2.692 million and the total cost for building improvements in

1997 was $3.352 million. The Defendants knew or, barring deliberate

recklessness, should have known, that the construction guarantees set forth in the

Official Statement were unreliable (or fictitious).

177. WRS Architects was listed as the design architect for the renovation

project. Berman and Bertolini was listed as the “Inspecting Architect” who was to

“inspect the Renovation Project on behalf of the Trustee and registered owners of

the 1996 bonds as renovation progresses, and will authorize the distribution of

funds for renovation.” The contractor was “entitled to monthly progress payments

from the Renovation Fund based upon applications approved by the Renovation

Projects Inspecting Architect and the Company.” By agreeing to this role, Berman

& Bertolini took on fiduciary responsibilities to Plaintiffs and the Class.60

Berman & Bertolini either abdicated these duties or performed them negligently,

in violation of the fiduciary duties it assumed by agreeing to perform this task for

a fee. According to the tax returns filed for Heritage 7, Berman & Bertolini was

paid at least $32,417 in 1997.

Financial Information Regarding Texas City

178. As discussed above, the Heritage 7-Texas City Entity experienced

massive cost over-runs and paid excessive fees. The following table details some

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


of the pertinent financial information (red flags) gleaned from an analysis of the

tax returns filed by Heritage 7-Texas City:

Texas City Facility - Financial Information

ITEM 1997 1998 1999 Details

Revenue - Total $3,458,000 $4,352,414Expense - Total $6,406,000 $5,959,122TotalManagement fees

$267,745 $224,969 $84,600 in managementfees were owed in 1998to an unspecified Entity

Furniture andfixtures

$827,000 OS allotted $590,000 forfurniture and fixtures

Buildingimprovements

$3,352,000 $739,225 OS stated that$2.5million was themaximum renovationcost

Total Loss $2,918,000 $1,578,000

179. By December 31, 1996, two weeks after consummating the bond

offering, $1.428 million had been withdrawn from the bond funds. A substantial

portion of these funds were used to make payments to those intimately involved

with the scheme. Most notable were the following payments: Chalker’s insurance

company received $17,000; SCS received $5,440; Sabo & Green received

$85,000; Fulbright & Jaworski received $65,000; Goldstein received $30,000;

Berman & Bertolini received $5,000 (although the tax returns for Heritage 7 show

a payment of $32,417 in 1997); Zelenkofske received $47,000 and Debra Kasirer

received a check for $20,000. Many of these payments were in violation of the

IRS and Medicare rules and regulations.

THE HOUSTON FACILITY OFFERING

180. The next bond offering raised $10.37 million for the Houston

Facility. Once again, the Municipal Issuer was the Danforth Municipality. The

Houston bonds were dated March 1, 1997.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

2861 Heritage 8-Houston paid Columbia $160,000 in cash which it had

borrowed from HHD and issued a note for $1.690 million. FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 107

Omissions From the Houston Official Statement

181. The Official Statement disseminated to the investors was virtually

identical to the Texas City Official Statement. Thus, it was false and misleading

for all of the same reasons. In addition, the Houston Official Statement did not

disclose the history of delay and construction cost-overruns at the Texas City

Facility nor the fact that Rancho Hospital had run of out of money to pay the

interest on the bonds and that Heritage 7 had “loaned” Heritage Rancho money to

make the payment.

Appraisals and Viability Studies of the Houston Facility

182. On December 27, 1996, prior to the bond offering, Heritage 8

Houston acquired the Houston Facility from Columbia for $1,850,000.61 On

November 1, 1996, Capital Valuation valued the Houston Facility at $8,000,000 in

its “as is” condition, as of May 1, 1997. Capital estimated the market value of the

Facility upon completion of renovation to be $11 million, and $13.8 million upon

stabilization in July 1999. These appraisals had no reasonable basis in fact. In

fact, according to the “1998 Texas Nursing Facility Cost Report” Houston filed, it

listed the value of the land and building at $1.85 million.

183. In addition, Zelenkofske provided a financial feasibility study and

market study for the Houston Official Statement that was baseless. The feasability

study projected a net profit of $10 per patient per day, $1.189 million in operating

income, and $118,000 in net income for 1999. However based on 1999 actual and

projected results, the Houston facility was losing $10 per patient per day, showing

a $486,081 operating loss and a $1.96 million net loss. As with the Texas City

Facility Official Statement, the projections in the financial feasibility study were

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


provided by Kasirer and his management company executives and Zelenkofske did

little to no work in the preparation of the report. Once again, the study failed to

address the fact, which was known to Zelenkofske, that Heritage was experiencing

massive financial problems at early facilities and the management team had

proven itself incapable of operating these programs/facilities at a profit.

Financial Information Regarding the Houston Facility

184. According to the Official Statement, the renovations on the Houston

Facility were to be completed by November 1997 with a maximum renovation cost

of $3.3 million. In fact, the Houston Facility did not open until August 1998, and

the construction cost exceeded the budget by approximately $1.3 million. The

Facility closed in May 2000 and mechanics liens of over $1.9 million were

asserted. Real estate taxes appear to have been due as well. The Heritage 8-

Houston Entity experienced massive cost over-runs and paid out excessive fees.

The following table details some of the pertinent financial information (red flags)

gleaned from an analysis of the tax returns filed by Heritage 8-Houston and bond

fund requisition certificates executed by the Heritage 8 Entity:

Houston Facility - Financial Information


Revenue - Total $616,111 $4,855,000

Expense - Total $3,542,053 $7,066,094Total Managementfees

$281,000 $293,600 There was anoutstanding liabilityfor management feesof $211,815 in 1998

Renovations $4,400,000Total Loss $2,925,000 $2,170,504

185. Within two months after the bond offering, numerous payments to

those intimately involved with the scheme were made including $25,000 to both E.

Rubin and Debra Kasirer (within the first two weeks); $90,000 to Sabo & Green;

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


$154,520 to Miller & Schroeder; $18,000 to Chalker via LFC’s “risk management

fees”; and $267,467.50 to HHD. In addition, Berman & Bertolini received

$31,000 as the Facility’s inspecting architects over a five month period. Many of

these payments were in violation of the IRS and Medicare rules and regulations.

186. In a letter dated March 6, 1997 to Boehm, with copies to Kasirer,

Goldstein, Dhooge and William Barber of U.S. Trust, among others, bond counsel

John D. Bray of Fulbright & Jaworski advised that bond proceeds from one project

may not be used to pay obligations on another project, stating: "[I]n connection

with the [Ft. Worth]’s acquisition, a Columbia entity loaned Heritage V

$32,878.30 for which Heritage V gave a promissory note (the “Heritage V Note”).

. . . pursuant to a letter agreement dated February 18, 1997, Heritage V agreed to

repay the Heritage V Note when the [Houston] bonds are issued . . . As we are

sure you are aware, the [Houston] bond proceeds may not be used to repay

the Heritage V note." This letter removed any question that the Heritage

Defendants’ prior diversion of funds was improper, should have been disclosed to

investors, and should cease. Nonetheless, Defendants continued to divert monies.

187. These fund transfers and improper payments placed the Houston

Facility in immediate financial trouble. By October 8, 1997, Jeff Head (“Head”)

of HCH wrote to Kasirer, E. Rubin and Dierckman to discuss the Facility’s

financial conundrum. In particular, Head noted the following: the project fund

and working capital fund were insufficient, at a minimum, $315,000 and

$600,000, respectively; Commercial Finish Group had received over $300,000 for

construction work although the contract was supposedly with Affiliated

Metropolitan Contractors; and it appeared that the ODA was funded from the bond

funds as part of the Cost of Issuance.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

2862 In October 1998 the second Ft. Worth Facility offering was held and

Notes were sold.FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 110

THE INITIAL FT. WORTH FACILITY OFFERING

188. On September 9, 1996, a quorum of the Board of Directors for

Heritage 9-Ft. Worth (Bertolini, Wexler, Kornreich, and L. Rubin) met and

approved the purchase of the Ft. Worth Facility and all acts required to finance the

acquisition. The initial Ft. Worth Facility bond offering raised $13 million for the

acquisition, renovation and operation of the Facility.62 Tarrant Municipality

issued the bonds which were dated May 15, 1997.

Omissions From the Ft. Worth Official Statement

189. The Ft. Worth bonds were offered pursuant to an Official Statement

which was false and misleading for the same reasons previously discussed. In

addition, by the time of this offering, Defendants knew and did not disclose the

following facts and circumstances:

a. Kasirer was to be given ownership of a portion of the property,

specifically the parking structure adjacent to the Facility.

b. Funds were already being, and would continue to be, freely

transferred among the various Heritage Entities.

c. In April 1997, Saltzman and Pontarelli communicated with Bob

Coates, an employee at Heritage Hospital. Coates complained about the

implementation of the billing process for the PHP at Heritage Hospital, and the

fact that he was forced to use so many of his employees to conduct a chart audit at

the Hospital. Coates insisted that Kasirer, Saltzman and Pontarelli would “all soon

be going to jail because of the fraudulent manner” in which they handled their

“affairs.” Coates also opined that they were “more than likely going to have

serious problems with Medicare and the OIG.”

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

2863 Larry Rubin signed the closing documents as Secretary for both Heritage

V and Heritage 9-Ft. Worth. FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 111

d. Per the Official Statement, the purchase of the Ft. Worth

property occurred as follows: (1) on September 24, 1996, Heritage Housing V

acquired the Ft. Worth Facility for $3,800,000 from Columbia, (2) three days later,

Heritage V transferred the Facility to Heritage 9-Ft. Worth for $3.8 million to be

paid at the closing of the bond financing, and (3) Heritage V then transferred the

$3.8 million to BHMC, L.P. to pay down the note given by Heritage V to BHMC,

L.P. These statements were false. According to the actual closing documents, on

September 24, 1996, Ft. Worth Medical Plaza Inc. sold the Ft. Worth Facility to

Heritage V for $1.2 million. The seller’s statement established that there was a

credit to the purchaser from seller of $1.2 million, reflecting that Heritage V

actually paid a few hundred dollars at closing. On the same day, Heritage V sold

the property to Heritage 9-Ft. Worth in exchange for a $5 million note due to

Heritage V. Therefore, the $3.8 million is really the profit Kasirer was making on

the deal.63

e. On April 4, 1997, a quorum of the Board of Directors of HHD,

including Bertolini, Kornreich, L. Rubin and Chalker, met and discussed the

affiliation with the University of North Texas Health Science Center at Fort

Worth. According to the Official Statement, the University would establish an

Alzheimer’s disease research center at the Facility in Ft. Worth and eleven (11)

additional sites would be established thereafter in Texas, including the Heritage

Facilities in Houston and Texas City. The purported goal was to have the center

established as a funded research center by the National Institute on Aging. The

relationship with the University of North Texas was farcical. No research was

ever performed and the space at the Facility was rented to the University for $1 per

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

64 A year and a half later, a second offering was done for the Ft. WorthFacility. In that Official Statement the as is value was $18.2 million – more thanthe initial estimate for the Facility running at full capacity despite the fact theFacility did not open until September 1998 (9 months late).


year. The Board discussed the status of various bond offerings including, inter

alia, the completed Texas City and Sam Houston offerings and the up coming Ft.

Worth offering. Additionally, the Board approved a resolution whereby Larry

Rubin was granted permission to change the name of Heritage Housing

Development of Kansas, Inc. Upon information and belief, at this time, Heritage

Housing Development of Kansas, Inc. was preparing to file for bankruptcy and

eventually did so. The name change provided a cover for the bankruptcy of this

related entity. Burying the bankruptcy was a necessary part of the scheme because

(1) it would have resulted in an obvious blemish on the Heritage organization’s

track record, and (2) in many states, including Florida, a license to be an Assisted

Living and/or Medicare/Medicaid provider can not be obtained if a related entity

has filed for bankruptcy.

Appraisals and Viability Studies of the Ft. Worth Facility

190. Capital valued the property in its "as is" condition as of November 1,

1996 at $8,400,000 – an appreciation of 121% in two months time! Capital also

estimated that the market value of the Facility would reach $13.5 million upon

completion of the renovations in January 1, 1998 and $17 million upon

stabilization in December 2000.64 The appraisal had no reasonable basis in fact

and was a testament of Kasirer’s influence over the information included in the


191. Once again, Zelenkofske provided the financial feasibility study and

market study for the Ft. Worth Facility. Although once it opened, the Facility met

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

65 The feasability study for the Fort Worth facility’s 1999 results projected anet profit of $2.34 per patient per day, $342,479 in operating income, and a netloss of $1.07 million. However based on 1999 actual and projected results FortWorth was losing $26.61 per patient per day, showing a $945,601 operating lossand a $3.658 million net loss.


the patient occupancy rates estimated in the feasibility study, the patient mix was

primarily Medicaid. Like the earlier studies, the budgeted operating costs were

grossly underestimated.65 In fact, the feasibility figures were provided by Kasirer

and his management company executives and/or Heritage executives to

Zelenkofske who did little legitimate work. Had the management company

operated numerous similar Facilities, as was touted in the Official Statement, the

operating costs should have been relatively easy to estimate based upon

experience. Although some level of error is expected, the estimated budget for the

Facility was absurd given the actual costs. Moreover, the construction time frame

and costs should have been stable figures given the so-called “performance bond.”

Instead, the time and costs for renovation were greatly underestimated (the Facility

in fact opened nine months late and was at least $1 million over budget). Again,

as in the earlier studies, Zelenkofske purposefully failed to address the fact that the

early projects (the Phoenix, Maryland Gardens, and St. Thomas Moore) were

failing, the Heritage entities associated with these projects had defaulted on loans

from G&L, and one entity was preparing to file for bankruptcy. Overall, the

feasibility study was a farce.

Financial Information Regarding the Ft. Worth Facility

192. According to the Official Statement, renovations on the Facility were

to be completed by the construction contractor in December 1997 for a maximum

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

66 The Official Statement listed SEDALCO as the construction company, butthe feasibility study identified Commercial Finish and the tax returns showAffiliated Metro Contractors being paid.

67 By August 1997 the construction delays were such a problem that onAugust 27, 1997, Stacy Roberts of Affiliated Metropolitan Contractors wrote anapologetic letter to Kasirer explaining the reasons for the delays and promising hewould be happy with the end results. Despite this fact, the delays were nevermentioned in the future Official Statements.


cost of $2.75 million.66 In fact, the renovation costs, again, exceeded the budget,

and the Facility did not accept any patients until September 1998.67 The Heritage

9-Ft. Worth Entity experienced additional cost overruns and paid excessive fees;

including fees to Sabo & Green and Berman & Bertolini. The following table

details some of the pertinent financial information (red flags) gleaned from an

analysis of the tax returns filed by Heritage 9-Ft. Worth and bond fund requisition

certificates executed by the Heritage 9 Entity:

Ft. Worth Facility - Financial Information


Revenue - Total $576,498 $5,537,820Expense - Total $2,440,617 $10,876,117Total Managementfees

$114,440 $255,159 In 1998 $335,479 inadvances were made toa managementCompany

Renovations $5,763,151 $2.75 millionrenovation costguarantee in OS

Total Loss $1,864,119 $5,338,297

THE 1997 HHD AUDIT BY SOBELMAN COHEN & SULLIVAN

193. SCS performed a review of HHD’s books for the fiscal year ending

June 30, 1997. While performing these tasks, SCS stated that it “discovered that

the ODA’s had not been funded” to the Ft. Worth, Houston, and Texas City

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

68 The alterations to the books and records of HHD and the other Entitiesare described in a memo from Ada Lee Sullivan of SCS in response to an inquiryby Goodman in May 1999.


Facilities. SCS’s response to this discovery was to retroactively change the

journal entries to show that “HHD had advanced these funds to the Facilities on

behalf of Health Care Holdings[.]”68

194. The documents relating to this review show a variety of improper

transfers, improper expenditures and most importantly – fraudulent entries - in the

books and records which masked the theft of funds, to wit:

a. expenses incurred by HHD and presumably paid for with bond

money for other proposed facilities that were either abandoned or failed (Tustin

Hospital, St. Thomas Moore and Maryland Gardens)

b. $425,000 in “loan advances” from Miller Schroeder .

c. BHMC L.P. was labeled an “interco” account.

d. Debra Kasirer drove a car leased by HHD. She also received

salary payments, loans and expense reimbursements from HHD. One “loan” to

Debra Kasirer was booked on April 11, 1997 for $58,500. This appears to be a

transfer requested by Robert Kasirer in a fax to E. Rubin. The fax stated that J&J

refused Kasirer’s offer to postpone further monthly payments. In light of the

refusal, Kasirer stated that he needed $58,500 by April 15th. He instructed E.

Rubin to take the money from Houston and “call it a loan and I will repay it upon

the closing of [Ft. Worth].” The Ft. Worth offering closed in May 1997, and the

HHD books showed a repayment of this loan by Debra Kasirer on May 30th.

e. In addition, there are a number of payments made by HHD in

1997 to Debra Kasirer for consulting services, totaling $517,078.16, which were

reclassified by SCS as loan receivables from Robert Kasirer. A loan payable to

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

69 Not surprisingly, the books of Heritage V have apparently disappeared!

70 Presumably, “MAS” is Michael Sobelman.FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 116

Iatros of $252,924.80 was also reclassified as a loan receivable from R. Kasirer to

“net loans per conversation with E. Rubin.” A $66,000 loan receivable from

Robert Kasirer was reclassified as a “rent-option payment.” A $521,899.26 loan

receivable from Robert Kasirer was reclassified “to a Heritage V inter-company

account per client.” The net result of all of these entries on HHD’s 1997 books

was as follows: The books showed a beginning loan receivable of $323,746 from

Kasirer. On June 30, 1997, this amount increased by $517,078.16, bringing the

total Kasirer owed to $840,824.16. However, also on June 30, 1997, there are

three adjusting journal entries which reversed the monies owed by Kasirer. These

three adjustments were for the following amounts: $252,924.80, $66,000, and

$521,899.36 – which just so happen to total $840,824.16!!! Thus, the amount

owed by Kasirer became ZERO!!!

f. Yet another entry of $75,423 is booked as: “reverse prior year

consulting expense related to Debra Kasirer.” A loan receivable of $82,207.55

from Debra Kasirer was also reclassified as a loan receivable from Heritage V

based upon the note, “this amount should not have been an expense but rather an

increase in the loan receivable-Heritage V.”69

g. As for Emery Rubin, the documents showed salary payments

and payments to Emery Rubin and Marion Healthcare (his company, named after

his wife Marion) for consulting on 1/6/97, 1/22/97, 2/4/97, 2/7/97, 2/10/97,

3/14/97, 3/19/97, 4/1/97, 5/9/97, 6/3/97, 6/10/97, and 6/13/97 – totaling

$528,078.77. There was also an adjusting journal entry that reclassified

$291,078.77 of this amount as a loan receivable from Emery Rubin “per MAS70

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


conversation with Emery Rubin,” leaving a total payment of $237,000 to Emery

Rubin. However, there is an entry in the HHD adjusted trial balance for the period

ended December 31, 1997 that showed the related party receivable from Emery

Rubin began as $307,878.77,which was increased by two adjusting journal entries

by $24,738 and then in a different adjusting journal entry, offsets $237,000,

leaving $95,616.77 owing. In the adjusted trial balance of June 30, 1998 for

HHD, $109,116.77 was listed by HHD as a “due from” Emery Rubin. However,

there was a credit for this exact amount and in a very strange coincidence, the

“other income” line item in Emery’s personal 1999 tax return, prepared by SCS,

has an entry for this EXACT AMOUNT!!!!

KASIRER’S CONTROL OVER HERITAGE IS SOLIDIFIED

195. The marketing of future offerings was already in the works. An

August 11, 1997 memorandum from Kasirer to Miller & Schroeder, with copies to

Goldstein, Boehm, and Dhooge among others, stated: "In an effort to gain name

recognition between the projects, effective immediately the word ‘Heritage’ will

precede all project names . . . This change is effective immediately. Please be

sure to update all marketing materials.”

196. On August 18, 1997, Kasirer strengthened his control over the

Heritage Organization by ensuring that people of his own choosing were sitting on

the Heritage Board of Directors. He sent a memo to Goldstein wherein he stated:

“Pursuant to our discussion last week, I trust that new board members and officers

will be elected for Heritage Housing Development, Inc.” In the memo, Kasirer

gave his “suggestions” for who should be on the Boards of the various Heritage

Entities.

197. That same day, HHD held its annual meeting. Bertolini, Wexler,

Kornreich, E. Rubin, Goldstein and L. Rubin attended. Chalker’s resignation was

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

71 The Agreement to Expand Management Services was entered intoapproximately two (2) weeks after the Defendants answered the complaint in Plattv. Iatros Health Management Network et. al.


announced by Goldstein, Bertolini was elected Chairman of the Board, Kornreich

was elected Vice Chairman and Lim was elected Secretary/Treasurer. The Bylaws

were amended to allow for six Directors and Goldstein, as outside counsel, was

given the deciding vote in the event of a tie. Wexler and Larry Rubin resigned

from all the Heritage Boards, Medill, Saltzman and King were elected to the Board

of HHD. Medill and Saltzman were elected to the Boards of all the Heritage

Affiliates. All of Kasirer’s “suggestions” were followed. In addition, E. Rubin

was hired pursuant to a five year employment contract as President, earning

$120,000 per year. Bertolini’s firm, already serving as “inspecting architects,”

was given an expanded role for an additional $250 per month, per project, and

Goldstein was given a fixed legal retainer of $1,250 per month per Entity.

198. Soon thereafter, Kasirer convinced the powers that be to transfer the

management contract for all Facilities to HCH. Charles Green drafted the initial

documents assigning Iatros’ management contracts from Iatros to Kasirer.

Goldstein reviewed the initial drafts and negotiated changes between Kasirer and

Iatros. On September 30, 1997, Goldstein wrote to Kasirer and Sobelman to

confirm their meeting for the next day wherein he would be reviewing with them

“various accounting and management issues.”

199. In November 1997, the Agreement to Expand Management Services

was entered into between HCH and the individual Heritage Entities.71 The

Agreement was signed by E. Rubin as President of HHD, Heritage Rancho,

Heritage 7-Texas City, Heritage 8-Houston, Heritage 9-Ft. Worth, Heritage

Sarasota and Heritage Chicago, and by Kasirer as General Partner of HCH. A

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

72 One of the reasons the agreement was entered into was that no paymentshad been made to Miller & Schroeder to pay off the seed money loan.

73 On December 11, 1997 a fax was sent from Sabo & Green to the“Distribution List – Sarasota Project” requesting that “all correspondence anddocumentation in the future” also be sent to the Trustee, William Barber and the


copy of this Agreement was provided to Dhooge, Boehm and Goldstein. HCH’s

role was expanded as follows:

a. HCH would now be intimately involved in the management of

cash flow and would create a “Lock Box Revenue Account” to repay the

undisclosed loan from Miller & Schroder.72

b. The agreement assigned to Kasirer and HCH the

responsibilities of the Heritage Entity with respect to handling and/or monitoring

the bond funds.

c. HCH promised to deposit any funds with U.S. Trust needed to

keep the debt service payment on the bonds current.

d. HCH was also to monitor and pay all draw requests for

construction and pay all costs of operation, including payroll.

e. HCH undertook fiduciary obligations to the bondholders

pursuant to this agreement because it had responsibility for all debt service

payments, draw requests for construction and disbursements for cost of operations.

SARASOTA OFFERING

200. On December 8, 1997, the Board of Directors for Heritage Sarasota

held a meeting which was attended by Bertolini, Kornreich, E. Rubin and

Saltzman. At the meeting, the Board passed a resolution wherein it approved the

plan to purchase the Sarasota Facility via $12.305 million in bonds issued by the

Mexico Beach Municipality.73 In addition, despite the fact that the Preliminary OS

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Trustee Counsel, John Trofa of Chapman and Cutler. The next day, December12, 1997, Kasirer sent a memo (on HCH letterhead) to bond counsel, with copiesto Goldstein, Boehm, Dhooge, and others, requesting "expedited input from youon comments on this and all future correspondence and documents that youreceive."

74 By the time of the Sarasota bond offering, the Board of HHD andHeritage Sarasota (and all other Heritage Entities) had changed. According to theOfficial Statement, Bertolini was the Chairman, Kornreich was Vice Chairman, theoutside Directors consisted of Saltzman, Medill and King and E. Rubin was thePresident. Larry Rubin and Virgil Lim were listed as Vice President ofConstruction and Controller of the Heritage Entities, respectively. According tothe Official Statement, two residents of Sarasota were to be appointed to the Boardof Heritage Sarasota after the offering, but this never occurred.


did not contain any information regarding the Platt lawsuit, the Board approved

and ratified the dissemination of the preliminary OS and authorized and approved

the preparation and distribution of the final OS in connection with the Sarasota

bond offering.74 The City of Mexico Beach was the Municipal Issuer for the

Sarasota bonds dated December 1, 1997.

Omissions From the Sarasota Official Statement

201. The Official Statement was false and misleading for the same reasons

all of the prior Official Statements were false and misleading, as described above.

In addition, this Official Statement failed to disclose the following facts:

a. On November 4, 1997, the HHD Board of Directors held a

meeting which was attended by Bertolini, Kornreich, E. Rubin, Medill, Saltzman,

Goldstein and L. Rubin wherein E. Rubin informed the Board that Rancho

Hospital would be purchasing additional land. Despite the fact that the Rancho

Board had not approved the purchase, no objection to this form of action was

made. In addition, the HHD Board discussed the filing of the Platt litigation and

the allegations contained therein.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

75 This “loan” was discussed in a fax from Kasirer to Dierckman and BillMertz on March 5, 1998 wherein Kasirer told them to make sure Virgil wasreflecting the “loan” as part of the ODA and not as a loan to Heritage Housing.


b. WRS had, on three occasions, informed E. Rubin (two

conversations and one writing on December 31, 1997) that the mechanical

engineer had ceased working on all projects due to nonpayment.

c. Rancho Hospital missed payments and lost money on an

operating basis, and Kasirer “lent” Rancho Hospital $135,000 on August 1, 1997

in order to make a debt service payment on the bonds.75 Despite the cash shortage,

material purchases were made on behalf of the corporation without Board

approval (such as purchase of land and clinics).

d. All of the existing Facilities were behind schedule (Texas City

opened four months late) and over budget.

e. In addition, at the time of the Sarasota Facility offering, the

Official Statement listed HCH as the manager for all existing Heritage Facilities

(replacing Iatros). HCH was self-described as an integrated healthcare services

company based in Los Angeles, formed in 1994. Senior management were

allegedly individuals with prior experience as senior members of other national

healthcare companies. The Official Statement went on to discuss the backgrounds

of the key personnel of HCH, including Kasirer, Dierckman, Pontarelli, Filippone

and others, but neglected to mention their past involvement in the Beverly Hills

Medical Center, the allegations of fraudulent conduct and the litigation that

resulted. The Official Statement listed the first four (4) Heritage Facilities as

completed projects and stated that Kasirer had developed these Facilities as

President of IHN, a division of Iatros. The Official Statement noted: “Even

though IHN was not experiencing financial problems and the Completed Projects

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

2876 The seller was given a note for $1.250 million and a cash payment of

$50,000, which Heritage Sarasota borrowed from HHD via a second note. UponFIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 122

were meeting projections, Iatros has had recent financial difficulties with other

operations within its company and Heritage determined that HCH, a company

separate and distinct from Iatros, should manage all future Heritage Projects . . .

To accomplish this goal, Heritage terminated IHN as manager of the Completed

Projects and appointed HCH as manager of the Completed Projects.” This

statement was false and misleading in that the four (4) Heritage Facilities

being discussed were not meeting projections and three of them were not

complete, and three (3) had already failed.

f. This Official Statement, for the first time, promised investors

– what John Orr had said SEC rules required and which Orr promised the Texas

City mayor would be done – ongoing disclosures through the filing of an annual

report with a “nationally recognized municipal securities information repository”

certified by the SEC and with a State repository, if any existed. The Official

Statement also noted that Article Six of the Loan Agreement required audited

financial information to be provided within 180 days after the end of the fiscal

year and to provide notice of the occurrence of certain “enumerated events,” such

as delinquency in payments, any non-payment related defaults, or any unscheduled

draw on Reserve Funds. This representation, which was repeated in all future

offerings, was false as no such annual report was ever filed with any agency, and

no notice was given of the numerous improper transfers of funds and other

occurrences which constituted the “enumerated events.”

Appraisals and Viability Studies of the Sarasota Facility

202. On January 3, 1997 Heritage Sarasota acquired the Sarasota Facility

for $1,300,000 from Columbia.76 Heritage Sarasota received a report dated

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28completion of the offering, these two notes were to be paid off.


November 12, 1997 from Valuation Counselors which valued the property in its

"as is" condition at $6,010,000 – an appreciation of 362% in 10 months!

Valuation Counselors also estimated a value of $12.88 million upon completion of

the renovation (projected to be July 1998) and $15.250 million upon stabilization

(estimated to be July 2000). There was no reasonable basis in fact for these

projections (an earlier appraisal from Capital Consulting put the “as is” value of

the property at $5.5 million). In fact, in the study, VC projected the value based

on a (1) net operating income (NOI) per bed analysis and (2) Price per bed sales

analysis. In both instances, VC projected that Heritage would have an NOI per

bed and sales per bed value substantially in excess of its competitors. According

to deposition testimony, this increase was warranted because of all the programs

Heritage would be providing. However, with one exception, Heritage never got

these programs up and running. Had VC conducted any legitimate due diligence

on this issue, it would have known the earlier facilities had never implemented

such programs (CORF, PHP etc.). In addition, VC described the existence of

asbestos within the structure as being a “minor problem” when, in fact, the

asbestos content was so substantial that it resulted in significant construction

delays and cost over-runs. The report further stated “[t]he value reported herein is

that of a fee simple interest, free and clear of any leases or encumbrances. The

value includes the land, improvements, personal property and intangible going

concern assets.” In a section entitled “Easements and Encroachments”, the report

noted “[w]e reviewed a title report on the subject property ... dated March 4, 1996.

A number of utility easements are recorded. It is assumed that none of these

would adversely affect the development potential of the site.” In fact, the property

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


was encumbered by use restrictions which prohibited the facility from being used

for many of the very services Heritage was proposing to offer – a matter which

would have certainly come to light if Valuation Counselors had not relied on a

twenty-month-old title report (particularly knowing that the property had changed

hands in the interim, ten months after the title report in question was prepared).

Valuation Counselors employee Jean-Pierre LoMonaco, an appraiser who helped

prepare the report, acknowledged in deposition testimony that he was “unaware of

the extent of these deed restrictions.” LoMonaco’s testimony served to highlight

the internal inconsistences in VC’s methodology: in arriving at the property’s

“highest and best use,” VC made specific reference to certain of the restrictions.

Thus, VC was clearly aware that the assumptions of the property being held “free

and clear” was false. Further restrictions in the deed prohibited the property from

being operated as an acute care facility – the purpose for which it had originally

been constructed. While this restriction may not have prohibited the types of

services contemplated by the OS, it would clearly impair the value of the facility

in the event the Alzheimer’s facility were to fail and the property was put on the

market. In fact, notwithstanding VC’s $6.01 million “as is” appraisal, and after

over $7 million in bondholder money was spent on renovation, this property

ultimately netted a mere $4.2 million for the bondholders when it was finally sold

in 2001.

203. For the first time, Healthcare Financial Solutions (“HFS”) formulated

the financial feasibility study. This feasibility study, and all future feasibility

studies done by HFS were negligently prepared as they assumed the Facilities

would open on time and on budget, despite the fact that the renovations on all

prior Facilities had gone over-budget and had opened late. The average forecasted

daily patient fees were too high, the estimated demand was too high and number of

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


months until the Facility stabilized its occupancy (generally 90% occupancy) was

not a realistic projection. Moreover, the costs were understated. For example, the

feasibility study purportedly used average employee salary rates to calculate the

cost of operations for the Facility. The salary rates used were vastly understated -

in some cases a mere 25% or less of the actual "going rate.”

204. Also enclosed for first time was a separate market feasibility study

done by Capital Consulting Group. This report was also negligently prepared as it

was based upon unrealistic assumptions, such as the time it would take for the

Facility to attain stabilized occupancy. The market was already saturated with

elder care Facilities. However, the competition was dramatically understated in

the study.

205. An internal memo, dated October 10, 1999, entitled “Significant

Business Issues” listed the problems actually experienced at Heritage Sarasota as

follows:

a. Weighted average patient rate per hour was higher than listed

in the OS;

b. The Facility opened one year late due to construction delays;

c. The marketplace was very crowded competitive. This meant

that the room rate listed in the OS could not be charged in an “over bedded

marketplace”;

d. The revenues were less than listed in the OS;

e. Labor rates were much higher than claimed in the OS;

f. Assisted Living Alzheimer service base and care expectations

were too high.

This memo exemplifies the unrealistic assumptions of the marketability and

feasability studies included in the OS.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Construction Delays and Cost Overruns at the Sarasota Facility

206. According to the Official Statement, Heritage Sarasota had contracted

with Affiliated Metropolitan to complete the Facility renovations by July 1, 1998,

at a maximum construction cost of $4,200,000. However, construction completion

was delayed by one year and the costs exceeded the budget by over $3 million.

Although, as with all projects, a performance bond was allegedly in place and the

construction company was subject to per diem late charges, there were no

payments made to the Facility pursuant to the guarantees allegedly in place.

207. Based upon the previous projects, the Defendants knew or, in absence

of deliberate recklessness, should have known, that the promised budgets and

construction completion dates in the Official Statements were historically

inaccurate. Accordingly, they should not have led Plaintiffs and the other

investors to believe that the estimates were reliable. They should have, instead,

disclosed the history of delays and cost-overruns associated with the prior

Heritage Entity projects. Eventually, mechanics liens totaling over $900,000 were

asserted against this Facility, and it closed within 6 months of completion.

208. Construction cost overruns were due substantially to changes in the

elder care programs available at the Facility after the OS was disseminated. The

OS represented that it would operate as a skilled nursing facility, rather than as a

short-term rehabilitative center. However, upon information and belief, when the

Facility actually opened, the services offered were radically different from those to

be found in a skilled nursing facility. The effect on costs - both construction and

operating costs - were dramatic. Changes to the Facility’s elder care programs

meant that different state, federal and local regulations for design and construction

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

77 For example, rooms in a Skilled Nursing Facility are constructed on thepresumption that a nurse's assistance is needed to help with basic needs. The roomwould be designed to allow a nurse to bathe the patient, etc. A rehabilitativecenter should be designed to allow patients to perform all of these basic needsthemselves. So, each room might have a wheelchair-accessible sink, bathroom,shower, etc., allowing patients to care for their own basic needs without theassistance of a nurse.


would have to be satisfied.77 In addition, altering the use after construction would

still leave a room that was not user-friendly for the purpose it was put to.

Therefore, if the Facility was actually built for one program and then later used for

the different purpose, the cost of nursing would be unnecessarily high, as the

physical construction itself would mean a nurse's assistance would be necessary

for tasks the patients should normally be doing for themselves in a properly

designed rehabilitative facility.

Financial Information Regarding the Sarasota Facility

209. Even though the Sarasota Facility was under-budgeted from

inception, immediately after the offering closed, numerous insiders were paid

large fees, some in contravention of the IRS and Medicare rules. The fees were

as follows: Chalker’s insurance company received $22,000; SCS received

$31,940; Sabo & Green received $110,000; Fulbright & Jaworski received

$70,000; Goldstein received $40,000; Berman & Bertolini received $11,000; and

HHD received $137,123.

210. Moreover, Heritage Sarasota, like all the other Facilities, paid out

excessive fees. As the Facility Manager, HCH was to receive $14,000 for the first

five months of operation and $23,500 thereafter (plus a variable monthly fee based

upon results). During the renovation period, HCH was to be paid $10,000 per

month. In addition, this project had two more layers of management! A

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


“Supervisory Manager” was hired to oversee HCH. The company was Golden

State Health Centers Inc. (“Golden State”). Kasirer’s father, Jacob Kasirer, was

the Vice President and Chief Operating Officer of Golden State, which was to be

paid $2,000 a month to oversee HCH. Golden State received this fee, but never

performed any supervisory work for any Heritage Entity. Additionally,

CareContinuum, LLC (“Care”) was listed in the Official Statement (and all future

ones) as the manager for the community mental health center and the

comprehensive outpatient rehabilitation Facility. Kasirer was the President of

Care. Care’s fixed monthly management fee was $38,000 per month for the first

four months and $50,000 per month, thereafter. The fact that the fees paid to

Kasirer and his companies were duplicative and excessive was, of course, not

disclosed in the OS.

211. In addition, even though the Sarasota Facility was experiencing

substantial delays and eventually operating at a loss, the Defendants continually

diverted monies from this offering to other projects. By year end 1998 Heritage

Sarasota had used $11 million of the cash raised in the offering leaving $312,163

in cash. The following table details some of the pertinent financial information

(red flags) gleaned from an analysis of the tax returns filed by Heritage Sarasota:

ITEM 1998 1999 Details

Revenue - Total $792,801 $615,043Expense - Total $1,892,126Total Managementfees & general

$318,237

Renovations $5,503,317 $7,257,098 Over $3 million more thanwas initially earmarked in theOS for renovations

Total Loss $ $1,277,083

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


SUMMARY OF THE 1997 IMPROPER TRANSFERS

FROM TO AMOUNT DETAILS

Houston Austin $24,140.58 Transfer on 12/1/97Houston Austin $274,332.13 Transfer on 12/2/97Texas City Rancho Hospital $250,000 According to Heritage

Rancho adjusted trial balancesheet for 1997

Heritage 7-Texas City

Heritage Rancho $278,779.80 According to HeritageRancho adjusted trial balancesheet for 1997


Heritage Rancho $31,726 According to HeritageRancho adjusted trial balancesheet for 1997

HeritageRancho

Heritage 7-TexasCity

$156,407 According to HeritageRancho adjusted trial balancesheet for 1997

Heritage 8-Houston

Heritage Rancho $925,811

Heritage 8-Houston


Heritage 9-Ft. Worth



Heritage Rancho $5685

HeritageRancho

HHD There were numeroustransfers during the year andat year end Rancho owedHHD $141,955.25


Unknown $266,790


Heritage 7-TexasCity

$1,383,640

212. These numbers net out to $1,333,831, almost the same amount listed

on Rancho’s 1997 tax return as due per “inter-company loans,” $1,336,832. The

tax return, however, did not delineate to whom the money was owed.

PROBLEMS ARE DIAGNOSED AND A PLACEBO IS ADMINISTERED

213. On January 12, 1998, Ostlund wrote to Kasirer the following:

Attached are copies of the updated requisition certificates per yourrequest of January 9th. [Texas City] and [Houston] are not updated asthese project funds have been depleted and we no longer submitrequests to the trustee. The process of approval is a signature fromRamiro [Lozano - VP of operations for HCH] on the check register. Which along with copies of the invoices is submitted to Emery and

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

78 Boehm wrote to Bill Barber of U.S. Trust on January 7, 1998 (withcopies to Kasirer, Goldstein and Dhooge) to inform U.S. Trust that HCH mustapprove all construction draw requests for Sarasota and Rancho Hospital.


Virgil for final review and assistance with arranging funding. [Ft.Worth] and Sarasota will continue the requisition process with theupdated forms78.

Kasirer forwarded Ostlund’s letter to Goldstein and included the following

handwritten notes: “I am now working on the two (2) year schedule which

addresses inter-company loans to keep everything going until we catch up.”

(emphasis added).

214. On January 21, 1998, the Board of HHD and all “affiliated entities”

held a meeting. According to the minutes of the meeting, present were Bertolini,

Kornreich, E. Rubin, L. Rubin, Medill, King, Saltzman and Goldstein. The Board

voted to hire Bertolini to be Chief Operating Officer at a salary of $120,000 and

Saltzman was made Vice Chairman of the Board. The following issues were also

discussed:

a. Bertolini informed all present that all projects were not

completed as scheduled and there had been substantial cost overruns.

Supervision of construction was inadequate, timely responses to consultants

and contractors were not being made, and “there has been no leadership.”

Bertolini provided the Board with a two page memo showing that the first three

facilities were over budget and opening late. The memo stated, “The progress of

construction and the actual costs are not consistent with commitments made

in the closing documents.” It also stated that the problems were indicative of

“our” not providing coordination and direction of each project. The memo

expressed that the problems would be exacerbated with the additional projects

contemplated to be undertaken in 1998 (eight of which were listed). It further

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


stated that these problems are affecting “our” credibility and integrity. The memo

discussed the “serious commitments we” have to Underwriters and others, “who

accept our professional positions at the closing and rely on our representations on

cost and completion schedules.” The memo concluded by stating, “we cannot

continue to operate in the above noted manner, and it is the responsibility of

the Board of Directors to acknowledge these issues and take action to correct

them.” (Emphasis added).

b. E. Rubin stated that the addition of new programs was

partially the cause for the problems noted by Bertolini.

c. Goldstein then discussed “various existing and potential

litigation matters.” It is interesting to note that no Official Statement ever listed

any existing or threatened litigation.

d. The Board also then discussed “the $109,000 and

additional funds received from the Sarasota closing.” E. Rubin stated that the

funds were used to pay various bills of HHD.

215. This meeting proves that all members of the Heritage Board:

a. had knowledge of the problems at each of the

Facilities;

b. were clearly informed that doing more offerings

would exacerbate the existing problems;

c. that major changes had to be made in the way

Heritage was managed; and

d. that it was their responsibility to the bondholders to

make such changes.

216. However, rather than acting in a reasonable and prudent

manner, the Board members (1) allowed Heritage to continue to raise money

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

79 In a declaration, dated September 11, 2000, filed in the U.S. BankruptcyCourt in connection with the bankruptcy of Heritage Rancho, Case No. RS 00-22864, Goldstein swore under oath: "By 1998, HealthCare Management [definedas Health Care Holdings and CareContinuum corporations owned and controlledby Kasirer] was receiving enormous management fees under the ManagementContract [with Heritage Rancho] - averaging between $150,000 and $200,000 permonth. HealthCare Management's fee approached ten percent of the Hospital'smonthly revenues. This far exceeds industry norms.”


via new offerings rather than calling off or delaying future offerings, (2)

continued to misrepresent the cost and completion schedules for construction,

and (3) continued to manage the Heritage organization in the same negligent

manner by, inter alia, providing inadequate supervision over the Heritage

Officers and the management company, and instituting programmatic

changes at the Facilities after the offerings. In short, rather than starting to

act responsibly and institute honest business practices, the Board members

instead opted to continue with the status quo, which included poaching the

proceeds of new bond issues.

217. The huge management fees (of which everyone involved was

aware79), construction cost overruns, misappropriated funds, a severe lack of

management skills, rampant incompetency and self-serving agendas were a toxic

combination. Despite the fact that over $30 million had been raised in the first

three offerings (not including the initial Rancho offering), by early 1998, the

financial condition of the Heritage Organization was a disaster. Kasirer knew that

outsiders would become suspicious if Heritage’s monetary situation did not

improve. However, he did not want his influx of cash to cease. Therefore, he

placed the blame for the wrongful acts upon the Rubins.

218. Kasirer knew that the Rubins had access to Heritage check books and

credit cards via their executive positions. Most importantly, he knew they had

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

80 On January 28, 1998, Goldstein wrote a note to the file which stated that,“in violation of the Agreement with Health Care Holdings and Miller &Schroeder”, Lim informed him that money had been transferred from Ft. Worth topay the interest on a loan from First Professional Bank to HHD. On January 30,1998, Ostlund wrote Lim to inquire about this transfer. Ostlund stated that shewas advised by the Bank that “this had been done before” by both Lim and E.Rubin and that she assumed they were “aware that this is not permitted under theagreement executed with Miller & Schroeder Financial, Inc.”


abused their power on numerous occasions. In fact, on January 5, 1998, according

to the HHD General Ledger, E. Rubin issued two checks from HHD bank

accounts. One was payable to Larry Rubin for $3,500 and the other was payable

to Emery Rubin for $21,000. Additionally, on January 12, 1998, L. Rubin issued

another check for $10,000 to Adam Hendershot for consulting services which was

assigned to and cashed by L. Rubin.

219. Thus, in late January 1998, Kasirer wrote to Saltzman and directed

him to immediately remove E. Rubin and L. Rubin from the list of people

responsible for compliance with the terms of an accounts receivable agreement

between Heritage and Finova Capital Corp.80

220. Then, on January 23, 1998, a memorandum was prepared at the

request of Bertolini regarding E. Rubin. The most poignant portions of the memo

were as follows:

a. Each project to date had experienced substantial cost

overruns under the supervision of E. Rubin.

b. “Substantial sums have been taken from the various

entities in violation of the bond documents, and without the knowledge and

authorization of the Board. As a matter of bookkeeping $400,000 has been

booked as a loan, however, there is no agreement at this date to repay.”

c. An accounting of funds received from the Sarasota

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


offering had never been received and major discrepancies appeared in the books.

d. E. Rubin unilaterally raised his salary to $150,000 per

year and, while he was at it also increased the salary of L. Rubin. Marion Rubin

had received $23,000 even though she performed no services and E. Rubin had

paid his mortgage payments with HHD funds.

e. HCH personnel were unhappy with E. Rubin because of

“his lack of responsibility, failure to respond on a timely basis, no attention to

detail, misrepresentations, lack of knowledge concerning the projects.”

221. On January 23, 1998, Kasirer, who, according to every OS was

independent from Heritage, acted on behalf of HHD and terminated L. Rubin. On

February 11, 1998 Kasirer sent two faxes to Goldstein regarding E. Rubin. One

fax details the discussion Kasirer had with Board member (and long time Kasirer

cohort) Don King wherein Kasirer informed King of the unauthorized salary

increases, bonus and loans as well as the reimbursements of expenses unrelated to

Heritage. The second letter states that Kasirer had directed Lim to remove the

Rubins from all bank accounts and that L. Rubin was overheard charging his

wedding travel expenses to Emery’s HHD credit card. These actions clearly

exemplify the control Kasirer had over the Heritage Organization, notwithstanding

any claims of independence put forth in the Official Statements.

222. On February 13, 1998, Goldstein faxed a standard resignation form to

E. Rubin’s friend, Kornreich, for his signature, who purportedly resigned on

February 18, 1998.

223. A letter from E. Rubin to Kasirer shortly thereafter details E. Rubin’s

version of his demise within the Heritage Organization (as well as the demise of

those deemed loyal to him - L. Rubin and Kornreich). In his letter, Emery

reminisced about the formation of the plan to raise money through bond offerings

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 81 This reference is to a prior deal involving HUD housing.FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 135

and thereafter, siphon money off for themselves. Emery spoke of how Kasirer

offered the Rancho Hospital to Heritage because he “could not close on the

hospital without a not for profit and the issuance of bonds for the renovation and

purchase.” Emery went on to recount the true purpose of Heritage V: “This was

the vehicle to recoup the money you had spent, plus a lot of other money not

related to your actual costs. At that time you told me that after $7.5 million I

would share in the money, as I should share in the overage.” (emphasis added).

Emery continued:

When the Cucamonga Hospital closed, it was not my idea to drawmoney down as you and Stanley [E. Rubin’s uncle] and I did from theprojects financed through United Community. You told me at thetime, that there are more than sufficient funds for us to distribute toyou and I, on an equal basis, which we did. The projects financedthrough United Community81, Stanley and I received only ten percentof the funds paid to Los Angeles Builders, the other, ninety percentwent to you. The same thing was done for [Houston] and [TexasCity], 50/50 split between you and I. In fact, you and I have anagreement as to the distribution of those funds, which I honored. Itwas only after it was determined that the renovations will cost alot more than anticipated, that we stopped taking the money out. In the meantime, you also put Debra on the payroll at thehospital, and continued to have her on Heritage payrolls into1997, I believe it stopped in March of 1997. Then, the“management” of Iatros had fallen apart, and you alone decided tomanage the buildings. You also told me at that point, that I would bein charge of construction, and you will handle all of the negotiationswith Columbia . . . You even told me that after we haveapproximately 100 to 1500 beds, we both can relax and “golf” all dayif we wanted to, as the money would be flowing in, and each of uswould be making at least $500,000 per year. . . .

Emery then detailed how Kasirer’s management company was receiving exorbitant

fees, Kasirer’s father’s company, Golden State, was receiving improper fees, how

Heritage was paying the attorneys fees for work done on unrelated legal matters

relating to Kasirer, and how Kasirer received half of the pre-opening management

fees. In addition, the letter states that Kasirer’s “Johnson & Johnson loan was

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


funded from Heritage Rancho Healthcare, as well as [Houston]. . . . The [Houston]

funds were to be repaid with proceeds of the closing of [Ft. Worth], in Fort

Worth.” Moreover, E. Rubin notes a meeting between himself and Sobelman as

follows:

[Sobelman brought up] the issue of our taking money out of theproject fund, as well as the money Miller & Schroeder had lent usfor pre-development, that I will have to pay taxes on that money. I agreed that the money should be converted to salary, as youwere going to convert the money that went to Debra as paymentof the option for the Beverly Hills Medical Center. There was nomention by Sobelman that what you and I did was “criminal.” That word, “criminal” only came into play after I was asked toresign by Goldstein.

(emphasis added). The letter then discussed the January 1998 Board meeting and

stated that, in looking back, it seems to him that the Board members set him up,

(except his old friend Andy Kornreich). “You now claim that each board member

is an independent thinker for himself. That sounds too good to be true. Saltzman

and King have a financial interest, and are deriving profits from the Heritage

entities.” (emphasis added). Emery finished by saying he had resigned effective

February 18, 1998, but was only paid through February 1, 1998, that the Board

refused to pay his American Express bill and asked “since when does corporate

counsel [Goldstein] sign checks for the entity he represents?” (emphasis

added).

224. On March 18, 1998, L. Rubin called Bertolini’s office. The following

is a portion of the dialogue between L. Rubin and one Diana McClellan which

was, presumably, transcribed after the conversation:

Vince handed me that letter saying Robert fired me for the sake ofHeritage. That’s bullshit. I’ve known Robert since I was 14. . . . I’mgoing to the IRS and I think I’ll talk to Miller & Schroeder. When Iget through there won’t be a Heritage. So, Diana, you had better startlooking for a new job. That Jerry Goldstein, Vince and MikeSobelman are whores. They might as well put a dress on and go standon Santa Monica Boulevard like the whores they are. They think I’mstupid. Robert should be calling me up to give money to me. I know

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 82 It is believed Sobelman was the author of this document. FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 137

too much, that’s why they fired me. I’m going to blow the whistle. David Platt tried to, but he didn’t have the proof. I have proof. (emphasis added).

225. On March 24, 1998. Bertolini wrote to L. Rubin requesting an

explanation for L. Rubin’s endorsement of a $10,000 check payable to one of his

friends. In addition Bertolini asserted that L. Rubin had used his Heritage charge

account for his car insurance, cigars, travel expenses and beauty treatments,

among other things.

THE PROBLEMS CONTINUE

226. In connection with the 1997 audits SCS was performing for the

Heritage Entities, Sobelman spoke with Dhooge and Boehm about the

commingling of monies. A note to the file82 dated March 1998 memorialized the

conversation:

This memo summarizes my recent conversations with Vic Dhoogeand Joel Boehm wherein we discussed the legal implications andbond issuance implications of the inter-co advances between theHeritage entities.” The memo went on to say that per theconversation he was told that inter company advances are “commonin the “non-profit” world. Joel Boehm stated that this activity isn’tprohibited in the bond docs in response to my concern about theadvances. Joel stated that although inter-co advances are notpreferred, they are common & no laws or rules were broken.Conclusion: we can issue F/S & will disclose in the F/S the inter-coadvances.” (emphasis added).

Boehm’s position that the commingling was not prohibited is directly contrary to

the advice he received from bond counsel on March 6, 1997 discussed at ¶186

above. This document proves that Boehm was fully aware of the commingling of

monies and purposefully chose to engage in a conspiracy to commit fraud by not

disclosing it in all Official Statements issued after this date.

227. The improper inter-company transfers continued and, as expected,

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

83 Upon information and belief, these funds were used to purchase a Utahski house for the Kasirer family. The property is currently owned by KYH, ofwhich Kasirer’s four children are the managing shareholders.


Kasirer continued to treat the bond funds like his personal piggy bank. For

example, on March 26, 1998, Kasirer’s assistant wrote to Pontarelli and requested

that $193,000 be transferred to High Country Title in Park City, Utah for the

benefit of KYH – the funds came from a Rancho Hospital bank account.83 The

transfer initiation was copied to Kasirer, Pontarelli, and Bertolini. Thus the Board

was aware, or should have been aware, of the misuse of funds.

228. Moreover, the fact that the construction cost overruns and delays had

not been curtailed is evidenced by an April 16, 1998 letter Bertolini wrote to one

of the interior designers for the Facilities wherein he stated:

I am deeply disturbed that not only has every project beenunacceptably late but also the fact that we have lost millions ofdollars on cost over charges and lost income. In addition, we haveserious problems on projects like [Ft. Worth] which has a paper signin front saying “Open in November 1997" and then has a brochuresent to the community saying “Open in March 1998" which now,based upon information indicated at yesterday’s meeting, might notbe able to admit patients by June. (emphasis added).

229. On April 20, 1998 the Board of Directors for all the Heritage Entities

met. In attendance were Bertolini, Medill, King, and Saltzman. Also present were

Lim, Kasirer and Goldstein. The Board discussed and/or decided the following:

a. The Board hired SCS to perform quarterly reviews and

hired Goldstein for a term of 8 years as Chief Operating Officer, General Counsel

and Executive V.P. for a salary of $250,000 a year. Bertolini’s employment

contract was extended to June 31, 2003.

b. The Board discussed the projects currently in

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

84 Also, on April 20, 1998, Saltzman wrote to Kasirer to tell him that he wasaccumulating invoices for Houston and Ft. Worth and would submit them forpayment once they reached $100,000 each.

85 The meeting notes do not detail the contents of this discussion. However,a memo penned by Bertolini does detail what was discussed.


negotiation, Austin, Chicago, Phase II of Ft. Worth, and a proposed refunding and

expansion of Heritage Rancho. Medill made a motion and all Board members

approved the execution of all documents and to negotiate the terms of the

acquisition and financing of the proposed projects.

c. The Board then retained Saltzman’s company HealthCap

to act as a consultant and seek financing for Heritage by obtaining “pool financing

for various potential projects.”84 According to a memo written by Saltzman in

October 1998 and sent to all Heritage Acceptance Board members, (Bertolini,

Medill, King) the idea was to use Heritage Acceptance for this purpose. Heritage

Acceptance was formed to serve as the “bankruptcy remote” financing conduit. Its

function was to purchase the accounts receivables from each of the Heritage

facilities. As described in greater detail under "SELL THE RECEIVABLES,”

below, this was admittedly done to allow Heritage Acceptance to commingle

receivables from all facilities in a single "pool,” as well as to avoid the

uncomfortable scrutiny that a typical lender would do to evaluate each one as a

stand-alone credit risk. The HAC Board members signed a consent authorizing

the transactions between HAC and Heritage Rancho and then HAC and DVI.

230. At the Board meeting, a memorandum written by Bertolini was

distributed which noted the current status and cost of construction at the Facilities

as follows85:

a. The construction at the Fort Worth Facility was nearly $1

million over budget and the costs were accumulating.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


b. The construction at the Texas City Facility was listed as

completed and $500,000+ over budget. However, the “completed construction”

did not include renovation of the exterior for which bids were pending. The

designation of this Facility as “completed” is particularly egregious given the

fact that three months later, the contractor warned Bertolini that the roof

would leak if it was not completed quickly. (See letter dated July 20, 1998 from

AMC - emphasis added).

c. Ultimately, according to a “schedule of construction

costs” as of July 1, 1999, the total construction costs for Texas City and Fort

Worth were $675,318 and $2,043,245 over budget, respectively.

d. The Sarasota Facility was $1.6 million over budget.

The memo shows that the information regarding the cost overruns and

extended time frames was available to HHD Board members.

231. However, the above information did not slow the marketing of future

bond offerings. Kasirer’s own notes, as well as memoranda from HCH, including

an HCH memorandum of April 20, 1998, show that Kasirer, Goldstein, and

Bertolini were not only present at "road shows" promoting the Heritage bonds but

were also key speakers at these events and assisted in preparing brochures and

slide shows.

232. Evidence of the defendant’s knowledge of substantial cost overruns

and construction delays was demonstrated in a May 7, 1998 letter from Bertolini

to Walter Arnold regarding construction at St. Joseph’s which stated: “[o]ur

history of ignoring budget and schedule consideration, as well as good project

coordination is not an accepted policy of Heritage Housing Development.” This

letter was copied to Kasirer, Goldstein, Dierckman, Ostlund and others.

233. In May 1998, the 1997 audited financial statement for Rancho

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


hospital was disseminated to Iverson, Dhooge, and Boehm. The financial

statement showed bond funds were being used for inter-company loans which was

inconsistent with the Official Statements. Discussions were then held concerning

the propriety of the transfers of monies from other Heritage Facilities to Heritage

Rancho. Dhooge and Iverson took the position that these transfers were

fraudulent and inappropriate as the bond proceeds were earmarked for other

projects.

234. On May 14, 1998, in yet another wholly disingenuous action intended

to subdue further inquiries into the improper handling of the bond funds, Kasirer

wrote a letter to Lim, Ostlund, Raymond Verdugo (Controller of Rancho

Hospital), and Bill Mertz (HCH personnel) and informed them that they were all to

attend two meetings designed to improve the “quality of our accounting systems.”

The first meeting would be held at SCS’s office and a second meeting would be

held at Goldstein’s office the following day. According to the meeting minutes,

the following topics were discussed:

(1) Inter-company transactions - agreed to avoid paying third partieson behalf of related entity and to prepare three-part approval forms toinitiate inter-company transaction. Approval forms to be signed byrelated entity and HHD party and HCH party. (2) Closing bondstatements and documents to be sent to SCS ASAP. (3) Division ofresponsibilities between HHD, Manager, and Facilities discussed. Also discussed accounting responsibilities for construction period(Virgil - HHD) and operating period (Geri - HCH). (4) BondCovenants - discussed possibility of making changes in futurecovenants to “Days Cash on Hand.” (5) Operating DeficitsAgreements “ODAs” - suggested procedure be instituted for drawsagainst ODAs - who may sign and request funds. (6) Jerry Goldsteinto document and summarize ODAs. (7) Virgil and on site facilityperson will monitor due dates for bond interest and principalpayments. (8) Monthly reports required to be sent to Jerry Goldsteinare financial statements, census data and cash flow reports &projections, general ledger showing cash disbursements. (9) Facilityinternal accounting procedures: (a) increased supervision, (b) monthend closing and preparation of financial statements to be completedwithin 10-15 days following month end, (c) agreed to use of“suspense” account only for posting of unknown transactions to“red flag” items for prompt solution, (d) establishment of on-site

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


permanent files with all necessary documentation. (10) Proposeddiscussion of establishing different fiscal year end for new entities asthey close. Suggested that entities closing July through Decemberhave June fiscal year end rather than December. This would even outthe workload throughout the year and relieve the increasing pressurefollowing December for all involved. (emphasis added).

235. An approval form for inter-company transfers was actually put to

use. This form was routinely co-signed by representatives of HCH and Heritage,

and copies to Goldstein, Kasirer, Saltzman and Bertolini. Clearly, SCS’s

accounting lessons could not and did not alleviate the financial woes of the

Heritage Entities and on May 18, 1998, Lim sent a memo to Ostlund, with copies

to Kasirer, Goldstein, Bertolini, wherein he stated that the Sarasota bank accounts

had withdrawn over $6 million and could not meet payroll without transfers

totaling $183,000 from other facilities. These transfers would leave at least one

facility short for its own payroll that month.

236. The lack of cash continued to be a problem. Because there was to be

a delay in the closing of the Austin and Chicago bond offerings, the anticipated

cash influx needed to sustain the operations and construction projects at the

existing Entities would likewise be delayed. On June 2, 1998, Kasirer sent a

memo to Goldstein and Saltzman wherein he stated that it was “critically

important for the three of us to get together as soon as possible to discuss

Heritage’s cash needs for the next couple of months. Because of the delay in

closings, we will need to scurry around to meet some necessary construction and

operational payments.”

237. Thereafter, he and the others took the following actions and held the

following conversations in order to obfuscate the true condition of the Heritage

Entities:

a. On June 15, 1998, according to Saltzman, he and

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Kasirer met to discuss Heritage’s cash needs and Kasirer wrote notes

detailing how much money he would pull out of each offering to transfer to

other entities

b. On June 26, 1998 Kasirer wrote to Saltzman and stated:

“We close Chicago the third week of July, Austin the end of July and [Rancho

Hospital] about August 15 - HOLD ON - I know you can do it.”

c. In a memo from Saltzman to Kasirer on June 29, 1998,

Saltzman stated that Rancho Hospital would be able to utilize the full $2.5 million

line of credit so that the payrolls for the Texas facilities could be paid.

d. On July 1, 1998, at the request and approval of Bertolini

and Saltzman, respectively, Heritage Rancho wire transferred $100,000 to

Affiliated Metropolitan Contractors for work purportedly done for the Sarasota

Facility. This transfer was later re-written as a partial payment for the Ft. Worth

and Houston Facilities.

THE MASTER TRUST AGREEMENT

238. Instead of refusing to do more offerings, a plan to create a Master

Indenture for future offerings was formulated. This was done to create an

argument that the commingling of funds was not prohibited by the terms of the

Indenture. Heritage America, a dormant shell corporation, was chosen as the

Entity to be used for the future offerings that would be done pursuant to the

Master Indenture. This strategy resulted from meetings at the offices of Miller &

Schroeder in Solana Beach in June of 1998 between Goldstein, Dhooge, Boehm,

Ekholm, Kasirer and Fulbright. These Defendants knew that the entire scheme

would collapse due to its Ponzi nature if they ceased diverting funds from new

Heritage Entities to the older Heritage Entities. Thus, these Defendants were

determined to conceal the illegal transfers of monies between projects by

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


conducting additional offerings in a desperate attempt to raise more funds for

diversion to the earlier Heritage Entities. Of course, this strategy was doomed to

failure as it perpetuated the Ponzi scheme, but it enabled the Defendants to

continue to personally get rich.

239. At or about this time, members of the Miller & Schroeder credit

committee, who were responsible for approving future Heritage bond offerings,

learned of the illegal transfers, but took no action to rectify the wrongdoing, nor to

prevent future Heritage bond offerings.

240. In fact, Ekholm actually undertook an analysis of the facilities that

had offered bonds so far. He became fully aware of the commingling of monies,

cost over-runs, opening delays, net losses from operations and, at some point in

1998, he had a meeting with Kasirer to discuss the problems. Ekholm, who was in

charge of public financing for Miller & Schroeder, determined to do more

offerings, without disclosing the plethora of adverse information.

THE CORNERSTONE LAWSUIT

241. On July 22, 1998, Cornerstone Health Management Company

("Cornerstone") filed a lawsuit against Heritage Rancho, Kasirer, and Kasirer’s

management companies, HCH, IHN, and Iatros, among others, in the Los Angeles

Superior Court, Case No. SC 053468. The Cornerstone lawsuit sought over

$686,000 in damages, plus interest and attorney fees for breach of a management

subcontract, fraud, and unfair business practices. The lawsuit was pending until

April 28, 1999, at which time it was settled under "confidential" terms.

242. On January 27, 1998, Charles Green of Sabo & Green wrote to

Kasirer (with copy to Goldstein) to find out if Kasirer wanted to be represented by

the same attorney as Heritage in the Cornerstone lawsuit.

243. The Cornerstone lawsuit put the Defendants on notice of actual

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


problems with management of the Facilities by Kasirer and his management

companies. According to Cornerstone’s affirmative allegations, shortly after Platt

reported the misappropriation of $1,900,000 from Heritage Rancho, Kasirer,

acting on behalf of IHN and Heritage Rancho, negotiated with Cornerstone to

assume responsibilities for managing Heritage Rancho. Kasirer told Cornerstone’s

president, Eric Reiseberg, that Heritage wanted to “flush the garbage,” which

Kasirer explained meant firing the existing management team, including the Chief

Executive Officer (Platt) and others involved in daily operations.

244. The Cornerstone lawsuit further revealed why Kasirer sought to

subcontract management responsibilities. As he acknowledged to Reiseberg,

Kasirer and his colleagues were "deal people," "not interested in operations."

Moreover, they were "not in a position to manage the Hospital effectively and did

not have the capacity to perform the management services called for by the

Management Agreement independently as an operating Entity." Representatives

of Heritage, including E. Rubin and Kasirer, further represented to Eric Reiseberg

during January 1997, that they were dissatisfied with the Hospital’s existing chief

executive officer and management team.

245. If allegations in the Cornerstone lawsuit are substantially true, then

the Official Statements were materially false and misleading in (a) not disclosing

the lawsuit, and (b) touting the management capabilities of Kasirer and his

companies, without disclosing their limited capacity to perform such services, as

well as the fact those responsibilities had been, and were being, delegated to

subcontractors (even though Kasirer and his companies still collected exorbitant

management fees).

246. Despite the nature of Cornerstone’s fraud allegations and the

materiality of the damage claims, the Heritage Defendants did not disclose the

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

86 Kasirer’s admission as to his inexperience in the day-to-day managementof a healthcare facility is further evidenced by his direct testimony during theLundquist v. Miller & Schroeder arbitration on October 29, 2001. Kasirer spokeof his role at IATROS just prior to his involvement at the Heritage Facilities andstated: “One of the things [I was in charge of] was finding opportunities. I wasinvolved in their ancillary services. They were involved in respiratory therapybusiness, things that were not day-to-day management operations. So I was notinvolved at that time as an operator.” See Lundquist Proceeding Transcript, Vol. 1at page 18.


Cornerstone lawsuit in any of the five (5) or more Official Statements published

while the lawsuit was pending.

247. The failure to disclose what Goldstein had acknowledged, that the

Heritage Entities paid excessive management fees to companies controlled by

Kasirer, is particularly egregious in light of Kasirer's admissions that he and his

companies were not capable of Facility management as set forth in the Declaration

filed in the Cornerstone Lawsuit.86

THE AUSTIN OFFERING

248. The Austin bonds were dated July 15, 1998. The sale of these bonds,

which were issued by the Danforth Municipality, raised $11.090 million.

Omissions From the Austin Official Statement

249. The Official Statement for the Austin bond offering was false and

misleading for the same reasons discussed above. In addition, the OS did not

disclose material facts, which had come to light since the Sarasota offering, such

as:

a. There can be no dispute that the exclusion of all

information regarding the financial status of HHD was purposefully deceptive. In

fact, on June 25, 1998, John Orr of Fulbright & Jaworski had a telephone

conversation with Joel Boehm regarding the Preliminary Official Statement for the

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Austin offering. Boehm memorialized his conversation with Orr as follows:

Page 15 reference to guaranty of Heritage of the Parent HeritageHousing Development wants to talk to you about re should that be inthere. If we put a statement like that in the OS he’s not sure thatwe’re not obligated to describe Heritage and its financialcondition and so forth (which of course we’re not gonna do). Hedoesn’t recall that we’ve said that in the past. It could presentmore problems than it gives us help. If we said these bonds areguaranteed by Heritage Housing Development than by thedisclosure rules the investor is able to see their history. (emphasisadded).

b. The initiation of the Cornerstone litigation and the

allegations therein were not disclosed.

c. On March 25, 1998, Saltzman, on behalf of his company

HealthCap Group, Inc., entered into an agreement with Heritage wherein Saltzman

was hired to act as a financial advisor to the Heritage organization and arrange for

all accounts receivable and equipment financing. Saltzman received fees in the

amounts of 1% and 2% of the total financing for accounts receivable and

equipment financing, respectively (which amounted to fees in the hundreds of

thousands).

d. Most of the Facilities were experiencing construction

cost over-runs and delays. For example: the Houston Facility opened late and

over-budget; the Ft. Worth Facility still had not opened even though the Official

Statement had represented that it would open by December 1997; the Sarasota

Facility was well behind schedule, over-budget and had no reservations for

residents. Moreover, the few Facilities that had actually opened were realizing

large operating losses far in excess of feasability study projections.

e. Importantly, the Official Statement for the Austin

offering also did not disclose that the Defendants went to great lengths to

surreptitiously legitimize the commingling of the bond funds without actually

admitting their intentions to prospective investors! The Defendants attempted,

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

2887 Moreover, at some point in time, Heritage America borrowed money

from an unspecified lender and granted this lender a lien on the Austin Facility. FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 148

albeit unsuccessfully, to reach this goal via the use of the Master Indenture (which

contemplated cross collateralization of the properties acquired with the funds

raised in the bond offerings for security purposes but did not allow the

commingling of funds). Despite the use of this new Indenture, the continuing

transfer of funds from Heritage bond proceeds violated the Master Indenture and

the Loan Agreement and acted as a fraud upon the bondholders. Nevertheless,

Defendants diverted monies from this offering to other projects.87

f. As discussed above, prior to the Texas City bond

offering, the municipal issuer was told that federal securities laws required that

an annual report be filed with a nationally recognized municipal securities

information repository. However, although at the time of the Austin offering, the

first Texas City report was due, no such report was ever filed. The failure to file

these reports was intentional because all parties involved knew the scheme would

collapse if additional monies could not be raised. Had these reports been filed, it

is unlikely that further offerings would have taken place, as the true financial

status of the Heritage organization would have been revealed. The Defendants

failure to file these federally mandated reports was omitted from the Official

Statement.

g. The Austin Official Statement again falsely proclaimed

that the Facility would have an affiliation with the University of North Texas and

that Heritage and the University were going to establish a center for research.

These statements were false at the time they were made because given the fact that

the entire Heritage Organization was a sham, the Heritage Entities had no

reasonable basis to believe that such affiliations would be consummated or that

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

2888 Valuation Counselors had done an appraisal of the Facility as of March 1,

1997 for another Entity and had calculated an “as is” value of $3.6 million. FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 149

research centers would be opened.

Appraisals and Viability Studies of the Austin Facility

250. In July 1998, Heritage America acquired the property from 22 Texas

Partners L.P. for $3,600,000.88 In a report dated May 5, 1998, Coddington valued

the Austin Facility in its "as is" condition at $4,200,000. The value upon

completion was $11.9 million and upon stabilization was $13.8 million. There was

no factual basis for these figures. In fact, according to the 1998 Texas Nursing

Facility Cost Report Austin filed, it listed the value of the land and building at

$6.1 million after millions had been spent on improvements.

251. Valuation Counselors prepared the market feasibility study for Austin

and HFS prepared the financial feasibility study, which were again, at best,

negligently prepared because the assumptions were clearly unreasonable. HFS’s

feasibility study projected a net profit of $6.65 per patient per day, $904,961 in

operating income, and a $282,716 net loss. However based on 1999 actual and

projected results, the Austin facility was losing $3.16 per patient per day, showing

a $403,723 operating income and a $783,954 net loss. The market feasibility

study prepared by Valuation Counselors was largely a cut-and-paste job using a

prior report prepared by Capital Consulting Group. In fact, large portions of this

report (including those portions purporting to reflect the content of actual

discussions and interviews with local area professionals, and opinions and

conclusions of VC itself) were simply cribbed, word for word, from the Capital

Consulting report. For example, the report purported to evaluate the ability of

Heritage to “successfully market Heritage Duval Gardens ... [and] to meet its

operating expenses, working capital needs, and other financial requirements for

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


the years ending December 31, 1998 through 2002.” In so doing, VC purportedly

assisted management of the company in “identifying and formulating its

assumptions...” which VC then opined “provide a reasonable basis for

Management’s forecast.” However, VC conducted no such financial analysis in its

study. It appears this language mistakenly appeared in this study because VC

didn’t even bother to review and edit the “cut and paste” job it haphazardly

performed. The report also misstated completely the status of licensure

requirements in the State of Texas for the programs Heritage was proposing;

neglected to mention the state moratorium on new medicaid beds; contradicted

itself in describing the capabilities of competitors in the area; miscalculated

ongoing admissions needed to maintain occupancy; failed to ascertain whether the

purported affiliation with the University of North Texas ever existed (which would

be the critical factor in Medicaid licensure); and finally, calculated revenues and

room rates based on private pay, rather than Medicaid reimbursable rates –

notwithstanding the fact that Duval Gardens was projecting a payor mix of 81.7%

Medicaid, with the remainder being a mix of Medicare and private pay. This last

is an astonishing oversight, in light of the fact that at the time Texas had one of the

lowest Medicaid reimbursement rates in the United States. In deposition

testimony, VC employee LoMonaco was unable to recall or explain how most of

these opinions and/or conclusions were arrived at.

Construction Delays and Cost Overruns at the Austin Facility

252. The renovations on the Austin Facility were to be completed by

February 1, 1999 for a maximum cost of $1.8 million, which was guaranteed under

the terms of the Official Statement. Despite this construction cost guarantee,

mechanics liens of almost $500,000 were eventually asserted against the Austin

Facility.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


253. In addition, the maximum amount earmarked for use on furniture and

fixtures was $975,000 as per the Official Statement. Despite this, on August 3,

1998, less than one month after the offering, U.S. Trust allowed Heritage America

to withdraw $900,000 from the Austin Project Fund as an “advance” for furniture,

fixtures and equipment. This was improper, for the following reasons: (1) at the

time of the of the request the renovations on the Austin Facility were not

underway; (2) in light of the early stages, there was no way Heritage America

could actually use the furnishings at the Austin Facility, nor was there a place to

store such furnishings until such use was possible; and (3) the amount requested

was $75,000 short of the entire furnishing budget set forth in the Official

Statement. By wiring the money, U.S. Trust was in breach of its obligations under

the Indenture.

THE CHICAGO OFFERING

254. The Chicago bonds were dated July 15, 1998 pursuant to an OS with

an effective date of July 24, 1998. The Chicago offering raised $17.275 million to

be used for the acquisition, renovation and operation of the Chicago Facility.

Omissions From the Chicago Official Statement

255. The Chicago Official Statement was false and misleading for the

same reasons as the prior Official Statements, discussed above. In addition, the

Chicago offering was conducted without the use of the newly developed “alibi,”

termed the Master Indenture. The Defendants went to extensive lengths to re-draft

the Deed of Trust so that commingling the bond funds would, arguably, not be in

violation of the bond documents. However, this was not revealed in the Official

Statement.

a. On June 4 and again on June 15, 1998 Boehm instructed

Joel Dalinka of Foley Lardner to modify section 8.10 of the Deed of Trust to say

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

89 Days later Goldstein also wrote to John Orr of Fulbright and asked for asecond time that the same change be made to the Master Indenture. Goldsteinstated that Boehm, on behalf of the underwriter, had approved the language. Thisletter was copied to Boehm, Saltzman and Kasirer.


that the Grantor could use “surplus revenues” for loans to affiliated Entities, and

instructed that a sentence be added regarding this in the section of the

Official Statement entitled Bondholders’ Risks-Primary Source of Funds is

Revenues.

b. Then, on June 19th, Goldstein instructed Dalinka by letter

to change the term from “surplus revenues” to “surplus funds” ; everybody knew

there would never be surplus revenues89 as “Revenue” is a defined term in the

bond documents.

c. On June 24, 1998, Paul Damm of Foley & Lardner (bond

counsel) faxed Susan Megar of Wildman, Harrold, Allen & Dixon (underwriter’s

counsel) his comments to a draft Preliminary Official Statement. Under the Risk

Factor subsection entitled "Additional Debt,” Damm wrote, "See Addition in Bond

Document summaries re: loan to related entities of excess revenues. Convert to

risk factor." On that same day, Damm also sent to Boehm changes to Appendix C

(entitled "Definitions of Certain Terms and Summaries of Principal Documents").

To this Appendix at page C-45 he added the text "Nothing in this provision shall

impair the ability of the company, provided there exists no event of default, to loan

its surplus revenues on a fair market basis to the company's parent entity or any

affiliated entities of the company."

d. Boehm's and Goldstein's response was to have the word

"Revenues" changed to "funds" -- an attempt to fudge their way into a position of

being able to put bondholders' funds to improper use without actually coming out

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


and saying so, as investors would be highly unlikely to interpret a vague, brief and

concealed reference in an Appendix in a manner inconsistent with the more

precise, lengthy and detailed discussion of the use of bond proceeds in the main

body of the Prospectus.

e. Despite the attorneys' clear understanding that the

commingling of funds would place bondholders' money at risk, no such risk

factor ever appeared in the section entitled "Bondholders' Risks" in the final

document, and the sole reference, which omitted to mention any risk,

remained buried near the end of Appendix C. This meaningless and

emasculated text remained unchanged in all subsequent offerings.

256. In addition, the Official Statement did not reveal the following

material facts and circumstances:

a. $3,000 from the Chicago bond funds was going to be

used to “reimburse” HCH for payment of a settlement between Plaintiff law firm

of Bell, Boyd, & Lloyd and IHN/Health Services, Inc. and another $30,000 would

be used to pay funds due on one of E. Rubin’s deals with Medical Real Estate in

Houston, Texas.

b. An appraisal had been completed on the Chicago Facility

by Capital on February 3, 1997 and the “as is value” of the property was estimated

to be $3.8 million. One year later the “as is value” was stated to be $4.23 million.

c. On June 3, 1998 WRS wrote to Bertolini and stated that

it was imperative it get paid for the “long overdue” invoices (on Houston, Ft.

Worth, Texas City and Rancho) because it had accommodated the needs of

Heritage and was now in a desperate situation. Bertolini wrote back stating that he

was trying to expedite payments to WRS but there had been confusion and delay

based upon the extensive additional costs, which required additional funding

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


sources. Bertolini wrote “having Chicago close by the end of the month is

essential” (emphasis added); and

d. On July 15, 1998, Green wrote to Dierckman and

Goldstein (with cc: to Kasirer and Boehm) regarding the title on the Chicago

property. Green states that there were back taxes due on the property which may

be substantial. He anticipated that Bill Barber of U.S. Trust would not allow the

deed of trust to be recorded after the tax liens. Green stated that he assumed the

taxes would be paid from the bond proceeds but did not want to say so to Barber

without first obtaining a green light from Dierckman and Goldstein. According to

a memo from Ostlund to Kasirer on February 16, 1998, the money from the title

company for Chicago’s taxes ($200,402.54) was transferred first to Ft. Worth bank

accounts and then split between Rancho Hospital and HHD. Later HHD had no

money to pay the taxes for Chicago.

e. According to the Official Statement, on February 27,

1997, Heritage Chicago acquired the Chicago Facility for $2,500,000 from

Columbia. However, according to a memo from Charles Green to Kasirer, E.

Rubin and Goldstein dated February 19, 1997, “We have deposited into escrow a

certificate acknowledging that Columbia receives a $2 million credit to the

Settlement Agreement.” It went on to say that “Heritage Care of Chicago will

execute and deliver a note and mortgage on [Chicago Facility] in favor of Heritage

Housing V, which will in turn assign that note and mortgage to BHMC L.P. The

funds required to be deposited by Heritage Care of Chicago will be the money to

be refunded to Heritage from the [Austin] closing. . . Inasmuch as the funds

from the [Austin] closing do not belong to Heritage Care of Chicago, Ms.

Fenwick requires a letter of authorization permitting the forwarding of those

funds for the benefit of Heritage Care of Chicago. I have prepared such a

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


letter and it is being sent under separate cover for execution by Larry”.

(Referring to Larry Rubin, emphasis added). Closing documents show the facility

was actually acquired for $2,021,225.50. There was a credit of $2 million to

Heritage Chicago from Illinois Psychiatric Hospital Company Inc. Charles Green

signed the Final Closing Statement as the attorney for Heritage.

f. The Chicago Official Statement discussed a proposed

affiliation with the University of Chicago School of Medicine, and stated: “The

Company expects to receive an agreement from UCSM in the near future.”

Allegedly, another center for research was being discussed for Chicago, with a

goal of establishing additional sites in Illinois. No such center was ever

established.

Appraisals and Viability Studies of the Chicago Facility

257. A report dated April 17, 1998 from Valuation Counselors valued the

Chicago property in its "as is" condition at $4,230,000 – an appreciation of 70%.

Undisclosed to investors was the fact Capital Consulting had appraised its “as is”

value in February 1997 (two months earlier) at only $3.8 million. The report also

stated that the value of the Facility upon completion of renovation would be $17.3

million and upon stabilization, $20.490 million. There was no reasonable basis for

the appraised value. The report opined repeatedly that if the subject property were

offered for sale, a sale could occur within 12 months (emphasis added). In fact,

notwithstanding the investment of an amount in excess of $8 million of the

Bondholders’ money for renovations on the building, the Chicago facility remains

unmarketable: a real estate broker was retained and the building put on the market

in April of 2001; numerous buyers have performed due diligence on the property;

four buyers have executed purchase contracts for the property, the first for $5.5

million, the second for $4.5 million, the third for $4.1 million and the fourth for

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


$3.3 million – and all buyers have backed out of the deal. Unlike the Sarasota

appraisal, this appraisal did not disclose to investors the existence of deed

restrictions on the Chicago property – restrictions which would have compromised

Heritage’s ability to operate many of the programs necessary for the Facility’s

success. This omission is difficult to reconcile with the plain language of the

appraisal, which describes, as one of the four stages of analyses for highest and

best use: “Permissible Use (Legal) – Uses permitted by zoning and deed

restrictions on the site in question.” (Emphasis added). In discussing this factor as

applied to Chicago, the report notes “Legal restrictions, as they apply to the

subject, involve the public restrictions of zoning and the private restrictions of

easements and restrictive covenants.” (Emphasis added). Notwithstanding this

explicit language, VC failed to consider the impact of the deed restrictions on the

value of the Chicago property, and, unlike before, appraised the property “free and

clear of liens and encumbrances.” In addition, in this study, like in the Sarasota

study, VC projected the value based on a (1) net operating income (NOI) per bed

analysis and (2) Price per bed sales analysis. In both instances, VC projected that

Heritage would have an NOI per bed and sales per bed value substantially in

excess of its competitors. According to deposition testimony, this increase was

warranted because of all the programs Heritage would be providing. However,

with one exception, Heritage never got these programs up and running. Had VC

conducted any legitimate due diligence on this issue, it would have known the

earlier facilities had never implemented such programs (CORF, PHP etc.).

258. Coddington provided the market feasibility study for the Chicago

Facility Official Statement. For example, the study failed to adequately address

the fact that Heritage was attempting to enter an already crowded market, in an

area of Chicago commonly known as "Nursing Home Road." The marketability

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


study was negligently prepared because there was no reasonable basis in fact for

the projections as stated. In fact, Kasirer, Dierckman and other management

company executives provided the information to Coddington, who, in turn,

plugged the information into the study without verification.

259. HFS prepared the financial feasibility study for the Chicago offering.

The feasibility study was negligently prepared for a number of reasons. First, the

study was based upon an assumption that the Facility would open on time and on

budget despite the fact that every other prior Facility had gone over-budget and

opened late. The financial feasability study completely avoided the issue of

whether the budget was feasible given the fact that it was questionable as to

whether there were enough funds to complete the renovations and construction or

let alone to operate the Facility. The fact that the study did not address the

construction budget and its potential effects on operations as an aspect of

‘feasability’ is a material omission. Moreover, HFS failed to detect (or to divulge)

that the business plan for the Chicago Facility was bogus. For example, the study

used estimated salaries to calculate operations costs which were roughly 20-25%

of the actual going rate for the Chicago area. Given the foregoing, the feasability

study in its entirety was materially misleading.

Construction Delays and Cost Overruns at the Chicago Facility

260. The actual construction contract ultimately used for the Chicago

facility was so far divergent from the contract described in the disclosure that for

all practical purposes it was an entirely unrelated business deal. In fact, although

a signed construction contract conforming with the description in the OS was

presented at the Chicago closing on or about July 28, 1998, minutes of the August

board meeting held a mere fourteen days later discuss the contract being “bid out”

at a projected $6.5 million. The $5.3 million construction contract was never,

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

90 The Chicago OS is internally inconsistent -- page 22 describes theconstruction contract as being for $5.8 million, but everywhere else it says $5.3. This inconsistency is evidence of the casual and sloppy attitude the Defendantshad towards the accuracy of the disclosure. In addition, the Official Statementidentifies Affiliated Metropolitan as the contractor while the actual contract waswith Walsh Construction.


in fact, used to construct the Chicago Facility – its sole purpose appears to

The ultimate “real” contract was executed the following year for $7.1 million.

The following is a list of discrepancies:

a. The Official Statement repeatedly misstated the cost of

construction as being capped at $5.3 million, and failed to disclose the probability

-- or even the possibility -- that the actual cost was likely to be much higher.

Given the fact that the construction contract was the single largest line item in

"Sources and Uses of Funds" (and nearly double the next highest item), the

Official Statement was materially misleading in not disclosing that the budgeted

amount for construction could rise just as it had done in the prior projects. This

was a very significant risk factor which was purposefully omitted. In fact, the cost

rose to such a degree that this hospital was never even completed. Contrary to the

Official Statement description, the real contract excluded from the base price the

cost of owner changes, add-ons, and latent problems inherent in the upgrade of an

older, deteriorated building. In fact, it was common knowledge amongst those

involved in the offering that the Chicago construction costs, which the Official

Statement claimed would have "a guaranteed maximum contract price of $5.3

million90" were not actually fixed, and were being grossly underestimated. A

memo from WRS to Bertolini dated May 13, 1998 (over two months prior to the

effective date of the Official Statement) expressed concern over many of the

assumptions underlying the estimated cost of construction, particularly in light of

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


their (Heritage and WRS's) experience with past projects. The memo went on to

suggest "the total construction cost is going to be in the $7,000,000 range

(excluding exterior renovation for Phase I)." (emphasis added). The memo

proved to be far more accurate than the Official Statement, as the ultimate

construction contract commenced with a base price of $7.1 million, plus the cost

of add-ons (as opposed to the fictional $5.3 million guaranteed all-in "capped"

contract described in the Official Statement).

b. The Official Statement claimed this contract guaranteed

completion by November 1, 1999, while the actual contract had an April 5, 1999

start date and an estimated completion date of March 2000, subject to

adjustments. The potential delays described in the Official Statement, included

under "Risk Factors," were limited to externally-generated delays such as labor

problems and acts of God. The actual contract included adjustments for delays

generated by owner, such as changes in design or scope of work, and changes in

"programmatic scheme" -- for example, as Heritage switched back and forth

between designing an Acute Care Facility and a Skilled Nursing Facility, the

regulatory scheme changed, impacting design and construction, and the costs

swung upward (and delayed the time when revenue might be expected). In

response to a blistering demand from Goldstein that WRS explain why there were

change orders approved in excess of $900,000, WRS sent a letter to Heritage

America on February 16, 2000 stating: "There are many changes being instigated

by the owner to meet the new programmatic needs not known during the original

design process."

c. The Official Statement did not accurately describe the

scope of work included in the base price, and failed to note that owner-generated

change orders could add to the cost. In fact, at the time the Official Statement

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

91 The WRS memo also makes clear that the construction budget was farfrom established at that date, and the construction bids were in the process ofbeing received -- however the draft budget and all draft disclosure provisions,even going back as early as December 1997, assumed a fixed price of $5.3 millionwith Affiliated Metropolitan; and this remained unchanged in the OfficialStatement in July of 1998.


became effective (and of course unbeknownst to the bondholders), the design of

the Chicago Facility was still a "work in progress” with each revision to the plans

resulting in undisclosed adjustments to the contract price and additional architects

fees. In order to keep the base price artificially low, items were eliminated from

the scope of work, only to be added in later at a never-disclosed additional cost.

Even those items described in the Official Statement as being "included" in the

capped contract, such as fire alarms, were in fact not included in the scope of work

in the real contract, and were later added to the cost of construction, as were other

costly add-ons (such as $150,000 worth of kitchen equipment).91

d. Because the Official Statement falsely described the

price as fixed, it also failed to disclose the risks inherent in estimating

rehabilitation costs for an older, deteriorated building. In the February 16th, 2000

WRS letter to Heritage described above, the architects pointed out that per

Heritage's direction, the scope of work did not originally include work to be done

on the mechanical, electrical or fire alarm systems. In addition, WRS observed

"Renovation projects tend to have more changes due to the process of

revealing existing conditions that are not known until the work progresses,

these changes result from unforeseen conditions.” This was a risk that was

known to all parties involved in the preparation of the Official Statement prior to

its effective date, but was never presented in the "Risk Factor" section, nor was the

possibility that the condition of the building might impact the budget ever alluded

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


to elsewhere in the disclosure.

e. By March 2000 the actual price tag for construction had

reached $8.114 million, with over $900,000 in change orders approved and

$600,000 more under review. At a cost that now exceeded 50% of the bond issue,

and significantly higher than the "capped" amount budgeted in "Sources and Uses

of Funds,” work on this facility was ultimately halted. This facility was never

completed.

f. The entire balance of the Official Statement

unconditionally presumed that a complete Facility would, in fact, be constructed

for $5.3 million dollars. This renders the remainder of the disclosure utterly

worthless and materially misleading (except of course for the parts that are

outright false).

261. On July 21, 1998, Sabo & Green invoiced Miller & Schroeder

$25,000 for fees in connection with their work as underwriter’s counsel on

Chicago bond offering. As stated in the invoice, their work included the following:

Review of all documents with regard to the above referred 1998Bonds including but not limited to the Indenture, Loan Agreement,Deed of Trust and various resolutions, opinions and other closingdocuments. Preparation and revision of the Purchase Agreement,Preliminary Official Statement, Final Official Statement and certainclosing documents. Discussions and meetings with the legal counseland representatives of the various parties involving the 1998 bonds.

Therefore, Sabo & Green and Boehm had a duty to ensure all of those documents

were reliable. Thus, Sabo & Green and Boehm are liable for all of the non-

disclosures in the OS. In addition, Goldstein, as general counsel, had a duty to

review all documents relevant to the bond offering. Knowing their fees were

being paid with funds ultimately entrusted to them by the bondholders, these and

other participants had a clear responsibility to ensure that these investors were not

being misled, and as the correspondence described above has shown, they were all

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


very well aware of the risk to which the bondholders were being unwittingly

exposed.

262. Given the history of delays and cost overruns in prior projects, all

Defendants who participated in the preparation of the Official Statement utterly

failed to meet even the most basic, minimum standard of due diligence and

accuracy in describing to the bondholders the true risks inherent in this project.

Given the foregoing “construction” costs, it is no wonder the Facility never

opened for business. Had this information been properly disclosed in these

Official Statements, Plaintiffs and the marketplace would have known that prior

construction guarantees were unreliable, that bond funds were likely to be

prematurely depleted, that if the Facilities actually opened, they would not be able

to generate enough revenue to repay the bonds, and that the Heritage Entities were

commingling the monies. Therefore the bonds would have been unmarketable and

the scheme would have collapsed.

263. On July 20, 1998, Affiliated Metropolitan Contractors sent a letter to

Bertolini (with copy to Kasirer, Goldstein, Dierckman et. al.) regarding the

current status of jobs and payments on work at various Facilities. The contents of

the letter can be summarized as follows:

a. Houston Facility - The next day, the sub-contractors

were all required to attend an inspection by the State Life and Safety board. None

would attend the inspection due to non-payment.

b. Texas City Facility - the roof flashing could not be

replaced until the sheet metal man was paid to date. If replacement was postponed,

bad weather would result in roof leaks and would ruin expensive equipment inside

the Facility.

c. Sarasota Facility - Electrical, Mechanical and Drywall

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


subcontractors have skeleton work crews. The plumber pulled off the job until he

is paid in full. The plumber, electrician, mechanical contractor, and refuse

removal company will not order any materials until they are paid. Some of the

delays in ordering materials could result in construction delays of up to 6 months

due to back ordering by suppliers.

d. Goldstein’s proposed payment schedule, sent on July 17,

1998 was inadequate to bring these accounts current.

264. On July 29, 1998 - one day after the Chicago bond offering closed -

Kasirer executed Requisition Certificate No. 2 wherein Heritage Chicago

requested $900,000 as an "advance for furniture, fixtures and equipment." The

Requisition Certificate was facially improper for the following reasons: (1) at the

time of the request renovations of one building at the Chicago Facility had not

begun and the other building would not even be built for another six months; (2)

in fact, there was no need for Heritage Chicago to begin furnishing its Facilities,

nor was there any place to store such furnishings; and (3) the amount requested

was two-thirds of the furnishing budget set forth in the Official Statement.

Despite these facts, U.S. Trust wired the money, in breach of its duties because no

advances were allowed under the terms of the Indenture. Pursuant to transfer

requests signed by Kasirer and Lim and copied to Goldstein, Saltzman and

Bertolini, this money was promptly split between Sarasota and Rancho.

RANCHO HOSPITAL OFFERING NO. 2

265. As discussed above, Heritage Rancho was experiencing

developmental delays and massive cost overruns, and bond proceeds from the

first Heritage Rancho offering had been illegally transferred to and from various

Entities. In an effort to conceal these ongoing problems and to continue to enrich

themselves from their scheme to defraud, the Defendants structured a second bond

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


offering for the Rancho Hospital. The Desert Hot Springs Public Financing

Authority acted as the Municipal Issuer and Heritage Rancho was again the

Private Issuer. Charles Green, partner of Sabo & Green, was the City Attorney for

the City of Desert Hot Springs. The Official Statement listed Sabo & Green as

“special counsel” and Fulbright & Jaworski as underwriter’s counsel. The Rancho

No. 2 bonds, dated August 15, 1998, raised $22.330 million.

266. Fulbright & Jaworski, as underwriter’s counsel, were actively

involved in the drafting of the Official Statement. Prior to the second Rancho

Hospital offering, Fulbright acted as bond counsel on nearly all of the previous

offerings. When they assumed the role of underwriter’s counsel for the Rancho

offering, they unilaterally made the decision to increase their fees associated with

this extensive undertaking. In fact, on August 19, 1998, Harry Hathaway of

Fulbright wrote to Kasirer in response to Kasirer’s inquiry regarding the increased

fees. The letter attached a draft letter from Fulbright to Dhooge and an internal

Fulbright memo explaining the situation as follows:

The primary reason for our increased fees is the unanticipated workwe have undertaken, particularly with respect to the PreliminaryOfficial Statement and the Official Statement. . . . For the past fewweeks we have essentially acted as the principal drafters of the legaldocuments by virtue of our discussions with the Underwriter,Trustee’s Counsel and others and our subsequent revisions to thePOS; this was not contemplated in our original fee quote. In theinterest of efficiency, Special Counsel has suggested that the POS beconsidered the definitive documentation of the transaction,superseding existing drafts of the Master Trust Agreement and theInstallment Purchase Agreement. Special Counsel plans to modifythe legal documents to conform to the final OS after it is printed. Thisprocedure is a reversal of the typical bond transaction, in which thelegal documents govern and the POS and OS summarize suchdocuments. Our original expectation was that Special Counsel wouldtake the lead in structuring the transaction and reflecting the terms ofthe deal in the legal documents. At the request of the principal partiesto the transaction, including [Rancho Hospital], we have effectivelytaken over those responsibilities.

Omissions From the Rancho No. 2 Official Statement

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



as the earlier Official Statements because the Defendants still did not disclose the

adverse information described above. It was also false and misleading because it

failed to disclose the following facts and circumstances:

a. Due to their roles as bond counsel on a majority of the

offerings thus far and their role as co-author of the Rancho offering, Fulbright was

well acquainted with the problems that the Heritage Facilities were experiencing;

including but not limited to the Platt lawsuit. Fulbright’s knowledge of the Platt

lawsuit is evidenced by the fact that on April 30, 1998, J. Kelly Moffat of

Fulbright wrote to Louis Pontarelli and requested copies of the Heritage Board of

Directors meeting minutes for review as part of its due diligence investigation on

the Rancho offering. In response, Pontarelli sent the minutes of a Board meeting

held on November 4, 1997 wherein the Platt litigation was discussed. In addition,

Fulbright knew that the bond funds were being improperly transferred between

facilities, as discussed at ¶186 above. However, while drafting the Rancho

Hospital OS, Fulbright failed to disclose this information.

b. The Official Statement purported to divulge the 1997

financial results for Rancho Hospital. The Official Statement noted that the

revenues for the year were $20.939 million and expenses were $14.316 million.

The undeniable implication being that the Hospital had income of $6.6 million.

This is incredible given the fact that the audited financials attached to the OS and

tax returns for 1997 show a loss of $760,000! Further, and more importantly,

according to the 1997 audited financials and tax returns, the Hospital’s total

revenue for 1997 was $12.492 million - only 60% of what the Official

Statement represented!

c. The OS failed to mention that the accounting department

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

92 The exact number owed to the Hospital at year end is not clear. The 1997Heritage Rancho tax return showed payables to other Heritage Entities of $1.336million, SCS provided a statement of financial position as of March 31, 1998 thatshowed $1.163 million still owing and Ostlund wrote a memo on March 30, 1998for use in the OS which listed the amount owed as $1,218,913.25.


at Rancho Hospital was a debacle. According to a memo sent by Ada Lee Sullivan

of SCS to Filippone and Ostlund on October 23, 1998, Rancho Hospital needed to

immediately address the following major issues: (1) implementation of in-house

payroll accounting would be impossible because employees had already written

themselves checks in excess of their salary; (2) the accounts receivable was out of

control; (3) there is no guidance being given on the bond financing.

d. According to the Official Statement, Heritage Rancho

would apply $4.1 million of the bond proceeds to the working capital fund. Of

this amount, $2.1 million was “to repay existing accounts receivable.” On April

30, 1998, HCH faxed HFS information regarding the “Sources and Uses of Funds”

section of the Official Statement. The information showed that the working capital

fund would actually be used to pay accrued management fees of $485,000; pay off

the Operating Deficits Agreement; and the repayment of $1.2 million in inter-

company loans.92 The Defendants purposefully deleted this material information

from the final Official Statement.

e. According to a letter dated February 3, 1998 from Joel

Boehm to Don Hunt of Fulbright, $1.2 million of the bond funds raised was

specifically earmarked to pay off “the Subordinate Notes which Miller &

Schroeder issued on behalf of Heritage.” There was no disclosure of the fact these

were notes originally issued to G & L but then 30% was kicked back to Debra

Kasirer.;

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


f. The Official Statement failed to disclose the fact that

although the third floor of the outpatient building was not capable of being used,

Medicare had been fraudulently billed for over $2 million for services allegedly

performed there! In fact, Heritage Rancho entered into a settlement agreement

with Medicare that related to 1998 overpayments whereby Rancho promised to

repay $1.698 million. After, Heritage Rancho filed for bankruptcy, the

government asserted a claim with the bankruptcy court stating that Medicare was

actually owed between $10-20 million. Currently, there is an ongoing grand jury

investigation regarding massive and systematic Medicare fraud at Rancho

Hospital.

g. Rancho funds were already being utilized for the benefit

of other Heritage Facilities and other projects altogether. For example, on August

28, 1998, the President of HFS, Richard Gianello, sent a letter to Leo Dierckman

which states that, as per Dierckman’s request, only $8,034 of a $15,000 payment

from Heritage Rancho was applied to the invoice for the Rancho feasability study.

The remaining monies were applied to other outstanding invoices; the smaller

facility projections ($4,430), Temple Hospital due diligence ($1,342), Seminole

due diligence ($1,205).

h. The Official Statements failed to mention that Kasirer

had been negotiating contracts on behalf of HHD. Specifically, in April 1998,

Heritage Rancho, DVI and HHD entered into a subordinate agreement, which was

signed by Kasirer as the as the General Partner of HHD. However, according

to documents filed with the Bankruptcy Court relative to the Rancho bankruptcy,

DVI had no knowledge that Mr. Kasirer lacked the authority to bind HHD to such

agreement. This fact was evidenced by a DVI representative’s declaration, filed in

the above proceeding, which stated “[his] research, including a detailed review of

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


the Records and telephonic interviews with many DVI employees” did not reveal

Kasirer lacked such authority.

i. The OS failed to disclose that Kasirer was using funds

and workers from other projects to purchase and remodel his new ski home in

Utah and a proposed Malibu home. On August 6, 1998, a representative of WRS

had a conversation with Kasirer regarding the work to be done on Rancho

Hospital, the proposed Malibu House and Kasirer’s Utah house. The WRS

representative memorialized his conversation with Kasirer in a telephone report

which emphasized that the labor force for the Utah house was mainly coming from

Texas. On August 19, 1999, a tentative meeting was set up in Los Angeles

between Kasirer and Haase-Divine so that Rancho Hospital and the Utah house

could be discussed in person.

j. The Official Statement failed to disclose that Affiliated

Metropolitan Contractors would not accept the proposed payment plan and the

construction workers at each facility walked off the job as a result of non payment.

k. The Official Statements failed to disclose the fact that

Heritage Rancho regularly engaged in “business transactions” with related parties

in violation of Medicare rules. This fact is evidenced by a review of the

“Complete List of Creditors” which was filed in the Bankruptcy Court by

Goldstein under penalty of perjury. The following is a non-inclusive list of related

parties that were listed as creditors of Heritage Rancho at the time of the

Bankruptcy filing:

i. JDDJ Holdings with a business address of 611 N. Canon,

Beverly Hills (Kasirer’s home address);

ii. JB Rudy & Company with a business address of 611 N.

Canon, Beverly Hills (Kasirer’s home address);

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


iii. Debra Kasirer with a business address of 611 N. Canon,

Beverly Hills (Kasirer’s home address);

iv. Iatros Respiratory Corp is listed as a creditor of Rancho

Hospital. The address listed for Iatros Respiratory Corp. is

9461 Charleville Blvd., #174, Beverly Hills, CA. This is the

same address currently listed with the California Secretary of

State for JDDJ Holdings.

v. HealthCap Group, Inc. and MedPay, Inc., (two

companies with which Saltzman is affiliated);

vi. King-Pak Meats and Food Service (Donald King’s food

service company); and

vii. King Med with a business address of 1055 West

Rosecrans Avenue, Compton, CA (the same business address

as King Pak Meats and Food Service).

l. The failure to disclose these numerous related party

transactions in the OS was particularly egregious considering the fact that

Fulbright & Jaworski, the co-drafter of the Rancho Official Statement, had

recently given Kasirer advice on how to revise the CareContinuum and Rancho

Hospital management agreement to deflect Medicare officials’ scrutiny regarding

the separate appearance of the entities.

m. The Official Statement stated that concurrent with the

offering, Heritage Rancho would enter into a new management contract with HCH

and CareContinuum for a term of 10 years. The Official Statement noted that

Heritage Rancho could terminate the contract if the manager “caused or allowed to

exist a breach of any provision which shall cause a default or if a receiver,

liquidator or trustee is appointed by court order.” Although just such a situation

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

93 The debt reserve fund had been depleted.94 These figures do not match up with any loans recorded by Heritage Rancho on any tax

return or financial audit documents.


existed at the time of the second Rancho offering93, HCH continued on as manager

due to Kasirer’s control over the Heritage Entities and the deliberate decision to

continue the fraudulent scheme. Adding insult to injury, in January 2000,

Heritage Rancho entered into a contract, signed by either Goldstein or Bertolini at

Goldstein’s direction, whereby it was obligated to pay Kasirer or one of his

management companies $5.6 million to “buy-out” the contract!

Appraisals and Viability Studies of the Rancho Facility

268. Again, HFS performed the financial feasibility study. In doing so,

HFS reviewed the actual operating results for Heritage Rancho over the past year.

HFS noted and alerted HCH to a number of issues which were never included in

the OS, including the following:

a. Heritage Rancho had borrowed over $2 million from

Texas City and $804,000 from Houston;94

b. the actual operating results for the first quarter of 1998

were much lower than the projections for 1998 and occupancy of the Facility had

been much slower than projected;

c. the balance sheet had no debt service reserve fund

(which implies that all of the debt service funds from the first offering had be

used up in two years!);

d. the hospital had not created a plant renewal and

replacement fund as mandated by the Official Statement;

e. the hospital had a $1 million Medicare liability;

f. the cash collection was very poor and the bad debt

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

2895 The “as is” value of the Hospital was $17.3 million, upon completion the

value was estimated to be $24.5 million, and $26.5 million upon stabilization.FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 171

expense listed in the Draft Official Statement was .05%, but, in reality, was 1.5%;

and

g. a Memorandum dated June 2, 1998 from Bill Mertz of

HCH to HFS shows that as of March 31, 1998, the bank accounts of Heritage

Rancho had a total of only $346,008 which included only two (2) months worth of

interest in the funded interest account held in Trust. This memo was copied to

Pontarelli and Dierckman.

269. HFS issued a favorable financial feasibility study which asserted that

Heritage Rancho was a viable investment. This was contrary to all of the

documented evidence presented to HFS. Moreover, the market feasibility study

and appraisal submitted by Valuation Counselors and Coddington, respectively,

were, at least, negligently prepared because no work was done to verify the figures

provided by the Management Company and included therein.95 In fact, many

aspects of the market feasibility study are inexcusable. For example,

determination of the Service Area appears to have been falsely created to add

population: between the Rancho site and the other cities are at least two

competitors of all services (except the hyperbaric chamber, for which there is at

least one). Thus, for example, patients in Redlands would have to pass by

facilities in Redlands, Loma Linda, San Bernardino and Rialto just to reach

Rancho Cucamonga. There is no reason to conclude that people would travel 25

miles away from their homes and doctors for therapy or rehabilitation; this service

area is so large it encompasses three mountain ranges and four counties with

extremely diverse cultural differences, and travel times to Rancho can be up to an

hour long. Additionally, for many of the programs discussed in the Rancho study,

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


VC fails to discuss whether or not there is actually any need in the community for

such programs.

The Rancho Audit Report and Audit Failures

270. Furthermore, the Official Statement attached the audited 1997

financial statements as of December 31, 1997, along with the Independent

Auditors Report from SCS stating that the attached financial statements fairly

present, in all material respects, the financial position of Heritage Rancho

Healthcare, Inc. and are in conformity with the generally accepted accounting

principles (“GAAP”). Also attached were Financial Statements for March 31,

1998, and an Accountants’ Review Report for that time period. SCS represented

in this letter that, “Based upon our review, we are not aware of any material

modifications that should be made to the accompanying financial statements in

order for them to be in conformity with GAAP.

271. When new auditors were retained in 1999, the audit opinion was

qualified due to the uncertainty of Rancho’s ability to continue as a going

concern and over $5 million in ter-company loans were written off. The

opinion of the new auditors (MBFR) stated, “As discussed in note 14 to the

financial statements, Heritage Rancho Healthcare Inc. (a non profit corporation)

has suffered recurring operating deficits and has a net deficiency of assets that

raise substantial doubt about its ability to continue as a going concern.” The 1999

financial statements disclosed a net deficiency of assets of $23 million. The

situation in 1999 was similar to the financial condition as of year end 1997, when

there was also a net deficiency of assets (in the amount of $4.9 million which

increased to $5.1 million by March 31, 1998). Rancho had also suffered recurring

net losses and negative cash flow from operations for the years ended December

31, 1996 and 1997. SCS, as the auditor, was obligated by Generally Accepted

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Accounting Standards (“GAAS” ) to carefully investigate the ability of the

Company to continue funding its operations for the next year. Statement on

Auditing Standards (SAS) No. 59, requires auditors to evaluate whether there is

substantial doubt about an Entity’s ability to continue as a going concern for the

12 month period following the date of the financial statements. SCS failed to

issue a qualified opinion for the 1997 audited financial statements and the March

31, 1998 review indicating that there was substantial doubt as to the ability of

Heritage Rancho to continue as a going concern, despite these facts. The fact that

the balance sheet had no debt service reserve fund left, which should have

resulted in an event of default being declared, was also a reason to issue the going

concern qualification.

272. Moreover, SCS’s letter to management documented that the

accounting personnel failed to prepare calculations to determine compliance with

bond covenants, despite the fact that management was required to comply with

such covenants on a quarterly basis. In addition, this management letter contained

no reference to any of the flagrant revenue recognition issues or problems

discussed in the next paragraphs.

273. Contrary to the clean opinion letters issued by SCS, the audited

financials statements of Heritage Rancho violated GAAP because revenue was

improperly recognized from Medicare for services that were not actually rendered

and SCS failed to book an adequate bad debt allowance for over billed services.

The following GAAP standards were thus violated in connection with the 1997

year end audit and 1998 first quarter review

a. GAAP generally provides that revenue which arises

from circumstances involving uncertainty as to possible gains should not be

recognized since to do so might result in gains being recognized on revenue prior

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


to its realization. (FASB's Statement of Financial Accounting Standards ("SFAS")

No. 5, ¶ 17). This principal was particularly important with Heritage Rancho

in that millions in “revenues” should never have been recognized in light of

the millions in unrecorded Medicare liabilities for illusory services and the

fact that bad debt expense based on those services that were actually

performed was much higher than what the Official Statement represented.

b. Profit is deemed to be realized when a sale in the

ordinary course of business is effected, unless the circumstances are such that the

collection of the sales price is not reasonably assured. (ARB No. 43, Chapter 1A, ¶

1);

c. Revenues should ordinarily be accounted for and not be

recognized until the earnings process is complete and collectibility is assured.

(FASB Concepts Statement No.5 paragraph 83 and 84; and SEC Staff Accounting

Bulletin No. 101);

d. Contingencies that might result in gains usually are not

reflected in the accounts since to do so might recognize revenue prior to its

realization. (SFAS No. 5,¶ 17)

e. Financial reporting should provide information that is

useful to present and potential investors and creditors and other users in making

rational investment, credit and similar decisions (FASB Statement of Financial

Accounting Concepts No. 1, ¶34); Financial reporting is reliable to the extent that

it represents what it purports to represent (FASB Statement of Financial

Accounting Concepts No. 2, ¶62);

f. Management should provide commentary relating to the

effects of significant events upon the interim financial results (APB Opinion No.

28, ¶21, 30);

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


g. Financial reporting should provide information about the

economic resources of an enterprise, the claims to those resources (obligations of

the enterprise to transfer resources to other entities and owners’ equity), and the

effects of transactions, events and circumstances that change resources and claims

to those resources (FASB Statement of Financial Accounting, Concepts Statement

No. 1, ¶ 40);

h. To the extent that management offers securities of the

enterprise to the public, it voluntarily accepts wider responsibilities for

accountability to prospective investors and to the public in general (FASB

Statement of Financial Accounting, Concepts Statement No. 1, ¶ 50);

i. Financial reporting should provide information about an

enterprise's financial performance during a period. Investors and creditors often

use information about the past to help in assessing the prospects of an enterprise.

Thus, although investment and credit decisions reflect investors' and creditors

expectations about future enterprise performance, those expectations are

commonly based at least partly on evaluations of past enterprise performance

(FASB Statement of Financial Accounting, Concepts Statement No. 1, ¶ 42);

j. Financial statements should be complete. Freedom from

bias, both in measurer and the measurement method, implies that nothing material

is left out of the information that may be necessary to insure that it validly

represents underlying events and conditions (FASB Statement of Financial

Accounting, Concepts Statement No. 2, ¶ 79); and

k. Financial statements should be conservative.

Conservatism is a prudent reaction to uncertainty to try to ensure that uncertainties

and risks inherent in business situations are adequately considered. The best way

to avoid injury to investors is to try to ensure that what is reported represents what

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


it purports to represent (FASB Statement of Financial Accounting, Concepts

Statement No. 2, ¶¶ 95, 97).

274. As a result of the violations of these well established GAAP

principals, the Rancho 1997 and March 31, 1998 financial statements did not

“present fairly” the Company's financial position and results of operations, nor did

SCS disclose that the ability of Rancho to continue as a going concern was in

doubt. Accordingly, SCS failed to perform their auditing responsibilities as set

forth in GAAS and in Codification of Statements on Auditing Standards ("AU") §

411.04 as follows:

a. SCS did not use methods that were appropriate in the

circumstance, as required by ("AU") § 411.04;

b. The Financial statements, including the related notes,

were not informative of matters that affect their use, understanding, and

interpretation, as required by ("AU") § 411.04;

c. The Financial statements did not reflect the underlying

events and transactions in a manner that present the financial position and the

results of operations within a range of acceptable limits that were reasonable and

practicable to attain accuracy in financial statements, as required by ("AU") §

411.04;

d. SCS’s opinion falsely represented that Rancho’s

financial statements were presented in conformity with GAAP, in violation of

GAAS, Standard of Reporting, No. 1;

e. SCS should have stated that no opinion could be issued

by it or issued an adverse opinion stating that the financial statements were not

fairly presented, as required by GAAS, Standard of Reporting, No. 4;

f. SCS failed to maintain an independence in mental

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


attitude be maintained by the auditor, as required by GAAS, General Standard, No.

2;

g. SCS failed to perform the audit procedures required in

response to possible improper acts. SCS knew or recklessly disregarded the fact

that improper adjustments were being made on Rancho’s books, in violation of

AICPA Statement on Accounting Standards No. 54;

h. SCS failed to adequately plan its audit and establish and

carry out procedures reasonably designed to search for the existence of errors,

irregularities and consider the presence of fraud risk factors and assess the risk of

material misstatement of the financial statements due to fraud, as required by the

standards in AICPA Statement on Accounting Standards Nos. 1, and 53, and 82;

i. SCS failed to use due professional care as the auditor

and in preparation of their report, as evidenced by the numerous GAAP violations,

in violation of GAAS, General Standard, No. 3; and

j. SCS failed to measure and plan for the appropriate levels

of materiality and risk associated with Rancho’s business operations, as required

by AU §§312.

As a result of its numerous audit failures, SCS issued an unqualified audit report

and failed to disclose the numerous GAAP violations that materially impacted on

Rancho’s financial statements, SCS utterly failed in its role as an auditor as

defined by the SEC Accounting Series Release No. 296, Securities Act Release

No. 6341, Exchange Act Release No. 18044, which states in part:

The quality of information disseminated in the securities markets andthe continuing conviction of individual investors that suchinformation is reliable are thus key to the formation and effectiveallocation of capital. Accordingly, the audit function must bemeaningfully performed and the accountants independence notcompromised. The auditor must be free to decide questions againsthis clients’ interests if his independent professional judgementcompels that result.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


275. In sum, SCS allowed revenue to be improperly recognized from

Medicare for services that were not actually rendered (which Medicare eventually

disallowed) and failed to book an adequate bad debt allowance for the over billed

services, in violation of GAAP.

Financial Information Regarding the Rancho Facility

276. Heritage Rancho experienced extraordinarily poor operating results

since its inception and consistently paid excessive fees at every turn. The

following table details some of the pertinent financial information (red flags)

gleaned from an analysis of the tax returns filed by Heritage Rancho:

Rancho Facility - Financial Information


Revenue - Total $12,492,010 $23,264,552 $18,867,634Expense - Total $13,535,412 $23,897,157 $37,555.066AdministrativeServices

$1,321,447

3rd Party PayorSettlements

$3,755,056 $9,591,132

TotalManagementfees

$1,114,809 $1,395,000 $2,215,676

Loan forAdjacent Land

$900,000 $ from East Houston

improvements $4,037,443 $4,381,729Loss onAffiliates

$5,351,601

Loans fromAffiliates

$1,336,832

Net Loss ($760,808)loss

($167,704)loss

($17,889,000)loss

277. Rancho made the following payments to insiders: Goldstein received

at least $12,500 for legal services in 1998 on top of his salary as Officer/Director

of the Heritage Entities; King received $92,853 in 1998 and $74,623 in 1999; SCS

received $109,459 in 1998 and $79,641 in 1999; Pontarelli received $124,412 in

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

2896 According to the financial statements for March 31, 1998 attached to the

Official Statement, reserves were only $2.347 million.FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 179

1998 and $123,110 in 1999; Pollack (Kasirer’s nephew) received $103,842 in

1999; and Berman & Bertolini received at least $10,000 in 1997. Many of these

payments were in violation of the IRS and Medicare rules and regulations.

278. Moreover, in a very strange line item on the 1999 tax return,

Heritage Rancho recorded a “loss on affiliates” of $5,351,601, or 30% of the

total loss for the year, yet there was no delineation of the loss whatsoever!

This “loss on affiliates” was particularly disturbing given the fact that, according

to its 1998 tax return, Heritage Rancho had loaned $2.812 million to HHD (and

did not have any other loans to other Heritage Entities outstanding). Thus, in

1999, it appeared that Heritage Rancho loaned another $2.5 million and then

immediately determined the amounts loaned could not be recovered.

279. In September 1999, HFS prepared the 1998 Heritage Rancho cost

report for submission to Medicare. Submission of yearly cost reports was a

prerequisite to future reimbursements from Medicare. The report showed that

Heritage Rancho had potential liability to Medicare of $3-10 million. An

employee of HCH or Heritage reportedly was outraged that HFS had determined

that such enormous liabilities were outstanding and unsuccessfully attempted to

persuade HFS to change the report’s findings.

280. In fact, according to the declarations filed in the Bankruptcy Court on

behalf of Medicare, despite already having agreed to repay $1.69 million for

overpayments in 1998, Heritage Rancho owed Medicare the following amounts

due to Medicare overpayments: $4.651 million in 199896; $6.706 million in 1999;

and $1.519 million in 2000 - totaling $12.876 million! Moreover, a 1999 audit

conducted by Mutual of Omaha on Rancho Hospital relating to Medicare

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

2897 In fact, Heritage Rancho was in such poor financial shape that the

bankruptcy trustee abandoned the bankruptcy.FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 180

overpayments resulted in the following preliminary findings:

a. Medicare would likely disallow $246,843 and

$1,121,048 in related party home office costs for 1997 and 1998, where Heritage

Rancho did not submit a home office cost statement and did not disclose several

related facilities.

b. Medicare would likely disallow $2.3 million in 1998

management fees. Of this amount, $1.3 million was non-allowable home office

costs and the remainder was duplicate costs claimed by Heritage Rancho.

c. In auditing the listing of assets, there were checks,

adjusted entries and duplicate entries which were depreciated. Mutual of Omaha

was told that there was no asset tracking system.

d. The auditors stated that Heritage Rancho’s accounting of

costs was inaccurate, duplicative, and costs were inappropriately allocated.

e. Heritage Rancho had not been forthcoming with

information regarding home offices, affiliated providers, and management

contracts with related parties.

281. Thus, the Heritage Rancho bankruptcy filing in August 2000 should

have come as no surprise to the Heritage Officers and Directors, given the

foregoing excessive operating costs, enormous liabilities and the various

fraudulent activities.97 As noted above, bankruptcy was one of the occurrences that

justified firing HCH.

THE MAUI HAWAII TRIP

282. While the Rancho offering was closing, the Heritage Officers and

Directors and Robert and Debra Kasirer decided to use the bondholders’ money to

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


pay for a trip to Hawaii for themselves. Debra Kasirer made arrangements for a

Board meeting to be held in Maui! In attendance were: Robert Kasirer, Debra

Kasirer, Walter Arnold, Dierckman, Filippone, Bill Mertz, Ostlund, Pollack,

Pontarelli, Boehm, Lim, Goldstein, Bertolini, and Saltzman. The Hawaiian

excursion cost $50,000 which was paid for by unsuspecting Heritage bondholders.

Debra Kasirer was personally reimbursed $14,238.48 in expenses.

283. At the Maui Board meeting on August 13, 1998, Bertolini discussed

the history of construction cost overruns and delays. Below is a chart of the

information presented to the HHD Officers and Board members at the respective

meetings.

TEXAS CITY FACILITY

Per OS As of January1998

As of April1998

As of August1998

FacilityOpening Date

9/1/97 12/97 12/97 Exterior Work90% complete,interior completed12/97

ConstructionCost

$2.5 MM $2.730 MM $2.932 MM $3.065 MM

HOUSTON FACILITY


As of April1998

As of August1998


11/1/97 2/9/98 4/23/98 4/23/98

ConstructionCost

$3.3 MM $3.781 MM $3.841MM $4.020 MM

FT. WORTH FACILITY


As of April1998

As of August1998

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



12/1/97 3/30/98 6/15/98 6/25/98

ConstructionCost

$2.75 MM $3.097 MM $3.662 MM $4.777 MM

Bertolini also informed all present that the pattern would continue at the Sarasota

and Chicago facilities. Sarasota was supposed to open on July 1, 1998 for a cost

of $4.2 million, but now it was projected to cost $4.934 million and not be

completed until November 10, 1998. Chicago was supposed to be finished by

November 1, 1999, but construction would not start until October 20, 1999 and the

cost, originally “guaranteed” at $5.3 million in the OS a mere twenty days earlier,

was now “estimated” to be at least $6.5 million.

THE IMPROPER TRANSFERS CONTINUED

284. As the improper transfers continued, Boehm wrote a letter in August

1998 regarding this practice. In response, a September 10, 1998 letter from

Goldstein to Dhooge which attempted to characterize the diversion of bond

proceeds as "inter-company loans," stated: "This is to advise you that surplus

funds of the above Facility [Heritage Chicago], in accordance with the Bond

Documents, may be transferred to Heritage Housing Development, Inc. for,

among other things inter-company loans for use in other Facilities of the Heritage

Group to alleviate shortfalls which may arise." (Emphasis added; Requisitions

presented to the Trustee the very next day show identical $150,000 furniture,

fixtures and equipment “advances” being drawn on both Chicago and Duval.)

285. Goldstein wrote Dhooge another letter on September 15, 1998, with a

copy to Boehm, stating in even broader terms: "This is to advise you that surplus

funds of each of the Heritage Group Facilities, in accordance with the Bond

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Documents, may be transferred to Heritage Housing Development, Inc. for,

among other things, inter-company loans for use in various of the Facilities of the

Heritage Group to alleviate shortfalls which may arise." (emphasis added). By

this time, the “advances” requisitions on September 11, 1998, had been received.

Pursuant to a fund transfer request dated September 18, 1998, signed by Lim and

Ostlund and copied to Kasirer, Bertolini, Goldstein and Saltzman, the full amount

of $300,000 was immediately transferred to HHD and then to Texas City, Houston

and Fort Worth.

286. Goldstein’s reference to "surplus funds" was farcical, as all

Defendants knew there were no surplus funds at any of the Heritage Entities. In

fact, they were lacking funds due to the construction cost over-runs and delays.

Thus, the only "funds" which Goldstein could have been referring to were

specially designated "reserve funds." According to the Official Statements, each

Heritage Entity was to maintain a Debt Service Reserve Fund, an Indigency Fund,

and an Operating Reserve Fund. Using these funds for anything other than their

stated purpose was not permitted. Goldstein’s letters made it clear that the

Defendants had been pilfering the Heritage Entities’ reserve funds, and would

continue to do so in the future.

287. Goldstein’s letter shows that Heritage was not complying with the

Official Statements’ “Sources and Uses of Funds” section and fully intended to

continue diverting funds from one project to another. Of course, John Orr of

Fulbright was fully aware of the revisions to the latter offering documents

which created the language regarding surplus funds being transferred as

Goldstein asked him to make the changes to the bond documents governed by

the Master Indenture. Given their clear intent, the Defendants should have

disclosed this fact to investors. Yet none of the Official Statements, not even

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


the four (4) Official Statements published after Goldstein’s letters, mentioned

anything about the prior diversion of funds or the intention to continue

diverting funds from one project to another. Furthermore, the Official

Statements detailed all permitted uses of the bond funds, and inter-company

"loans" were not one of the permitted uses. Thus, Goldstein’s position had no

legitimate basis whatsoever.

288. In September 1998 the improper transfers continued. Around

September 11, 1998, U.S. Trust allowed Heritage America to withdraw $150,000

as an advance for furniture, fixtures, and equipment in connection with the Austin

Facility. On the same day, according to Requisition Certificate No. 6, signed by

Kasirer, Heritage Chicago requested another $171,703.93, of which $150,000 was

for furniture, fixtures and equipment. However, any investigation would have

indicated that the Facilities were not ready for furnishings at this time. In fact,

Heritage Chicago never opened: a testament to the fact that designated funds were

misappropriated. All of these transfers were improper as advances and were not

permitted under the terms of the Indentures, but U.S. Trust, in breach of its

contract, sent the money as requested anyway.

289. In early September 1998, Kasirer requested that his ODA

“advances” be repaid. A check for $150,000 was paid to HCH from the

Heritage America ODA accounts. Interestingly, during this time period, the IRS

asserted a tax lien against Kasirer and his wife, Debra Kasirer, of $594,441.

290. None of this had any impact on the marketing of future bond deals. A

September 17, 1998 memorandum from Dhooge to Kasirer, copied to Goldstein

and Dierckman, requested a conference call regarding the sale/marketing of the Ft.

Worth No. 2 offering.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


FT. WORTH OFFERING NO. 2

291. As discussed above, the Ft. Worth Facility (again Tarrant

Municipality was the issuer) experienced substantial cost overruns and

construction delays and large portions of the bond funds had been improperly

diverted from Heritage 9 accounts. Thus, the Facility did not have any funds

available to continue operations. In order to conceal their wrongful actions and

continue the financially rewarding enterprise, the Defendants decided to hold a

second offering, wherein Heritage 9-Ft. Worth would issue $6,855,000 in Notes.

These Notes were dated October 1, 1998 and were issued pursuant to a supplement

to the “stand alone” Indenture originally dated May 1, 1997 and utilized in the first

Ft. Worth bond offering.

Omissions From the Ft. Worth No. 2 Official Statement

292. Pursuant to the Official Statement drafted in substantial part by

Defendants Boehm and Atkinson, Andelson, the monies raised would be used as

follows: $2.8 million for construction costs, $200,000 for architectural costs,

$980,000 for furniture fixtures and equipment, of which $700,000 was to repay an

existing loan, $685,000 into the Debt Service Reserve Fund, $689,500 cost of

issuance and $1.5 million for start up costs. Once again, the Official Statement

was false and misleading for all of the reasons the prior Official Statements were

false and misleading. In addition, the Official Statement did not disclose the

following:

a. The original feasibility study was proven to be extremely

inaccurate.

b. The costs of renovation now stood at over $3.7 million,

despite the fact the original Official Statement stated the renovation cost would be

$2.75 million, guaranteed.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

98 SCS documents relating to KYH showed that in 1999 this Kasirer entity(owned 25% by Robert and 75% by his 4 children, but Debra Kasirer signedchecks for the entity) wrote a check for $41,875.71 to the City of Ft. Worth fortaxes and paid for lawn service for property at [Ft. Worth].”


c. The Operating Reserve Fund and Project Fund had been

completely depleted, contrary to assurances in the first Official Statement that

these funds would be sufficient to cover the costs of renovations and begin

operations.

d. Kasirer had been given the parking structure that was

originally purchased as part of this property. A memo to Sobelman from Robert

Kasirer dated October 18, 1999, stated “one asset we forgot to include under

KYH98 relates to a piece of the [Ft. Worth] property in Ft. Worth that KYH

retained and did not sell. Specifically that is a parking structure which

accommodates about 250 cars and is located adjacent to Heritage [Ft. Worth] .”

Kasirer attached an appraisal conducted four years earlier by Valuation Counselors

which opined that the depreciated value was $480,000. A handwritten note stated

“Per Robert, 90% of original cost is for the building. Buyer didn’t want the

parking (even for free).” (emphasis added). Then in 2001 KYH sold the

parking structure for $1 million! This was a matter of some concern at

Heritage. On April 13, 2000, Goldstein received a memo from Rick Kuhl asking

who had ownership of the parking garage, as he had just been informed it was

owned by Kasirer.

e. The Official Statement did not disclose that on August

24, 1998, a meeting was held at Ft. Worth’s Hospital in Fort Worth, Texas.

Attendees at the meeting included a representative of WRS Architects, Bertolini,

Filippone, and Walter Arnold (VP of Development for Health Care Holdings). At

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


the meeting a number of topics were discussed as detailed in the meeting notes.

First, the new bond issue funds would be used to cover project overruns from the

last issuance! Second, the tenant work which was to be done on the hospital’s first

floor could not be performed without “getting Columbia restrictions removed from

the South Campus.” As discussed above, restrictions placed on the facility by the

initial owner, Columbia, were omitted from the Official Statement. In addition,

according to the meeting notes, in order to complete the various phases of

construction for the Fort Worth Facility, Heritage would have to find additional

parking areas because “[Ft. Worth] is still short parking.” Kasirer received a copy

of the meeting minutes.

Appraisals and Viability Studies of the Ft. Worth Facility

293. As noted above, Heritage 9-Ft. Worth acquired the Ft. Worth Facility

on September 24, 1996 for $3,800,000. The cost of renovation was $2,750,000,

for a "hard cost" basis capitalization of $6,550,000. Coddington performed the

appraisal for both the first and second Ft. Worth offerings. The original appraisal,

dated November 1, 1996, reported the “as is” value of the Facility to be $8.4

million. The new appraisal, dated August 28, 1998, valued the Facility in its "as

is" condition to be $18,200,000! The estimated value of the Facility upon

stabilization also varied drastically from the initial figure of $17 million compared

to the later figure of $21.3 million.

294. The new financial feasibility study, again completed by HFS, and the

market feasibility study, done by Valuation Counselors, were, at best, negligently

compiled as they were once again based upon unrealistic assumptions and ignored

the history of cost overruns and delayed openings at other Facilities. In fact, after

reviewing the estimated expenses, an HFS employee commented in a written note

to Dierckman that the budget HCH initially submitted to HFS was essentially a

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


farce due to the large amount of mathematical and logistical errors. Additionally,

the HFS employee opined that the expenses listed seemed to be very high and

he stated: “You can’t survive off a mostly Medicare population with expenses

this high.” These facts were not disclosed in the Official Statement. The

Valuation Counselors market feasibility study was copied virtually word for word

from the prior (1997) report prepared by ZA, even so far as to include sections

describing the Community Mental Health Center and the Comprehensive

Outpatient Rehabilitation Program – sections which were entirely irrelevant to the

bond offering, since these programs were not being operated by Heritage prior to

the date of the report. That fact that they were included at all demonstrates the

lack of true research conducted by VC in the course of preparation of this report.

In fact, the Ft. Worth study mistakenly refers to the Austin market area because

VC haphazardly cut and paste information from prior studies into the later studies.

Furthermore, VC’s opinion that managements’ assumptions provide a reasonable

basis for managements’ forecasts is a curious statement, as by that time the

forecasts made in the prior report had failed to materialize. Essentially, the only

information VC did not cut and paste from the initial Zelenkofske study into this

study was the negative information regarding the economic depression of the Ft.

Worth area (e.g. barbed wire fences, boarded up buildings etc...). Moreover, there

is no discussion of the fact that the Facility itself was in a state of disrepair and

needed a tremendous amount of work and equipment to get up and running despite

the fact that the physical state of the Facility would undeniably impact Heritage’s

ability to draw patients to its programs. Significantly, VC also failed to address

the fact that any assumption provided by management should have been

extensively questioned since management’s prior “assumptions” regarding this

Facility, which were incorporated into the Zelenkofske study, were clearly well off

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

99 The Officers and Directors of HHD and Heritage America were nowlisted as Bertolini (Chairman), Saltzman (Vice-Chairman), Medill (Director) andKing (Director), Goldstein (President and General Counsel), and Lim (Secretary-


the mark (i.e.: fill-up and financial projections had not been met and there were

massive delays in the renovations/construction).

Financial Information Regarding the Ft. Worth Facility

295. As in all of the prior offerings, the Official Statement provided the

investors with assurances that the construction contractor would be paid for work

performed based upon applications approved by the Inspecting Architect and

Heritage 9 Ft. Worth. However, in blatant contravention of this requirement, on at

least two separate occasions, U.S. Trust allowed Heritage 9-Ft. Worth to withdraw

large sums of money from the Project Fund as “construction advances” (in each

case, pursuant to Requisition Certificates co-signed by Jerold Goldstein and

Kasirer or Ostlund and attaching “dummy” invoices). The first advance occurred

on or about October 29, 1998, and the second advance occurred on November 23,

1998. Each time, the withdrawal was $1,250,000 totaling $2,500,000. This

total was $300,000 less than the Official Statement represented would be used

for additional renovations.

296. On October 30, 1998, SCS, continued the practice of covering up the

fraudulent transfers via adjusting journal entries and ordered the following inter-

company journal entries: $186,408.00 debit on HHD account; $556,183.20 credit

on Rancho Hospital Account; $900,000 debit on Rancho Hospital account; and

$100,020 debit on Sarasota account.

EAST HOUSTON OFFERING

297. The second offering by Heritage America pursuant to the Master

Indenture was for the East Houston Facility.99 The Municipal Issuer of the bonds

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28Treasurer).


was the Tarrant Municipality. The bonds, dated December 1, 1998, raised

$11.320 million in proceeds.

Omissions From the East Houston Official Statement


that all of the prior Official Statements were false and misleading. In addition, this

Official Statement failed to disclose the following:

a. On October 16, 1998, the Danforth Health Facilities

Corporation had refused to issue any more bonds through the Heritage

Organization due to key management changes, overdue invoices, and Bertolini’s

failure to provide adequate responses to the concerns voiced at the last Board

meeting by Danforth.

b. On November 20, 1998, Kasirer wrote to Goldstein

regarding conversations with Dhooge, Iverson, and Boehm wherein Miller &

Schroeder voiced their concerns about construction progress and delays, and the

operational impact of the delays.

c. On November 1, 1998, the Chief Operating Officer of

HCH, William Filippone, sent a letter to Goldstein wherein he made a number of

suggestions aimed at resolving some of Heritage’s accounting problems.

Filippone stated that his suggestions were devised “after careful thought and

knowing that Heritage and HCH LLC accounting is intermingled as a whole.”

(emphasis added).

d. On November 5, 1998, the Texas City Sun printed an

article entitled “Danforth in Dire Straits” which detailed the extensive problems

experienced at the Facility and predicted an imminent closing. In response,

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Goldstein wrote a scathing letter to the author of the article denying any truth to

the allegations of the Facility’s financial woes. On November 12, 1998, Kasirer

sent a fax to Goldstein and Saltzman which read as follows:

Important you call me about Dhooge. To combat negative Danfortharticle we need report from owner, manager and auditor that facility ispaying bills and there is sufficient funds to pay debt service. Let’sfund the debt service now and have Sobelman indicate in a reportwhat Vic wants to hear. That will end it in Vic’s opinion. Lookforward to hearing from you. RAK (emphasis in original is doubleunderscored)

e. $2.5 million was improperly withdrawn by the Ft. Worth

Facility in October and November 1998 as construction advances pursuant to

requisitions signed by Goldstein;

f. The Austin Facility, also operated by Heritage America,

experienced construction delays and cost overruns similar to those at each

Heritage Facility;

g. Goodman sent a memorandum to Goldstein on

November 23, 1998 which detailed, once again, the critical state of the accounts

receivable department at Rancho Hospital. The reasons for the disorganization

include; lack of resources, lack of leadership, improper documentation sent to

government reimbursement intermediaries (Mutual of Omaha), and other billing

issues.

h. Sabo & Green would receive $20,000 for its real estate

services in connection with only the acquisition of the East Houston property.

i. Undisclosed to investors was the fact that Kasirer

intended to retain part of the parcel of land that the East Houston facility owned

prior to its sale to Heritage. In fact, JDDJ retained a portion of the parcel of land

when it sold the facility to Heritage, and later received $352,969.72 from the sale

of the three acres of land.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

100 Defendants planned to do a third Heritage Rancho bond offering toexpand the Rancho Hospital. It appeared that the money taken from the EastHouston Facility was to be returned upon the finalization of a loan from FirstProfessional. Saltzman was in charge of obtaining the loan, and according to aterse letter from Goldstein to Saltzman on June 23, 1999, Saltzman did not obtainthe appropriate appraisal and the loan was not funded on schedule.


j. Despite the fact that a Master Indenture was used in

connection with this offering, the Official Statement represented that the bond

proceeds would be utilized in connection with only the East Houston Facility. The

cover page of the Official Statement stated:

The 1998 Bonds are being issued to undertake the financing of (i) theacquisition of Columbia Doctors Hospital-East Loop, a closed acutecare hospital located at 9339 North Loop East, in the City of Houston,Harris County, Texas, to be renamed Heritage [East Houston] ,consisting of 82,400 square feet on 6.0 acres of land with 268 parkingspaces (the “Existing Facility” and after issuance of the 1998 Bonds,the “Facility”), (ii) the renovation of the Existing Facility into acontinuum of care Alzheimer’s Facility and Geriatric Centerconsisting of 151 Alzheimer’s nursing care beds, a behavioralhealthcare center, a comprehensive outpatient rehabilitation Facility,a research and teaching center, a senior healthcare clinic, an adult daycare/senior citizens center, various therapy areas, common areas, administrative offices and support areas (collectively, the “Facility”),(iii) the initial deposit to an Indigency Fund, (iv) certain start-up andfunded interest costs with respect to the Facility, (v) a Debt ServiceReserve Fund, and (vi) certain costs of issuance with respect to the1998 Bonds. See “THE Facility” and “ESTIMATED SOURCESAND USES OF FUNDS” herein.

This representation was false and misleading because the Defendants intended to

and did improperly utilize the offering proceeds for other projects. For example,

approximately $900,000, was diverted from these offering proceeds to Heritage

Rancho to purchase the land adjacent to the Rancho Hospital for expansion

purposes.100 Although the Official Statement listed many projects which were

planned for the future, such as the Rancho Hospital expansion, the plan to use

$900,000 of the offering proceeds to buy the land for the expansion was not

mentioned.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


299. Goldstein signed this Official Statement knowing that it was

misleading and would be distributed to prospective bondholders. Goldstein also

personally participated in the illegal transfer of funds from the East Houston

project by, among other things, executing and sending requisition certificates to

U.S. Trust to obtain funds to be utilized for the illegal transfers.

300. Atkinson, Andelson, Loya, Rudd & Romo sent a bill for $61,500 to

Miller & Schroeder for the work on the OS, including:

Review of all documents with regard to the above referenced Bondsincluding but not limited to the Indenture, Loan Agreement, MasterIndenture, and various resolutions, opinions and other closingdocuments. Preparation and revision of the Purchase Agreement,Preliminary Official Statements, Final Official Statement and certainclosing documents. Discussions and meetings with the legal counseland representatives of the various parties involving the 1998 Bonds,review of various Blue Sky statutes and preparation of the Blue SkySurvey.

Despite the claim that Atkinson Andelson diligently reviewed all pertinent

documents, the OS was missing a magnitude of material information.

Appraisals and Viability Studies of the East Houston Facility

301. According to the Official Statement, on June 20, 1998, Heritage

Housing V acquired the East Houston Facility for $750,000 from Columbia by

entering into a real estate lien note with Heritage America. $750,000 of the bond

offering proceeds was to be paid to Heritage Housing V by Heritage America,

which would then pay the $750,000 to JDDJ to pay down the note Heritage

Housing V had given JDDJ for the right to acquire the Columbia Facilities.

However, closing documents indicated that the sale was actually between Sunbelt

Regional Medical Center and either Heritage America and/or Heritage Care of

East Houston LLC. The actual amount transferred was $41,605. Documents

indicated that Heritage V assigned the right to purchase this property to Heritage

America, that there was a $500,000 credit to Columbia under the settlement

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


agreement with Heritage V, and that the amount remaining due to Heritage V

under that agreement was $1,207,187.50. Virgil Lim signed documents on behalf

of Heritage America, HHD, Heritage V, and Heritage Care of East Houston LLC.

302. Approximately two (2) months later, Coddington valued the Facility

in its “as is” condition at $2,000,000, an appreciation of 247%! The value of the

Facility upon completion was $11.5 million and value upon stabilization was

$12.9 million. The appraisal was negligently formulated as it simply reiterated

information the Management Company provided to Coddington without verifying

the accuracy of same.

303. HFS’s financial feasibility study, and Valuation Counselor’s market

feasibility study, were, at best, negligently prepared as they were based upon

unrealistic assumptions, such as the time it would take for the Facility to attain

stabilized occupancy, the daily forecast fees, the underestimation of costs, and the

fact that they ignored the history of cost overruns and delayed openings. In fact,

on August 14, 1998, Rich Gianello, President of HFS, wrote a memo (which

appears to be an interoffice memo) after reviewing the East Houston Project

Binder in which he listed some of his concerns as follows:

a. “This facility loses money every year during the

study. This would be disconcerting to me given that three of those years the

facility is at its peak of efficiency. . . . I understand that much of the facility’s

viability is based upon cash flow necessary for debt service coverage and

other covenants, but it still looks like a loser.”(emphasis added).

b. “If the DHFC (Danforth Health Facilities Corp) issues

bonds and [East Houston] goes belly up, can the bondholders go after one of the

other facilities under the DHFC? Shouldn’t there be some kind of disclosure

about this within the related parties section?”

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

101 The Official Statement listed Affiliated Metro as the constructioncontractor, but Olicon Inc. was the general contractor according to liens laterasserted against the Facility.


c. “The ODA discusses a $250k deposit, but I didn’t see

that on the books.” (emphasis added).

d. “Looking at the “Correspondence” section, it’s really

based upon Leo’s [Dierckman] estimates. It might be worthwhile to look back

at how [Austin], [Houston] or Sarasota filled up compared to its projections.”

(emphasis added)

Despite these concerns, HFS issued a financial feasability study which deemed the

investment a viable one, and ignored the actual occupancy rates. The Marketing

Study prepared by VC was, like those that came before, copied virtually word for

word from prior reports, and was negligently prepared for many of the same

reasons as prior reports, including flawed assumptions and missing information.

The study contains no discussion of the Texas moratorium on beds and the

requirement that programs be in place prior to licensure for Medicaid or Medicare

beds. Moreover, VC failed to include any analysis of turn-over rates for dementia

patients, utilized demographic data which was over a year old in the analyses it

purported to perform and failed to demonstrate that there was an actual need for

many of the programs which were noted in the study.

Construction Delays and Cost Overruns at the East Houston Facility

304. In addition, according to the Official Statement, the Facility

renovations were supposed to be completed by November 1999 at a maximum cost

of $3.2 million guaranteed by the contractor.101 The $3.2 million was earmarked

from the bond proceeds to be used solely for construction purposes. Despite these

“guarantees,” creditors in a foreclosure action asserted $750,000 in mechanics

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

102 The listing of Officers and Directors was identical to the one in the EastHouston Official Statement except that Goodman now appeared as the CFO ofHeritage America and HHD.

103 Of this amount, $134,828.02 was re-paid on January 14, 1999 from the

funds raised in the Seminole bond offering.


liens against this Facility.

SEMINOLE OFFERING

305. The East Houston offering was followed a few weeks later by the

Seminole offering, which raised $7.23 million.102 The Mexico Beach Municipality

issued the bonds which were dated December 15, 1998. According to the Official

Statement, the offering was the third offering held pursuant to the Heritage

America Master Indenture.

Omissions From the Seminole Official Statement

306. The Official Statement was false and misleading because it failed to

disclose all of the adverse facts which made the previous Official Statements false

and misleading, as noted above. In addition, this Official Statement did not

disclose the following facts:

a. The number of residents/patients at the operating

Heritage Facilities declined since the time of the last offering.

b. In August 1998, Miller & Schroder loaned $250,000 to

Heritage America in connection with the Seminole facility.103 Heritage America

repaid the monies, plus interest, in January 1999. The loan, like all the other loans

to Heritage from Miller & Schroder, was not disclosed to investors.

c. Neither Heritage Sarasota nor any other Heritage Entity

filed an annual report with a “nationally recognized municipal securities

information repository” despite the fact that over a year had gone by since the

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Sarasota offering and the OS guaranteed such annual filings would be made.

d. A December 14, 1998 fax regarding the Miller &

Schroeder credit committee meeting scheduled for December 15, 1998, went out

to Clarey, Ekholm, Erickson, and Tabolich. The agenda for the meeting included

a discussion of the upcoming Brownsville offering to be presented by Dhooge.

Attached to the fax were two pages of handwritten notes. The first was entitled

“Credit Committee Notes - Pre Initial Brownsville CC Meeting 12/15/98.” The

second page was entitled “Potential Cash Problems” and it detailed the monies

immediately needed for the Rancho, Ft. Worth, and Houston Facilities.

e. Although the Official Statement noted for the first time

that the Sarasota and Ft. Worth Facilities were experiencing construction delays

and failed to open on time, the information was materially misleading because it

misstated the actual reasons for the delays. The Official Statement stated that the

delays at the Sarasota Facility were solely due to “unforeseen additional

requirements of local and state inspectors” and falsely claimed that it was now

expected to be completed by January 1, 1999 and begin receiving patients on

February 1, 1999. The Official Statement also noted that the Ft. Worth Facility

currently had nine (9) patients and was “expected to begin moving people into the

Facility on December 11, 1998, initially at the rate of 8 patients per day.” Despite

mentioning these facts, there was no mention of cost over-runs, or similar

problems at the other Heritage Facilities, which were all listed as Affiliated

Entities.

f. Moreover, the Official Statement falsely represented that

despite the delays at the Ft. Worth and Sarasota Facilities, “Heritage fully expects

to meet the November 1, 1999 Renovation Completion Date for the Seminole

Project.” Given the track record of the previous Heritage Facilities, the

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

104 Once again, Affiliated Metro was listed in the Official Statement as thecontractor but in the foreclosure proceedings, it was Olicon Inc. that asserted themechanics liens as the general contractor.


Defendants had no reasonable basis for making such a statement. In fact, the

project never even opened due to the massive problems it encountered, and in the

foreclosure proceeding over $2 million of mechanics liens were asserted.104

Appraisals and Viability Studies of the Seminole Facility

307. On a date presently unknown to Plaintiffs, Heritage America acquired

the Seminole Facility for $665,000 from Columbia. The purchase of Seminole by

Heritage was a forces sale under the agreement entered into with Columbia.

Heritage Housing V entered into a real estate lien note with Heritage America to

finance the purchase. The Official Statement declared that upon obtaining an

approving opinion from the nationally recognized bond counsel of Miller Canfield

Paddock and Stone, Heritage America would use $665,000 of the proceeds of the

offering to retire all or a portion of the Heritage Housing V note. Heritage

Housing V would then pay the $665,000 to JDDJ. In a report dated November 2,

1998, Coddington, valued the property in its "as is" condition at $1,900,000 – an

appreciation of 186%! The value of the Facility upon completion was $7.5 million

and the value upon stabilization was $8.6 million. This drastic purported

appreciation is particularly suspect given the fact that an appraisal prepared in

May 1996 by Marshall & Stevens, concluded that, since the “current

improvements” were at the “end of their economic life,” the “highest and best

use” for the facility was demolition!

308. HFS’s financial feasibility study and Valuation Counselor’s market

feasibility study were, at best, negligently prepared because the reports were again

based upon unrealistic assumptions, including, the time required for the Facility to

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

105 Moreover, an employee of the Facility registered his concerns withmanagement that alligators often roamed the Facility’s grounds and were a seriousthreat to the safety of the elderly patients.


attain stabilized occupancy, daily forecast fees, underestimation of costs, and

because they ignored the history of cost overruns and delayed openings.

309. Despite representations in the OS that the Facility would have 76

Assisted Living beds, no one determined if the property could actually be used as

an Assisted Living Facility. In fact, on March 24, 1998, Kasirer wrote to

Goldstein and Bertolini (with copy to Green and Dierckman) to let them know that

“it seemed unlikely, due to zoning restrictions and other development restrictions,

that the Property would be feasible for development into an Assisted Living

Facility.” Kasirer’s letter continued to state that Saltzman had found a

potential buyer and if Heritage should end up selling the Facility for a profit,

that Kasirer would be the one to benefit financially – not Heritage!

310. Moreover, the Seminole facility was to be built/renovated in a flood

plane which was a material factor that was not disclosed in any portion of the OS

or the studies attached thereto. The feasability report failed to account for the cost

of a federally mandated flood-proofing of the structure. The marketability study

utilized countless pages detailing the beauty of the surrounding area, the access

from various highways and the location - right next to a lake. However, the study

neglected to disclose a major problem: the lake often flooded the Facility!105 On

January 1, 2001, Sumner Miller of the Heartland bond fund family sent an e-mail

to Chapman & Cutler, attorneys for U.S. Trust, regarding the flooding at the

Seminole Facility. The letter read as follows:

I just received a call from Marshall Field, the man interested in theSeminole Property. He spoke with his Florida architectural firm,Berman Bertolini, about the land, which fronts Lake Seminole. Thearchitects claim that when the wind blows from the East, the

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


water level at the Seminole end of the lake rises by 2 ½ feet. Thiswould put most of the Seminole property under water. Did weknow this? If it was disclosed in the bond offering, I missed it in theOfficial Statement. (emphasis added).

Interestingly, the potential buyer was using Berman & Bertolini as its inspecting

architect. In fact, it was Berman & Bertolini which notified the potential buyer of

the problem. The failure to obtain and/or include this information in the OS prior

to the Seminole bond offerings can be explained only by the negligence or

purposeful acts of those involved, including Berman & Bertolini. In addition, the

market study failed to address a number of problems which were noted by Phyllis

Cobb, an HCH employee, in a report she prepared on the facility’s feasibility.

Namely, the decrease in the area’s population over the past three years, the fact

that the area was at the bottom cycle of economic development, and many retirees

were moving further south and leaving the area.

Financial Information Regarding the Seminole Facility

311. On December 10, 1998, just days before the offering was completed,

Goodman sent a fax to Dhooge which stated:

some restricted funds have been used for cash needs at otherproperties. As you recall, this use of funds was requested andapproved by Miller & Schroeder. I did not reflect the ODAaccount at net because the funds were used in operations and notspecifically set aside. All unrestricted cash on October 31st isdetermined to be the unused ODA funds because if there was aseparate account, they would reimburse it. The managementCompany has not been repaid any funds of the amounts they haveadvanced. (Emphasis added)

312. This fax was copied to Kasirer, Dierckman, Goldstein and Saltzman

and appeared to have been written to satisfy the concerns of Miller & Schroeder

after the Texas Sun newspaper article appeared. As discussed above at ¶298(d),

Kasirer wanted certain letters written to mollify Dhooge, given the atrocious

bookkeeping at each of the Facilities. It was unlikely Goodman believed that “all

unrestricted cash” was part of the ODA, especially because some ODAs were

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28106 Strangely, this Resolution was signed by Bertolini and Lim as Chairman

and Secretary of Heritage Care of Sarasota, rather than Heritage America.FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 201

never funded and others were repaid by this time. This proved Goodman was fully

aware of the wrongdoing and was intimately involved. Moreover, evidence of

Goodman’s understanding of the ODA accounts was found in a letter written one

week later to Goldstein wherein Goodman stated that the ODA accounts should be

maintained separately from the operating cash accounts so that the withdrawals

could be monitored in case “outsiders” needed to know the account balances.

313. Oddly, two days after the offering closed, the Board of Directors

(Bertolini, Saltzman, Medill, and King) held a meeting wherein they (and

Goldstein as President), passed a Resolution on December 17, 1998, allowing for

the financing of the acquisition and renovation of the property. Moreover, the

Resolution approved the distribution of the preliminary OS and the final OS.106

Goodman, Kasirer, and Lim also attended the meeting. At the meeting, Bertolini

resigned as Officer and Director of all Heritage Entities, Saltzman was elected

Chairman of the Board, and Greenspan was elected to the Board.

314. Goldstein and Bertolini were paid handsomely for their legal and

architectural services, respectively, in connection with the Seminole offering.

Bertolini personally received $14,000 and Goldstein received $32,500. Clearly,

these payments violated the rules and regulations of the IRS and Medicare.

315. In early 2003, Bank of New York (the new trustee) reported that it

sold the Facility for $1.05 million. The bondholders received a paltry $ 0.07 on

the dollar for their investment.

THE 1998 IMPROPER TRANSFERS

316. The following chart details all of the improper transfers of bond funds

between and among the various related Heritage Entities and the Management

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Companies during 1998.

Improper Transfers in 1998


H e r i t a g e 7 -Texas City

HeritageChicago

$125,185

Heritage7-Texas City

Heritage 8Houston

$154,671

HHD Heritage 7-Texas City

$929,217 HHD did not list this amount asowed in its 1998 tax return

Heritage 8Houston

HeritageChicago

$2077

Heritage 8Houston


$15,860

Heritage 8Houston

HeritageAmerica

$27,842 Heritage America did not list apayable to Houston on its 1998return.



$1,352,979


Anunspecifiedmanagement company

$335,479

HHD Ft. Worth $1,155,787 HHD did not list this amount asowed in its 1998 tax return

HeritageSarasota

Ft. Worth $2,173,102

HeritageSarasota

HeritageChicago

$272

HeritageSarasota


$316,800

HeritageSarasota

Heritage 8Houston

$1,678,041

HHD HeritageSarasota

$3,212,892 This loan does not show up on theHHD tax returns

HeritageAmerica

HeritageSarasota

$3707 This loan shows up on the HeritageAmerica tax returns as $3,892

HeritageChicagoHeritageChicago

HHD $1,445,316 HHD had no payable to Chicago

HeritageAmerica

HHD $2,239,158 Not listed as payable to HA in 1998return.

HeritageRancho

HeritageResearchand Support

$147,861 On 1998 tax return for HeritageResearch this amount is listed as aloan but by 1999 it is re-classifiedas a contribution.

HeritageRancho

HHD $2,812,040

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


HeritageRancho

HeritageAcceptanceCorporation

$3,272,923 Due to factoring transaction, HAClisted as owing this to Rancho. In1999, this was “paid off” butRancho had to guarantee a note of$4,322,503

HeritageRancho

Anunspecifiedmgmt.company

$1,116,197

317. According to a document created for U.S. Trust’s attorneys

(Chapman & Cutler) by Underwood on March 30, 2001, by the end of 1998, HHD

owed Rancho Hospital $2,629,317.01. This amount included: $2,256,771.80 in

interco-loans; the payment of $193,000 for Kasirer’s Utah home; lease payments

on Debra Kasirer’s 1996 Chevy Blazer; insurance premiums for HCH employees;

and retainer fees for Berman & Bertolini.

318. Adding insult to the injury, Kasirer wrote to Goldstein on November

19, 1998 and requested that a $10,000 check be issued to him as repayment for an

advance on behalf of Heritage V. Since he did not have a receipt for his

“advance,” he requested that his letter to Goldstein be considered both his receipt

and his invoice!

WIDESPREAD FRAUD CONTINUED

319. With the dawn of 1999, the transfers continued.

a. On January 5, 1999, two transfers from Heritage Rancho to

Fulbright & Jaworski were made: one for $250,000 and the other for $22,601.42.

b. On January 5, 1999, three fund transfers totaling $210,000

were made to HHD from Texas City ($60,000), Ft. Worth ($100,000), and Austin

($50,000). This $210,000 was then transferred from HHD to Heritage Rancho.

Contemporaneously, HAC transferred $40,000 to Heritage Rancho.

c. On January 6, 1999, Heritage America transferred $25,000 to

HHD and HHD transferred $25,000 to Heritage Rancho.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

107 The fact that Kasirer pulled the ODA’s can also be proven by adocument created by SCS, entitled “Amounts Payable to HCH under ODA’s July31, 1999,” which listed $245,000 being paid back to HCH from Sarasota (out of$250,000), $275,000 from Austin ($25,000 over the ODA amount) , $245,000from Chicago (out of $250,000), and all $250,000 from East Houston. It alsonoted that there is no documentation to prove the $250,000 Brownsville ODA wasever funded.


d. On January 18, 1999, U.S. Trust permitted Ft. Worth to

withdraw $600,000 as yet another construction advance in connection with the Ft.

Worth Facility.

e. On February 4, 1999, $35,000 was transferred from Heritage

Chicago to Heritage America-Austin.

f. February 11, 1999, U.S. Trust allowed Heritage America to

withdraw $750,000 as a construction advance in connection with the East

Houston Facility.

g. On February 25, 1999, U.S. Trust allowed Heritage America to

withdraw $700,000 as a construction advance in connection with the Seminole

Facility.

h. On July 15, 1999, U.S. Trust allowed Heritage America to

withdraw $500,000 as a construction advance in connection with the East Houston

Facility.

KASIRER CASHED IN THE ODAs

320. In early 1999, Kasirer demanded that the ODA money be “repaid.”

On January 5, 1999, Heritage withdrew money from the accounts of Entities as

follows107:

a. On January 6, 1999, according to a Facility Fund Transfer

Request, $770,000 was transferred to HHD. The funds came from Heritage

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Chicago ($245,000), Heritage Sarasota ($245,000), and Heritage America -Austin

($280,000). The Facility Fund Transfer Request was copied to Kasirer, Saltzman

and Goldstein.

b. On the same day, another Facility Fund Transfer Request dated

January 6, 1999, showed HHD transferred $770,000 to Heritage Housing V. A

note on this document stated: "Funds will be transferred to JDDJ OP a/c." This

Facility Fund Transfer Request was copied to Kasirer, Saltzman and Goldstein.

c. Another Facility Fund Transfer Request, dated January 6, 1999,

stated $773,169.83 in funds were transferred from Heritage Housing V to JDDJ.

The note on this document stated: "Funds will then be transferred to Debra S.

Kasirer a/c." The transfer request was copied to Kasirer, Saltzman and Goldstein.

d. According to the fourth and final Facility Fund Transfer

Request, dated January 6, 1999, JDDJ transferred the $773,169.83 amount to

"Debra Schoenfeld Kasirer Operating Account #002-042843." Again this transfer

request was copied to Kasirer, Saltzman and Goldstein.

321. Each of the Facility Fund Transfer Requests were dated January 6,

1999 and executed by Geri K. Ostlund on behalf of HCH and Virgil Lim on behalf

of HHD. There were no notes on the last Facility Fund Transfer Requests for any

further transfers beyond the transfer to Debra Kasirer. A reasonably prudent

investor would want the facts of this misappropriation disclosed. Yet, the last

Official Statement did not disclose this misappropriation of funds.

THE MONEY IS GONE AND CONCERNS ARE NOTED BUT THE LAST OFFERING GOES FORWARD REGARDLESS

322. On January 12 and 13, 1999, the Board of Heritage America met to

discuss retaining Kutak Rock to develop a corporate compliance program. The

Board also reviewed all joint venture transactions, and similar affiliation between

Heritage and for-profit organizations. They discussed obtaining an opinion

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


regarding “non private foundation status of Heritage and its affiliates” as well as

“action steps” regarding current and potential projects.

323. On January 25, 1999, Bertolini wrote a memo to Dhooge discussing

the “Heritage Projects Cost Analysis.” Bertolini detailed some of the reasons for

the cost overruns at each of the Facilities and stated as follows:

It is clear that many conditions of the existing facilities should havebeen more extensively evaluated. Also, many tougher new “LifeSafety” code issues as applied to existing facilities, both on State andlocal level, have impacted the cost and delays of final approval. Inaddition, scope of work and development of lease areas as well asother new program additional construction due to the exceptionalgrowth and development of concepts that are a credit to the program,have added substantial costs and time to the early constructionprojects.

We have developed new procedures on the current jobs ([EastHouston], Brownsville & Seminole) that will minimize the costimpact of various problems uncovered during more diligent facilityinvestigations and including this construction work during the bidprocess.

The letter set forth cost overruns in excess of one million dollars in connection

with each of the following projects: (1) Texas City; (2) Houston; (3) Ft. Worth and

(4) Sarasota. Despite this knowledge, the Defendants conducted an additional

Heritage bond offering, and did not disclose any of these facts in the sales

presentations that took place in February 1999, or in the Official Statement.

Bertolini’s statements were of particular import for two reasons. First, they

demonstrated that the due diligence performed on the facilities prior to the bond

offerings was insufficient even by Heritage’s standards. Secondly, they

demonstrated that, contrary to the OS’s statements, there were no construction

contracts in place because bidding had not even commenced.

324. At this point in time, Miller & Schroeder became so concerned with

the financial state of affairs at the Heritage Entities that it retained an accounting

firm to examine financial controls, inter-project monetary transfers of bond

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


proceeds, continuing difficulties in construction resulting in cost overruns and

delays and cash management issues. These issues were addressed in a February

1999 meeting between Miller & Schroeder and Heritage representatives.

325. In January 1999, Goodman wrote to Goldstein regarding a

conversation he had with Bill Barber of U.S. Trust. The letter revealed

Goodman’s complicity in the cover-up and knowledge of the scheme’s Ponzi

nature:

I spoke with Bill Barber today. As in the past, he has concernsregarding the lack of regular payments in the facilities. He hasreceived inquiries from bond holders and brokers who invariably askif we are making timely payments. . . . Bottom line is our ability to dofuture deals. I reminded him that we are not doing more deals withconstruction and rehabilitation so that the problems of past delaysshould not recur. A strategy we might employ is to keep 2 to 3facilities up to date so that our pattern will show compliance onsome projects and non-compliance on those with the greatestproblems. This might help dispel the notion that we fund theseaccounts immediately before debt service as routine procedure.(emphasis added).

Moreover, it was clear that U.S. Trust knew of the massive problems facing the

Facilities and still agreed to act as Trustee over the bond funds for the next

offering.

326. On February 23, 1999, Goldstein reviewed a cash flow report for the

Texas City Facility which indicated that there would be a shortfall of $1.7 million

over the next six months. A discussion of this information was included as part of

the agenda at the HCH/Heritage meeting on February 24-25, 1999.

327. Despite the foregoing, insiders continued to market the bonds

aggressively. A February 23, 1999 memorandum from Dhooge to Kasirer,

Dierckman, and Boehm, regarding "Telephonic Sales Presentation/Heritage

[Brownsville]" [Brownsville offering], stated: "After introductions, I would like to

defer to Robert [Kasirer] and have him give a status report of Heritage’s previous

and proposed projects. Perhaps Robert [Kasirer] should also talk about changes in

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


the healthcare industry and how Heritage is poised to take advantage of these

changes."

328. On March 2, 1999, Goldstein wrote to Saltzman (copied to Kasirer) to

discuss the cash needs for the acquisition of more properties and cash needs to pay

for construction of prior projects. The letter read as follows:

Heritage needs $150,000 in order to make deposits on the Bradentonand CCS properties. $50,000 immediately for Bradenton which I willtake out of the Miller & Schroeder development account. Theremaining $100,000 will have to be taken out of the Acceptanceaccount as I am aware of no other source of funds, due to theM&S credit line being fully utilized. (emphasis added)

* * *

Stacy (Affiliated Metropolitan Contractors) is pushing hard for thebalance of the monies due him on the Texas life safety issues. He isowed $171,000 for [Ft. Worth] alone related to Life/safety. He isthreatening a lien but is holding off pending a conversation with youas to when he may expect some funds. (emphasis added)

The next day, Kasirer responded to Goldstein with the following recommendation:

“As Stacy is pressuring for money, and as he has not performed as per the GMP

contracts, now may be a good time to pursue an action against him to recover

those amounts and to release Heritage from any further payments to him.”

329. On March 4, 1999, Ekholm faxed a copy of the Credit Committee

report to Iverson. The report listed the following items of concern for the Heritage

Entities as of December 31, 1998: (1) Rancho Hospital, Austin, Sarasota, Texas

City, and Houston had no working capital funds available; (2) each of these

facilities opened or would open late; and (3) each of these facilities operated at a

loss (except Rancho Hospital) and experienced shortfalls.

330. However, this damaging information was not enough to quell the

greed that consumed those involved and dissuade Heritage from proceeding with

the Brownsville offering!

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

108 According to the Official Statement, the Officers and Directors ofHeritage America and HHD changed since the last offering. Saltzman was now theChairman, Goldstein remained the President and General Counsel, Goodmanremained CFO, Lim remained Secretary and Treasurer, and the outside Directorswere Medill, King and for the first time, Evan Greenspan.


BROWNSVILLE - THE FINAL OFFERING

331. The Brownsville Facility offering raised $11,735,000. Tarrant

Municipality issued the bonds which were dated March 15, 1999. The Board of

Directors for Heritage America (Bertolini, Saltzman, Medill, and King) and

Goldstein, as President, held a Board meeting on December 17, 1998, wherein

they authorized either Saltzman, Goldstein, or Lim to execute any document

necessary to finance the acquisition and renovation of the Brownsville property.

Omissions From the Brownsville Official Statement

332. According to the Official Statement, it was to be the fourth offering

pursuant to Heritage America’s Master Indenture.108 The Official Statement was

false and misleading for the same reasons each of the prior Official Statements

were false and misleading. In addition, this Official Statement failed to disclose:

a. The construction delays and cost-overruns experienced at

Sarasota and Ft. Worth. Even though the Seminole Facility Official Statement

described some of the problems experienced at the Facilities, this Official

Statement was silent in this regard.

b. All information regarding the fund transfers in early 1999

discussed above and the concerns of all involved was omitted from the Official

Statement.

c. In early January, 1999, Pontarelli signed off on behalf of

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

109 In February 1999, Lim’s handwritten notes on the signature page of theAirport purchase contract questioned why Pontarelli was signing on behalf ofHeritage when transactions of this size required a Board of Director’s signature.


Rancho Hospital109 for the purchase of an Airport Clinic adjacent to the Hospital,

and instructed Fulbright & Jaworski on how to distribute the partial purchase price

of $272,601.42.

d. The Official Statement failed to inform potential investors that

the funds available in the accounts held by U.S. Trust for other Heritage Facilities

were non-existent. For example, the Account Statements ending February 28,

1998, for the East Houston Facility (like the other) showed the Facility had

virtually no money, with ending balances as follows:

i. Fund $ 1.22

ii. Fund $268.03

iii. Debt Service Reserve $ 0.15

iv. Operating Reserve $ 0.71

v. Indigency Fund $ 0.35

333. Moreover, the Official Statement represented that a title insurance

policy would be obtained and the bondholders would have a valid first security

interest in the land and building. On March 25, 1999, Charles Green sent a letter

to Ms. Walker of Cameron County Title Company, Inc. which detailed the

instruction to close escrow on the Brownsville property. According to the

attached closing documents, Cameron Title was paid approximately $56,000 for

the title insurance. At the time this assurance was made in the Official

Statement, renovations already began at the Facility and, in fact, the

contractors had a superior lien on the Facility. This was contrary to the

representations in the Official Statement because the bondholders did not,

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

110 Once again, Heritage America was going to give the $1.1 million toHeritage Housing V, which would, in turn, use the money to pay down the note toJDDJ.


and could not obtain a first priority security interest in the Facility.

Subsequently, the construction contractors asserted mechanics liens totaling

$900,000 in the foreclosure proceedings. According to a letter to all bondholders

by Bank of New York in November 2001, Heritage America could not provide any

information to refute the contractors’ claims that they had a superior lien. As a

result, the contractors gave notice and conducted a foreclosure auction in

December 2000, wherein the contractors were the successful bidders on the

property. It also appeared that the title insurance did not pay a penny.

Therefore, it appears that no money will ever be returned to the Brownsville

bondholders.

Appraisals and Viability Studies of the Brownsville Facility

334. On July 20, 1998, Heritage America acquired the Brownsville Facility

for $1,100,000.110 Approximately three (3) months later, Coddington valued the

property in its "as is" condition at $2,900,000, an appreciation of 163%!

Coddington valued the Facility upon completion at $11.5 million and the value

upon stabilization at $13.1 million. These figures were completely unrealistic and

were simply inserted into the appraisal report at the direction of the Management

Company executives.

335. HFS’s financial feasibility study and Valuation Counselors’ market

feasibility study were, at best, negligently prepared as they were, once again,

based upon unrealistic assumptions, such as the time it would take for the Facility

to attain stabilized occupancy, the daily forecast fees, the underestimation of costs,

and the fact that they ignored the history of cost overruns and delayed openings.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


HFS reviewed the market feasibility study issued by Valuation Counselors and

noted that some of the information included in the study was unreasonably

optimistic. For example, Valuation Counselors forecasted that the 30 participant

PHP program would realize complete occupancy within nine months of opening

even though comparable Facilities had an average of slightly over 5 participants

total. Valuation Counselors also forecasted full occupancy of a 30 person

Comprehensive Outpatient Rehabilitation Facility (CORF) program within six

months of opening even though this was 30% of the market for the area. Because

the area was “more rural and impoverished” than any of the other areas Heritage

had opened Facilities in, HFS noted that these figures were irrational. The

Brownsville marketing study was, like all of the others before it, copied virtually

word for word from the prior studies and contained many of the same

shortcomings. In addition, the proposed primary market area was clearly and

obviously gerrymandered to include the Harlingen area, which was 25 miles

distant from Brownsville (prior marketing studies, citing a “national” standard

cribbed from the Capital Consulting study, gave a primary market area of a radius

of either 10 or 15 miles from the facility; this “national” standard, if applied to

Brownsville, would have resulted in over half the market area being located in

Mexico). The report also failed to address the difficulty of finding and attracting

qualified professionals to this remote, rural border town – a concern that was

explicitly communicated in a fax dated April 30, 1998 from Mark McKenzie and

forwarded to VC employee J.P. LoMonaco, the point person for the study.

336. A fax on December 11, 1998, from HFS to Dierckman stated:

The debt coverage ratio covenants contained in the latest version ofthe POS [Preliminary Official Statement] (enclosed) specify a date ofJuly 30, 1999 and January 1, 2001. The Master Indenture says June30, 1999 and January 1, 2000. I’m not sure why these dates havechanged. Furthermore, these dates are really only relevant to the[Austin] study, as the Brownsville facility won’t even be open on

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

111 The 1999 tax return was signed by Underwood as CFO. It listed King,Medill, and Saltzman as Directors, Lim as Secretary and Treasurer, and Goodmanas CFO, all thru 12/99 However, Plaintiffs believe that after August 1999,Goodman was succeeded by Underwood as CFO. Bertolini was listed asChairman thru 12/99 (despite the fact that the Brownsville Official Statementlisted Saltzman as Chairman and had no mention of Bertolini) and Goldstein waslisted as President.


June 30, 1999. How can we meet debt coverage when the placeisn’t even open? I asked Joel [Boehm] about this and he said thatyou [Dierckman] put those dates in the POS. If you compare thelanguage specified for the debt coverage covenants to the coverageschedule in our study you’ll see that the facility does not meet a 1.15to 1 ratio in 1999. By all appearances a potential investor wouldbe correct in assuming that the Project does not meet the debtcoverage covenant as specified in the POS. (emphasis added)

On December 14, 1998, Dierckman responded to the inquiry by HFS by faxing

the page of the POS in question with changes to the dates listed.

Financial Information Regarding the Brownsville Facility

337. In addition, the Official Statement falsely stated that the Facility

would open by February 2000 and have a total renovation cost of $4.5 million.

The renovations, however, were never finished and the Facility never opened.

This was likely due, in part, to the fact that all of the Heritage America Facilities

experienced additional cost over-runs and paid out excessive fees. The following

table details some of the pertinent financial information (red flags) gleaned from

an analysis of the tax returns filed by Heritage America:111

Brownsville Facility - Financial Information

ITEM 1998 1999 Details

Revenue - Total $2,609,168 $5,548,595Expense - Total $2,953,274 $6,324,206

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Total Managementfees

$223, 670 $353,106 The total management fees for1999 are somehow listed as lessthan the fees paid to HCH. Thisdoes not even account for the feespaid to HHD, and the fees likelypaid to Care.

Management Feeto HCH

$140,422 $362,500 According to the 1998 tax returnfor Heritage America, it hadborrowed $20,298 from HCH.

Management Feeto HHD

$87,739

Total Loss $344,106 $775,611

SELL THE BEDS AND LET THE GAMES CONTINUE!

338. On March 31, 1999, a meeting was held at the Austin offices of

Fulbright & Jaworski. In attendance were Goldstein, Dierckman, Dhooge, Boehm,

and Fulbright attorneys Hillary Young, Joe Eckert, Nicol Hebert, John Orr and Jim

Plummer (some by conference call). The purpose of the meeting, as listed in the

meeting memo was two-fold:

a. First, the participants discussed the structure of financing for

future Texas based Facilities. Each of the new facilities would be owned by a

separate Texas limited liability company, the sole member of which would be

Heritage America. However, it was questionable whether LLCs in Texas would

be given exemption from the Ad Valorem tax. Therefore, the meeting attendants

discussed two ways to circumvent the tax law. They planned to either introduce

legislation designed to change Texas law, or add a provision to the bond offering

documents to permit the transfer of the property without the consent of the

bondholders and then transfer it to a new non-profit corporation.

b. Second, the participants discussed the issue that the

Heritage Entities had no mechanism in place for complying with Rule 15c2-12

of the Securities and Exchange Commission. The meeting memo stated as

follows:

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 112 George Schaeffer was appointed to the Board at this meeting.FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 215

In compliance with Rule 15c2-12 of the Securities and ExchangeCommission. Because Heritage now has a very significantamount of debt outstanding which is subject to this Rule, I urgethat we try to organize a mechanism for seeing that appropriatematerials with respect to each of our facilities be filed. Thesematerials generally have to be filed within [6 months] of the end ofthe fiscal year. I believe we could workout a system for complyingwith this Rule in conjunction with one of the financial officers ofHeritage. We could assist in this for one or two years but we ought tobe able to structure it in such a way that it could be done internallywith consultation as needed by our Firm. I realize that this wouldcreate initial expense. However, given the scope of your operationyou should assume, in my judgment, that the material you filedquite likely will be reviewed by various governmentrepresentatives. (emphasis added)

339. On April 5, 1999, a meeting of the Board of Directors for all

Heritage Entities was held. In attendance were: Saltzman, Medill, King,

Greenspan (Directors)112, Goldstein, Kasirer, and Patty Aguire (from Heritage

Research & Support Foundation). During this meeting, the Board resolved to

implement its plans for expanding the Heritage Organization via the following

actions:

a. Closing on the pool financing agreement that was previously

approved by the Board. As per the pool financing agreement, Heritage would

receive a substantial fee that would be used to assist the facilities with the massive

cash shortfalls;

b. Authorizing Goldstein to arrange for Rancho Hospital to

purchase a physician’s practice;

c. Authorizing Goldstein and Lim to buy the Bradenton Property

on behalf of Heritage. The Bradenton Property was to be the subject of the next

bond offering. Bradenton was eventually purchased with money raised in the

$300,000,000 Gulf Breeze blind pool offering – an offering that resulted in other

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

113 Once again, Kasirer orchestrated this change in Board composition. Saltzman was initially paid a fee of $25,000 for the airport purchase transactionbut, he then invoiced HAC another $3,125 for “additional money due HealthCapregarding purchase of Airport Medical by Heritage per contract.”Contemporaneously, Saltzman attempted to renegotiate a flat monthly fee forHealthCap’s services. Apparently Saltzman’s fees had become a touchy subjectsince Kasirer and Goldstein traded correspondence on which of Saltzman’s feeswere legitimate and which were improper. Ultimately, on April 2, 1999, Kasirerwrote to Goldstein: “I hope you are pursuing a quick search for an appropriateVice President of Finance so we do not have to deal with these issues any longer.”


litigation and government investigation which had Heritage Healthcare of America

II as the private issuer and HCH as the management company.

340. However, there was not enough money in the Heritage coffers to

achieve all of these objectives and keep the mediocre operations afloat, despite the

fact that it had been only three weeks since the last Heritage bond offering closed.

Therefore, the Board approved the sale of “patient beds” from the Austin Facility

at a hefty sum of $4,000 each. Apparently, due to the fact that a number of the

authorized beds at the Austin facility were not being filled, Heritage was going to

sell the license for the beds to another facility, as Texas only authorizes a certain

number of beds in the state. In addition, Saltzman was asked to resign from the

Board after determining that it would not be appropriate for him to remain on the

Board given the scope of services he provided and the fees he was paid.113

THE 1998 SCS AUDITS

341. On April 29-30, 1999, in preparation for the upcoming audits, the

following general ledger entries were noted as being reclassified per Steve

Goodman: a $200,000 debit to the Rancho Hospital account; a $1,300,000 debit to

the Rancho Hospital account; a $250,000 debit to the Sarasota account; a

$3,250,000 credit to the Sarasota account; a $770,000 credit to the Heritage V

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

114 This is the same $770,000 that was transferred as mentioned inparagraph 321 (a) and (b).

115 Throughout his 1999 tenure, Goodman ordered a number of questionabletransactions. For example, prior to his departure from Heritage, Goodman orderedthe following journal entries to be reversed: $175,000 reverse credit to HeritageAcceptance and $200,000 reverse credit to Chicago. These journal entries wereactually entered into the books on October 31, 1999. Also, on July 28, 1999,Rancho Hospital wrote a check to U.S. Trust in the amount of $100,235.43. Onthe check request, a handwritten note stated: “Per Steve Goodman: the trust isshort by $100,235.43 to pay principal and interest on 8/1."


account114; and a $2,100 credit to the Heritage V account.115

342. Beginning in April and continuing through June 1999, SCS issued the

1998 audited financials for Sarasota, Texas City, Houston, Ft. Worth, Chicago,

Rancho and Heritage America. Nearly all of the audits noted “material

weaknesses”, including the following:

a. bond funds were disbursed for reasons other than those stated

in the bond documents;

b. fees were paid to the management companies that exceeded the

amount permitted per the subordination agreement;

c. advances to and from other facilities, in violation of the bond

documents.

343. Some of the more problematic findings were:

a. Monies were withdrawn from the Ft. Worth project fund

without documentation;

b. Payments made by Ft. Worth to the contractor were applied to

other entities invoices;

c. Ft. Worth was paying salaries for the staff of CareContinuum;

d. Both Rancho and Ft. Worth were not in compliance with

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


their bond covenants at Dec. 31, 1998;

e. Houston had still not set up the indigency fund as required

by the bond documents, something SCS had also noted the year before; and

f. the East Houston ODA was not funded.

344. Despite all of the above, SCS once again did not issue a going

concern qualification to their audit opinion letters. However, in Note 1 to the

Houston, Texas City and Ft. Worth financial statements (which were not

disseminated to the public) SCS stated that the ability to continue as a going

concern was an issue, but it referred to management’s “belief” that actions it was

presently taking would provide the opportunity for the Entities to continue as a

going concern.

345. A number of these facts should have caused U.S. Trust to declare a

default. A default in the performance or breach of any covenant or warranty in the

Bond Indenture or the Loan Agreement is an “Event of Default” under the Bond

Indenture. Among other things, the Heritage Entities were obligated to provide a

number of reports, certificates and other materials to U.S. Trust., such as:

a. a certificate of compliance with the loan agreement within 150

days of fiscal year end;

b. The annual disclosure report per Rule 15c2-12;

c. an officer certificate as to no default which demonstrated that

debt tests were met.

No such reports and certificates were provided, and, in light of the findings SCS

noted above, no such reports could have been provided.

346. On June 10, 1999, SCS issued the audit of Rancho Hospital to the

Officers and Directors of Heritage Rancho and stated the following:

a. Heritage failed to comply with the bond covenants. “Bond

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


covenants need to be analyzed on a regular basis. It appeared during our analysis

of the Bonds that there had been little consideration given to the bond covenants.”

b. “During the course of the year there were inadequate minutes

by the Board of Directors authorizing major transactions and purchases by the

entity.”

c. “The Organization needs to review its construction in progress

account on a monthly basis to ensure that items are capitalized and depreciated

when completed. We suggest that there needs to be more communication with the

accounting staff and the construction manager on the proper coding of invoices.

There should be budgets and tracking of costs for each project. Each budget

proposal should get written approval by an authorized person.”

d. “There is limited communication with the affiliates on

advances to and from affiliates by the accounting staff on a monthly basis.

347. On June 16, 1999 Ada Lee Sullivan, a partner of Sobelman, Cohen

and Sullivan, sent a fax to Lim requesting a transfer of $1,351,000 from the

Operating Reserve Fund for Ft. Worth to the Project Fund. The fax stated that if

the accounting firm did not receive verification of the transfer by June 18,

1999, they would be forced to disclose “this inappropriate use of restricted

funds to your disclosure [OS].” (emphasis added).

348. Upon receipt of this letter, on June 17, 1999, Lim passed the transfer

request to Goldstein which Goldstein approved. The next day, Goldstein sent a

memo to Saltzman which stated: “Attached are the transfers we discussed. Please

call as soon as you review same. Could these have been repayments to the

facilities of sums previously borrowed? Virgil says that you asked him to draw

out $1,250,000 from the Project Fund on two occasions.” On June 21, 1999,

Goodman wrote a memo to Lim requesting information on (1) how the funds will

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


be replaced into the project fund and (2) why the project fund was used and not the

operating reserve fund. In response, Lim wrote a memo to Goodman on June 21,

1999, which stated the following:

This is in response to your memo earlier today. It seemsto me that you are not listening as to what we havediscussed in Jerry Goldstein’s office last Friday, June 18,1999. Enclosed please find copies of [Ft. Worth] drawrequest numbers 2 & 3 both for $1,250,000.00 each foryour reference. May I suggest you ask the officerswhose signatures appears on the draw request on yourquestion as to why we have used the project fund and notthe operating reserve fund. For the reason that I do notknow the answer to your question. . . . Regarding thereplacement of the Project Funds, I have already talkto Bill Barber of the trustee bank this morning statingour concern. He said that he would look into thematter if there were any other way to put the moneyback in the Project Fund. I am still waiting for himto call back. I will let you know ASAP as I received theinformation. (emphasis added).

Despite this discussion between Lim and Barber, it took U.S. Trust three (3)

months to distribute a letter to the bondholders stating that funds “may” have

been utilized for purposes other than the intended project.

349. On June 17, 1999, SCS issued the audits for Texas City, East Houston

and Seminole without any mention of the misused funds.

SELL THE RECEIVABLES FOR A CASH INFUSION

350. In 1998, Heritage Rancho entered into a “portfolio purchase

agreement.” This was part of an ongoing process that was in place as early as

1997, in which the Heritage Principals explored various financing vehicles

through which they could leverage any existing accounts receivable ("A/R")

generated by any operating Facility. While these financing structures purported to

provide liquidity for the Facilities, they actually enabled Heritage Principals and

affiliates to accrue additional fees and facilitated the commingling of proceeds

among supposedly independent companies.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


351. The company initially obtained A/R financing from FINOVA Capital

Corp. (“FINOVA”), an asset based lender, which was later replaced with DVI

Business Credit. At that time, DVI was already providing financing of equipment

via equipment leases with Heritage Rancho and Texas City. Because the collateral

on the equipment was considered "soft,” or weak, DVI conditioned its credit

approval for the equipment finance deal, on a simultaneous A/R financing deal.

DVI first transmitted its proposal letter on January 13, 1998, for a revolving line

of credit in the maximum amount of $3,000,000 (later increased to $6,500,000),

secured by the A/Rs generated, initially, by Rancho and Austin, and on the

assumption that as new facilities became operational, the line would finance those

A/R as well.

352. DVI proceeded to close the equipment deals on the understanding

that the A/R deals were under negotiation. During 1998, however, Heritage began

to have difficulty delivering A/Rs free and clear of liens. Saltzman even began to

have confidential discussions with FINOVA to explore the possibility of FINOVA

taking over the equipment financing, rather than have DVI take over the A/R

financing. Although DVI agreed to keep its offer open, by September of 1998 the

transaction was not finalized. This was largely due to outstanding issues with

DVI's calculation of the A/R borrowing base (which would establish the amount

DVI could advance against the receivables). At some point, DVI became aware of

Rancho's Medicare problems. The main issue became the calculation of the

borrowing base for this line of credit, excluding the Medicare "overpayment" and

allowing for a re-evaluation of the borrowing base once DVI had a better

understanding of the Medicare problem. DVI's Regional Sales Manager David

Nettel, in a letter to Saltzman, expressed concern that a failure to come to terms on

the A/R line of credit would jeopardize the equipment leases. At that time, he also

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

116 The books and records of Heritage Acceptance have mysteriouslydisappeared and, at this time, it is impossible to determine if the proceeds fromthese various financing deals actually reached any operating Facilities.


expressed confidence that the initial proceeds of the loan would be more than

adequate to pay off FINOVA. In this letter, he suggested that the borrowing base

exclude $1 million related to the estimated Medicare overpayment.

353. The DVI structure required the formation of a special-purpose

subsidiary of Heritage. Heritage Acceptance Corporation was created for this

purpose. The transaction was structured so that Heritage Acceptance would

"purchase" the accounts receivables from each of the facilities and pool them in a

single Entity. DVI would then make the funds available to Heritage Acceptance

on a revolving basis, secured by the receivables "owned" by Heritage Acceptance.

According to an October 13, 1998 memo to his fellow Directors of Heritage

Acceptance, Herb Saltzman noted that "this type of borrowing precludes the credit

granting scrutiny generally inherent in single asset, start-up entities." That

scrutiny would have indeed made financing difficult with any lender predisposed

to explore the operating results and any potential Medicare fraud.

354. The A/R financing for Rancho and Austin was eventually closed in an

agreement dated October 7, 1998. At that time, Saltzman collected his $55,000

fee for closing this deal, yet Heritage Rancho never received any actual cash.

Furthermore, it was unclear as to whether there ever existed actual

"consideration" for the "sale" of receivables from Rancho to Heritage Acceptance.

It was also unclear how Heritage Acceptance used the proceeds of the DVI line of

credit.116 However, it was clear that Heritage Acceptance received $87,815 in fees

from that transaction and Heritage Acceptance issued a note to Heritage Rancho

for $3.272 million. Yet, in 1999, Heritage Acceptance no longer owed any money

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

117 The financial situation was so precarious that Underwood askedSaltzman for a loan. Of course, Saltzman declined and stated: “We have received[Rancho Hospital’s] loan request of $3 million. Unfortunately, there is inadequatecollateral and net cash flow to support the loan. As a result we must decline. Thank you for the opportunity to provide the financing.”

118 Also at this meeting, Medill was elected Chairman of the Board as ofMay 1, 1999 and Underwood was officially hired as the Chief Financial Officer. The Board also gave Goldstein a $25,000 bonus and permission to expand the“corporate office space in Encino” (Goldstein’s personal office) on Heritage’sdime.


to Heritage Rancho. A note on Heritage Rancho’s 1999 tax return stated that in

December 1999, the portfolio purchase agreement was satisfied and cancelled.

However, in order for Heritage Acceptance to pay the $3.272 million note,

Heritage Rancho had to guarantee and be liable for a note payable for $4.322

million!

355. By mid-1999, the Heritage Organization was experiencing serious

financial problems.117 Although DVI committed to lend against 85% of the value

of eligible receivables, this line of credit for alleged receivables of $8.5 million

generated a mere $2.1 in loan proceeds, which was not enough to maintain

operations. Thus, Underwood and Goldstein attempted to refinance the A/R line

of credit.

356. On July 12, 1999, while the Rancho and Austin A/R refinancing

effort was under way, HHD held a Board meeting which was attended by

Greenspan, King, Medill, Schaeffer (Directors), Goldstein and Kasirer.118 The

Board discussed the completion of a $300,000,000 “Florida pool financing” for

which Heritage was paid a fee in excess of $550,000. Some of the money raised

was used to buy Bradenton.

357. On May 9, 2000, Goodman sent SCS a copy of a memo dated June

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28119 HAC defaulted on the INAC loan by March of that year, as described

below at paragraph 393.FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 224

14, 1999 wherein Goodman acknowledged that on April 21, 1999, Heritage

America II made a “contribution” of $450,000 to HHD affiliate. The memo stated

that the “contribution is not a loan and represents a transfer between the two

affiliated entities.” Where the $450,000 came from was uncertain, but it appeared

to be part of the “fee” received in the Florida pooled financing.

358. In August 1999, Underwood began negotiations with INAC (a

Philadelphia based financial institution) on behalf of the Heritage Entities.

Underwood provided INAC with the requisite financial information for the

Heritage Entities, including information from the bond agreements, which

purportedly limited the access to the receivables. In late 1999 through early 2000,

two Loan Agreements were entered into with INAC: (1) a Short Term Loan

Agreement between Heritage Rancho and INAC (“Rancho INAC Loan”) and (2) a

Short Term Loan Agreement between Heritage Acceptance Corp. and INAC for

$4,322,503.33 which was guaranteed by Heritage Healthcare of America - Austin

(Austin INAC Loan”).119

MILLER & SCHROEDER PULLS THE PLUG AND INVESTIGATES THEIR LIABILITY

359. A few months after the Brownsville offering, Miller & Schroeder

refused to underwrite any more offerings. This refusal prompted Kasirer to write a

terse letter to Iverson, dated May 24, 1999, which stated:

not underwriting these future transactions would be a blow toHeritage’s growth and conversion into an operating Entity, whichwould be disappointing. . . and could undermine the viability ofHeritage as an ongoing Entity.

360. Miller & Schroeder Executives then set out to determine the extent of

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


their potential liability for the projects they underwrote. During May and June of

1999, Ekholm corresponded a number of times with Dhooge regarding the

finances of the Heritage Entities. One such correspondence included status reports

for the Texas City, Houston and Ft. Worth Facilities (copied to Boehm). The

reports contained the following information:

a. The Texas City Facilities had no money in operating reserves

or working capital funds. The Facility opened 2-5 months late and $192,000 had

been spent from working capital to convert assisted living beds to skilled nursing

beds because the City was too small to attract enough private pay assisted living

clients. Beds were expected to be fully occupied by July 15, 1999 and there was a

chance that the Facility could break even by October, but the Entity needed

immediate working capital to avoid default.

b. The Houston Facility required $100,000 to convert assisted

living beds to skilled nursing beds. It would take 90 days for construction and

licenses. There was no money in the operating reserves or working capital fund to

complete the project, and a cash infusion was needed immediately. The Facility

could break even possibly by November/December.

c. The Ft. Worth Facility had no money in operating reserves. It

was highly doubtful that the project could achieve sufficient additional revenues to

meet debt payments. Without severe financial changes, the project would not

work.

361. A document entitled “Miller & Schroeder Financial, Inc. Heritage

Healthcare of America, Inc. Bond Financings” dated July 11, 1999, indicated that,

to date, only four Facilities were open and these were losing $507,000 per month

on operations before debt service. Not including management fees, the Facilities

were losing $347,000 each per month operationally. The Facilities required an

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


additional $1 million for operating costs, an additional $2.4 million for debt

service and $3 million more for construction. This document was saved on the

M&S computers in a file entitled: “i:/legal/litigate/legalmatters/heritage.doc”

362. On August 11, 1999, Ekholm faxed the Agenda for a M&S meeting

in Minneapolis to Iverson. Among the topics to be discussed were as follows:

a. Termination of payment of on-going management fees to

Management Company and evaluation of participation fees to Heritage “Parent”

b. When there would be a default without outside cash.

c. Practice of Heritage of reimbursing Management Company for

ODA Draws (originally funded by bond proceeds) as a priority over other items.

363. Handwritten notes dated August 24, 1999 (which were attached to

letter to bondholders from Dlugosch discussing U.S. Trust’s recent notice) stated

the following “Heritage (12 issues) - Legal side - possible white collar crime

issue / is not an M&S obligation according to California legal firm that looked

into it.” (emphasis added).

THE LAWCO REPORT AND THE AFTERMATH

364. As discussed above, the accounting firm of Larson, Allen Weishair &

Co. (“LAWCO”) was retained to conduct an examination of financial records

maintained by the Heritage Entities.

365. Upon information and belief, LAWCO held a meeting on June 28,

1999 with Goldstein, Goodman, Saltzman, Dhooge, Dierckman et. al. Notes from

the meeting indicated, inter alia:

a. Between $10-11 million in additional capital was infused into

the Facilities over and above the bond financing.

b. Seminole was over budget by 10-15%.

c. Chicago was over budget by $800,000.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


d. Texas City decided to convert the Assisted Living units to

Skilled Nursing Facility units at a conversion cost of up to $200K

e. The Fort Worth project was experiencing difficulties with

government approval and from a competing hospital across the street.

f. The Liquidated damages clause in the Sarasota construction

contract was not exercised even though renovations were over budget and off

schedule.

366. Among the information reviewed by LAWCO was a financial

statement sent on July 2, 1999 from Goodman (CFO of the Heritage Entities) to

Michael McConnell of LAWCO. The consolidated balance sheets demonstrated

that as of May 31, 1999, Texas City had negative equity of $2.948 million, Austin

had negative equity of $1.131 million, Houston had negative equity of $2.694

million, and Ft. Worth had negative equity of $4.530 million, totaling a negative

equity of $11.305 million. Furthermore, these Facilities were projected to lose

another $2.497 million between July- December 1999. In July 1999, the

Sarasota Facility finally opened: one year late and $4.8 million over budget.

367. In August 1999, LAWCO reported its findings in at least two

meetings. One of these meetings took place in the Miller & Schroeder office in

Solana Beach, California, and was attended by Iverson, Goldstein, Diane Colby

and Dierckman of HCH/CareContinuum, one or more representatives of LAWCO,

and Bill Barber of U.S. Trust, who attended with counsel by telephone. The other

meeting took place on August 11, 1999 in the offices of Miller & Schroeder in

Minneapolis and was attended by the Miller & Schroeder Principals and U.S.

Trust. The findings of LAWCO which were discussed at one or both of these

meetings included the following:

a. There were $13.1 million in payables but only $9,300,000 in

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

120 Under the terms of the Subordination Agreement, the ODA was onlysupposed to be re-paid if the Heritage Entities were in compliance with all of theoperating covenants. If so, only then could the ODA be re-paid in the followingpriority: (1)Subordinate Management fee; (2) Subordinate Oversight Managementfee; (3) Operating Deficits Advances under the ODA.


receivables.

b. The ODAs, which were supposed to be funded by the

Management Company, were actually funded with Heritage bond proceeds.

Moreover, Heritage had a practice of reimbursing the Management Company

ODA through draws as a priority over other items. Specifically, in January 1999,

Kasirer caused four different Heritage projects to improperly repay HCH the

amounts HCH advanced as operating deficit agreement loans.120

c. Throughout 1997, phony invoices were written by various

Heritage personnel and insiders (E. Rubin & Debra Kasirer noted). In November

of 1997, in the course of the 1997 audit, the CFO of HCH, Jeff Head, “sat down

with Sobelman” in the hopes of correcting and stopping the various accounting

problems at Heritage. Sobelman conducted a “very cursory audit.” Around this

same time, the “phony invoices” were changed to “so-called advances” for

furniture, fixtures and equipment.

d. $900,000 was diverted from the East Houston project to

purchase land next to the Rancho Hospital for the anticipated expansion which the

Defendants planned to finance with a third Heritage Rancho bond offering;

e. There were numerous improper construction advances in

connection with the projects.

f. A large Medicare payable was owed by Heritage Rancho, and

Heritage Rancho was likely to default on monies owed pursuant to the receivables

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

121 In fact, the list of creditors filed with the Bankruptcy Court and attestedto under penalty of perjury by Goldstein, lists various Las Vegas hotels ascreditors of Rancho Hospital.

122 Prior to this letter, U.S. Trust had sent a letter to Goldstein wherein hewas reminded that, under the Indenture, access to the accounts, books and recordsof Heritage must be given upon request.


agreement.

g. Management company had direct control over money

belonging to the non-profit companies. For example, the bond proceeds were

utilized to pay for Hawaiian and Las Vegas vacations for Kasirer and his wife and

certain Heritage Officers and Directors and their wives121.

h. “U.S. Trust is not in the dark ... they must know or should have

known what is happening.”

368. Almost immediately, Bill Barber of U.S. Trust suddenly became

interested in the administration of the Heritage bonds funds! In August 1999, he

sent a letter to Goldstein wherein he requested information on the following

issues122:

a. The cash management system that has been utilized on the

Heritage Projects, including the Questioned Transfers of Funds;

b. The payments of payroll taxes for the Heritage Projects and the

ability of each Heritage Project to meet its operating expenses, including payroll,

for the next six months and (to the degree it could be promptly and reasonably

estimated) for the next two years;

c. The status of trade payables on the Heritage Projects and an

explanation of any increase in trade payables over the last seven months;

d. Compliance with state regulatory requirements for the Heritage

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Projects;

e. The basis for the Project Fund Requisitions that were

delivered to the Indentured Trustee, including all invoices that support the

Requisitions;

f. The practice of factoring receivables from the Heritage Projects

by Heritage affiliates, the terms of such factoring and any profits made thereon;

g. The status of the Operating Deficits Agreements;

h. An estimate of the costs of completing construction on any

unfinished Heritage Projects and the prior uses of Project Funds for such

Projects; and

i. Compliance with the continuing disclosure requirements of

the bond issues, including, but not limited to, the delivery of any Material

Event Notices to any “SID” and each “NRMSIR.”

369. On September 23, 1999, Pontarelli wrote Goldstein to give him the

latest update regarding Heritage Hospital. “Within the last month, our activity

has reached record levels. We are all very happy about the progress.” However,

“Unfortunately we are having significant problems with our accounts payable.

Our telephones were shut off today and the dialysis units will be picked up

tomorrow. . . . I cannot continue to operate this hospital without $1.0 million by

the end of next week. I have been assured by Clarke [Underwood] and Herb

[Saltzman] that I will receive $600,000 by Tuesday. If that is the only amount that

I will receive, the vendors, which includes basic operating services, will shut us

down on Friday, October 1st.”

370. On September 24, 1999, at Kasirer’s instruction, Lim faxed Kasirer a

list of the operating reserve funds and draw requests for August-September 1999

for the Chicago and Seminole Facilities. Kasirer then faxed this list to Saltzman

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


and wrote at the bottom of the page the following: “The issue will be how to

transfer the funds since the Trustee is very cautious now because of Miller &

Schroeder.” Clearly, the Trustee’s newly found interest in the activities of the

Principals was unexpected and, needless to say, unwelcome.

371. In response to the inquiries by the Trustee, on October 12, 1999,

Goldstein wrote to Bill Barber:

I have again reviewed the financing documents for the various bondtransactions involving [Heritage America], and the various bondtransactions for the [Stand-Alone Entities], upon which U.S. Trust hasbeen acting as the Trustee. . . . The purpose of this review is torespond to your inquiry as to whether the Stand-Alone Entities mayengage in inter-company loans of the bond proceeds among affiliatedentities. Based upon my review of the documents it has been, and continues tobe, my conclusion that the Stand Alone Entities may engage in suchinter-company loans for the following reasons:

(1) The bond documents do not prohibit Stand-Alone Entities frommaking inter-company loans among affiliated entities.

(2) Although the foregoing is sufficient to permit the above-describedloans, it must also be noted that the bond documents as drafted do notnecessarily limit the application of bond proceeds to a particularproject. The Indentures in the definitions typically define a “Project”as any project financed with bond proceeds. Further, the mortgagespermit the mortgagor to incur additional debt for purposes other thanthe development of Projects.

372. The next day, Goldstein conversed with Bill Barber regarding his

responses to the Trustee’s inquiries. Goldstein memorialized the conversation as

follows:

Spoke to Bill Barber who advised me that a follow-up letter tobondholders will go out out in the next 10 days. He appears to besatisfied with the documents he is getting and I believe the letter willbe favorable. He also said that if HCH sends him an invoice for theODA he will review same and make a decision as to payment after anopinion of his counsel.

A LAST DESPERATE ATTEMPT TO SURVIVE

373. In October 1999, the Principals attempted to maintain the viability of

the scheme. Underwood and Goldstein consulted with Boehm on the possibility

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

123 Boehm sent an invoice for $7,800 to Heritage America for these legalservices. Interestingly, the invoice was printed on AALRR’s letterhead butpayment was to be routed directly into Boehm’s bank account.

124 On October 14, 1999, Goldstein sent Kasirer a memo with attachedschedules which showed the amounts that HCH and Heritage owed to each other.The schedules indicated that the Heritage Facilities, other than Rancho, owedHCH $1.854 million in management fees. Of that amount, $767,706 was due and$1.154 million was subordinated. Conversely, CareContinuum owed Ft. Worth$583,000. Regarding the ODA’s Goldstein referenced the schedule (which said$1.173 million in ODA’s were still outstanding) but wrote, “each facility does notowe a reimbursement.” He further stated, “Before we pressure the Trustee, Isuggest we get a final schedule from Sobelman and you and I and he sit down toreview it as it appears the final amount due will be no more than $750,000.”


and repercussions of two contemplated events123: (1) The sale of the Seminole and

Chicago Properties (or portions thereof). Boehm advised that, due to restrictions

in the Mortgage, only 5% of the total assets of the Entity could be sold. Therefore,

Boehm reviewed the inflated appraisal value of the properties (after completion of

construction) and gave an approximate current value of the projects because they

were not completed. He then determined that 5% of those figures could be

transferred without violating the Mortgage. (2) What would happen to the ODA if

Heritage terminated the management contracts - Boehm stated that upon

termination of the management contract, the ODA became payable to HCH.124

The purpose of the legal counsel he provided was to conceal the fraud.

374. Underwood wrote to INAC, with which a receivables contract was

being negotiated, to let it know that (1) Heritage had decided to sell the Seminole

Facility because it would cost an additional $4.8 million to complete and (2)

Heritage was considering a sale of the Chicago Facility.

375. On October 14, 1999, in an attempt to circumvent Medicare fraud

charges, Boehm wrote another letter for use by Rancho Hospital which he knew

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


was false. He did this to assist the other Defendants in their plans to conceal the

fraud. The letter stated as follows:

The issue has been raised whether Heritage Rancho Healthcare, Inc.and its affiliated organizations (collectively, “Heritage”) areindependent from Health Care Holdings and its affiliated organization(collectively, “Health Care Holdings”). Heritage and Health CareHoldings have no interlocking directors or officers. No director ofHeritage is a director of Health Care Holdings. No director of HealthCare Holdings is a director of Heritage. No officer of Heritage is aofficer of Health Care Holdings. No officer of Health Care Holdingsis a officer of Heritage. Based upon these facts, and others, it iscorrect that Heritage and Health Care Holdings are independentorganizations.

376. On October 22, 1999, Goldstein responded to a letter sent by the City

Attorney for Texas City on September 23, 1999 inquiring about the recent notice

sent by U.S. Trust which discussed that the bond funds “may” have been

improperly utilized and that the Trustee was not receiving information from the

Heritage Entities as required under the Indentures. Goldstein replied that bond

funds had indeed been transferred among various Heritage Entities and that such

transfers ceased at the request of the Trustee. However, the Danforth Facilities

were net recipients of the loans and therefore no money was owed to these

Facilities.

377. In late October 1999, Underwood accessed as much cash as possible

by processing over $1 million in draw requests from the DVI line of credit.

378. On November 22, 1999 Underwood wrote to Goldstein regarding the

status of the Sarasota Facility:

Based upon the performance of Sarasota through October I amrecommending that we close it and default the bonds unless we obtainthe $1.8 million financing in December. . . . If we are successful incompleting the $1.8 million financing, we need to focus on bringingSarasota’s operating costs under control, as they are currently out ofcontrol.” (emphasis added).

On that same day, Goldstein wrote to Barber to inform Barber that it would be

necessary to use the debt service reserve fund to make the debt service payment

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


for Texas City and would likely be necessary for the upcoming payment for

Sarasota.

THE EXODUS BEGINS

379. After the LAWCO meetings, the mass exodus began. The Officers

and Directors of the Heritage Entities knew Miller & Schroeder refused to do more

offerings and commenced an investigation. Thus, the Ponzi nature of the scheme

would soon be revealed. The response was to run for the hills.

380. On December 6, 1999, Kasirer asked Lim to come to his Beverly

Hills home and retrieve some paper work. Kasirer’s secretary requested that Lim

not tell anyone where he was going but Lim informed Underwood. When Lim

arrived at Kasirer’s home, Pontarelli was also present. Kasirer gave Lim the four

memos which were dated approximately one year prior. These memos were all

requests from Kasirer to remove his name as a signatory from the Heritage bank

accounts. Lim never saw these documents before, notwithstanding Kasirer’s claim

that Pontarelli was reprimanded for not acting on the directions in the memo

earlier. Lim immediately told Goldstein what transpired.

381. Kasirer wrote to the Directors of each Heritage Entity in a letter dated

November 13, 1999, which was subsequently faxed on December 8, 1999. In his

letter he urged the Directors to resign from the Boards of each Heritage Entity “in

order to avoid any possible issues or liabilities.” Kasirer stated that his concern

and recommendation stemmed from the fact that, since the organization came

under the control of Goldstein in August 1999, it had experienced numerous cash

problems and would be forced to use debt service reserve funds to make interest

payments on the bonds on December 1, 1999. This, he noted, was “generally not

viewed as a good thing.” Attached to his letter were resignation letters for all

Directors and a memorandum which he instructed Medill to sign and send to

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Goldstein. The memorandum indicated that during a Board meeting held

telephonically on November 16, 1999, all Board members resigned. In addition,

Kasirer directed the Board to elect Goldstein, Colby and Underwood as the new

Directors for all Entities except Heritage America II, Heritage Rancho and

Heritage Research and Support Foundation. For these three, the Board was

instructed to elect Goldstein, Pollack, and Peter Lacombe. This letter, once again,

proved Kasirer’s involvement with Heritage. Moreover, it demonstrated that

Boehm’s letter regarding the separateness of the Heritage Entities and HCH to be a

bold faced lie.

382. According to Goldstein’s notes to the file, King subsequently faxed

Kasirer’s letter to Goldstein (December 8, 1998 - after the debt service funds had

were used to pay interest) and asked for an explanation. Goldstein explained that

there was a negative cash flow situation and that questionable transfers were

discovered. King stated that “[King] was aware of the transfers of funds as long as

he has been on the board.”

383. As expected, Goldstein was not altogether happy with becoming

Kasirer’s latest choice in scapegoats. He immediately sent a scathing fax to

Kasirer which stated “When the proverbial shit hit the fan in August 1999 while

you were in Africa, I recall I was the only principal who did not submit his or her

resignation, and put my integrity and honesty on the line.” He also wrote to the

Board and stated that, although he was surprised at the tone of Kasirer’s letter, he

and Kasirer had jointly agreed that it would be in their best interest to resign due

to the debt service problems.

384. On December 6, 1999, Pontarelli wrote to Goldstein (with copy to

Barber, Kasirer and Underwood) regarding the urgent financial situation at

Heritage Hospital and the immediate cash requirement of at least $750,000 to pay

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


critical vendors and avoid closing the Hospital.

385. On December 22, 1999, Underwood wrote to Ostlund, with copies to

Kasirer and Goldstein, stating the following:

No checks are to be issued that are not covered by a facility’sindividual bank accounts. The use of positive balances in oneHeritage facility to cover overdrafts of another Heritage facilitywill no longer take place, as this is not permitted by individualbond indentures. (emphasis added).

Despite this announcement, Underwood continued to authorize improper bond

fund transfers.

THE 1999 IMPROPER TRANSFERS

386. The following chart details some of the improper transfers of bond

funds between and among the various related Heritage Entities and the

Management Companies during 1999.



Heritage Rancho $20,000 Not on Rancho return

Heritage 8-Houston


$191,330 Was $154,671 in 1998 andHouston 1999 return still hasthe lower number

HHD Heritage 8-Houston

$2,549,890 In 1998, Houston purportedlyhad a loan payable to HHD of$88,966. No loan on HHDreturns.

HHD Heritage 9-Ft.Worth

$3,583,078 Was $1,155,787 in 1998 Ft.Worth return. HHD has noloans on its return.


HeritageAmerica

$22,454 Heritage America shows$40,999 due to affiliatedorganizations


Heritage Rancho $250,000 Not on Rancho return.

HeritageChicago

HHD $1,525,315 Was $1,445,316 on 1998Chicago return, but not onHHD return at all.

HeritageAmerica

HHD $8,705,963 Was $2,239,158 on 1998Heritage America return, noloan on HHD return.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


HeritageAmerica

HeritageSarasota

$3,707 Heritage America lists thisloan as $3,892

HeritageAmerica


$3,706 Not on Texas City return.

HeritageChicago

HeritageAmerica -Austin

$35,000

HeritageChicago


$91,184 Was $125,185 on 1998 return.

PREPARING FOR THE END

387. On January 4, 2000, the Board of Directors for Heritage Rancho

(Goldstein, Pollack, and Lacombe) held a meeting which was also attended by

Kasirer, Underwood, Pontarelli, and others. According to the minutes,

Mr. Pontarelli asked Mr. Underwood to explain the cash managementissues of the Hospital. Mr. Pontarelli feels that Heritage Healthcareof America, Inc. is retaining certain funds received on behalf of theHospital. However, as per Mr. Underwood, and confirmed by allothers present, as of July, 1999 the Hospital receives every dollar thatcomes to corporate headquarters for the Hospital’s account. Hesuggested that Mr. Pontarelli remember the “other” debt-relatedissues that may not be shown in the Hospital’s monthly payables butare paid out monthly directly from corporate headquarters. Mr.Underwood furthermore stated that the plain and simple truthabout cash management issue is that the Hospital spends morethan they receive. (emphasis added).

Underwood then informed the Board that the debt service payment for

February could not be made without accessing the debt service reserve fund.

In addition, the Board agreed that it could not assess the amount of money owed

between the Hospital and Heritage America. Therefore, Heritage asked SCS and

Muennichow, Berger, Foster and Robinson to ascertain the amount.

388. Contemporaneously, it was determined that another $20 million was

required to complete construction of the Facilities.

389. Soon after the board meeting on January 4, 2000, Goldstein sent a

memo to Kasirer, Underwood and others wherein he informed them of his

negotiations in several lawsuits filed by various vendors including Office Depot, a

drug supplier, and radiology company. In addition, he stated that all purchases

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


over $5,000 were to be approved by him or Underwood and that Pontarelli’s

$8,000 Dodger ticket purchase had not been approved.

390. Kasirer demanded the money “owed” him under the management

contracts. Consequently, Kasirer and the newly elected Director for Heritage

Rancho, Peter Lacombe, “reached a decision” to sell the Hospital. On January 18,

2000 Goldstein wrote to Kasirer to express his displeasure over not being

consulted regarding the decision. Goldstein, however, asked for a copy of the

buyer solicitation file to review. Kasirer’s grip was as strong as ever.

391. During the month of February 2000, Kasirer and Goldstein were

engaged in negotiations to terminate Kasirer’s management contract. On February

2, 2000, Kasirer proposed that Heritage execute three promissory notes to HCH:

(1) to buy out the existing management contract; (2) to re-pay the ODAs; and (3)

to pay off the accrued management fees owed to Kasirer’s companies. The

proposal called for Kasirer to receive over $300,000 per month for the next three

years and a total of $12 million over the life of the settlement. In exchange,

Kasirer agreed to the following: (1) the management contract would cease, albeit

with Kasirer’s continued involvement as a financial advisor to the Hospital; (2)

“HHD would control all board members” and (3) “All HCH employees will move

off of Hospital payroll.” In addition, Kasirer wanted the notes to be “as iron clad

as possible and as secure as possible in case of bankruptcy.” Goldstein responded

by saying he knew of no notes that would be safe from bankruptcy proceedings

and that Heritage could only manage to pay Kasirer $75,000 per month over 10

years for a total of $7.65 million. With some minor alterations, Kasirer agreed.

The final agreement was drafted by Boehm and was apparently executed on

February 14, 2000.

392. By February 2000, Austin defaulted on the INAC Loan. On March

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

125 In June 2000, INAC proposed that a Limited Forbearance Agreement beexecuted with regard to these loans. Goldstein replied that the SettlementAgreement with U.S. Trust prevented him from executing the Agreement onbehalf of Austin but that he would sign for Rancho Hospital.


17, 2000, INAC sent a letter to Goldstein (copied to Underwood) demanding an

explanation for the following: (1) why INAC was not receiving Weekly or

Monthly Cash Flow Reports; (2) why the COO of Heritage Healthcare of America,

Diane Colby, resigned; (3) if Heritage decided to close the Fort Worth Facility; (4)

if Heritage was about to adopt a plan to close all facilities except Rancho.

Goldstein responded by stating that (1) Ms. Colby resigned and the Fort Worth

Facility would be closed; (2) Although there was no plan to close all the Facilities,

construction at East Houston and Seminole was suspended for lack of funds; (3)

Saltzman was retained to secure a loan from Copelco (or an unidentified lender)

which would be used to repay the loan from INAC. Apparently, the plan to

“borrow from Peter to pay Paul” was unsuccessful. On March 29, 2000, INAC

sent a default letter which demanded the payment of the entire loan principal with

interest.

393. After the default and accelerated payment demand, Underwood wrote

to INAC to inform them of the status of two possible types of refinancing

currently being pursued by Saltzman, which would allow Heritage to payback the

existing loans from INAC. However, Underwood stated neither type of financing

could be secured if the default on the loan from INAC appeared on a credit report

or audit. Unbelievably, Underwood requested that INAC falsify its records of

the default by retroactively extending the current loan period by 90 days so

that no default would appear when Heritage attempted to secure other

financing.125

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28126 While the A/R line of credit with DVI had been cancelled, the equipment

leases were still in place.FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 240

394. On March 10, 2000, Underwood sent an interoffice memo to Ostlund,

Lim and Jeff Head (who originally worked for HCH but had left and was recently

re-hired) wherein he provided Heritage’s new policy in preparation for the “filing”

(bankruptcy filing) detailing the following: (1) no more payments should be made

to U.S. Trust or to DVI126; (2) vendors should be paid as little as possible so that a

large cash surplus could be accumulated; (3) after payroll, management fees would

be paid first. The letter was copied to Goldstein. In addition, handwritten notes in

Goldstein’s file indicated that, prior to filing, Goldstein’s credit card should be

paid, one month’s management fees should be paid in advance, and all HHD fees

should be brought current. The plans continued throughout March 2000 and, in

preparation, Underwood wrote notes on his personal stationary regarding how

certain aspects of the bankruptcy filing would be handled. He planned to write

off all of the ODAs as of 12/31 under “other income - forgiveness of debt” and to

pre-pay HHD fees.

395. On May 26, 2000, Goldstein wrote to Kasirer to see if he had any

suggestions as to how the Hospital would be able to pay off $2.2 million currently

owed to Medicare, an additional potential $8 million to Medicare, and $2.8 million

in vendor liability. Kasirer wrote back that he had no knowledge of the specifics

of the Medicare or vendor liability because “it is probably 1 ½ to 2 years since

Heritage through Herb Saltzman and then Clarke Underwood had ‘cash control’ of

the Hospital.” However, he suggested that Goldstein attempt to restructure the

debt into smaller payments over longer period of time in a fashion similar to the

restructured payments to Kasirer because Medicare would rather have the Hospital

“alive”.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


396. Despite the inevitable demise of Heritage, Underwood paid himself a

$3,750 bonus for his negotiations of the Medicare payment plan, and according to

the HHD General Ledger, in the first six (6) months of 2000, HHD transferred a

minimum of $152,000 to Heritage Bradenton.

397. On June 29, 2000, Underwood and Lim signed three checks payable

to HHD, totaling $16,837.89. These funds came from the operating accounts of

Texas City, Houston, and Austin but were to be used for the Fort Worth payroll.

This practice was repeated on July 13, 2000. However, this time there were four

checks (from Ft. Worth, Texas City, Austin, and Houston) totaling $17,627.60 and

the check memo did not specify for which payroll the funds were to be used for.

Interestingly, on July 14, 2000, the salaries of a number of insiders were

drastically increased: Lim’s salary increased from $2,047.50 to $12,737.50;

Underwood’s salary increased from $5,208.33 to $14,062.50 and Goldstein’s

salary increased from $10,729.17 to $21,770.84.

398. A memo entitled “Loans by Heritage Housing Development” attached

the balance sheet for HHD as of June 30, 2000. The loans lists were as follows:

a. Emery Rubin - $291,000 - paid by settlement;

b. Robert Kasirer - paid;

c. Debra Kasirer - paid;

d. Loans to various affiliated entities - Unpaid.

399. As noted above, the accounting firm Muennichow, Berger, Foster &

Robinson (“MBFR”) was hired to perform the 1999 Rancho Hospital audit.

During the course of their investigation, MBFR noted the following:

a. Management fee issues:

i. There was no invoice for the pre-paid management fee of

$52,275;

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


ii. There was no supporting documentation for 1998

management fees still “owed” of $411,757.27;

iii. There was no supporting documentation for Management

fees to CareContinuum still “owed” totaling $204,600;

iv. There was no supporting documentation to show that a

subordinate management fee of $49,725 per month was due

under the contract.

b. There was no supporting documentation for $27,400.59

accounts payable to Alan Pollack (Kasirer’s nephew);

c. “The board should approve all major purchases and contracts.

In looking through the minutes I found only one reference to any purchases

(purchase of the land adjacent to hospital), and it apparently was held over for

discussion.”

400. In June 2000, MBFR issued its draft 1999 audit opinion for Rancho

Hospital. It noted many of the same “material weaknesses” stated in SCS’s prior

annual audit, including:

a. MBFR estimated that the amount owed to Medicare was

$9,591,132 and that by the end of 1999 $5,351,601 was due from affiliates (all

of which was written off as uncollectible).

b. “Intercompany accounts should be closely monitored and

reconciled on a regular basis. During our analysis of Intercompany accounts we

found that several advances to and from affiliates were not recorded by the

hospital.”

c. “The Board of Directors should approve all major purchases

and contracts. While reviewing the Board of Directors minutes, it came to our

attention that there were no approvals of purchases and contracts entered into

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


during the year. This weakness was also noted in the prior year.”

d. “We continue to suggest that management monitor day to day

operations and review of accounting documents. The accounting personnel do not

have a reasonable level of awareness of the need for internal controls nor the

ability to implement the controls.”

e. In addition, the Organization made payments to companies

owned by individuals on the Board of Rancho, including (1) food service -

$74,723 (King’s company); (2) equipment financing - $40,194 (Saltzman’s

company).

401. In a letter to INAC on July 25, 2000, Underwood admitted that the

hospital’s audited financial statements “looked terrible” but insisted that it was in

the process of restructuring/renegotiating its debt.

402. On July 29, 2000, Goldstein wrote to Underwood to inform him that

he advised Kasirer that Medicare disallowed all management fees and

program costs. Moreover, Goldstein wanted to ensure that Kasirer would execute

and return the amendment to the management settlement agreement. Apparently,

the monthly payments were not made and they needed to amend the agreement to

defer payments for three years. Kasirer agreed to the amendments and asked

Goldstein to make the notes transferrable to another entity because he would “soon

want to dissolve HCH and CareContinuum.”

403. The Rancho bankruptcy petition was filed in August.

404. On October 31, 2000, with the demise of the organization, Goldstein

managed to maintain his sense of humor. He relayed to Underwood a

conversation he had with Clarey:

John Clarey of Miller & Schroeder called to verify rumor he heardthat I was resigning from the Heritage entities. I told him we weregoing to hang in for a few more months to assist in a transition. (Should have hit him up for some bucks) He said that Trustee is non

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


responsive to bondholders and to M&S. They do not know what ishappening. Did not know that hospital was converted to a Chap 7. I told him we had a clean no profit to use for deals. He laughedand laughed, as did I. (emphasis added).

405. On or about December 28, 2000, Goldstein wrote a letter to an SEC

attorney investigating the Heritage debacle, responding to her questions.

Goldstein discussed a June 1998 meeting at the offices of Miller & Schroeder

wherein he, Saltzman, and Kasirer met with Iverson, Dhooge, Ekholm and Boehm.

The inter-company loans were discussed, as well as the future projects, including

the “imminent refunding of Rancho Hospital.” This proved that all of the above

mentioned Defendants were aware of the commingling of monies prior to the

Rancho No. 2 offering, yet did not disclose this fact to prospective investors.

Goldstein also discussed a meeting in February 1999 in Minneapolis at M&S

where a power point presentation regarding the financial status of the Heritage

Entities was made, including disclosures of the intercompany loans. This meeting

took place prior to the final offering (Brownsville), yet there was still no

disclosure of the commingling (nor of the fact the Facilities were failing) in the

Brownsville Official Statement. A list of transfers was provided, and Goldstein

said the transfers “were primarily made to make up shortfalls in debt service

payments, working capital and construction moneys.” Goldstein said Heritage

and/or HCH sent monthly and annual reports to M&S, but did not learn until

September 1999 that M&S did not deliver those reports to U.S. Trust.

406. As for the problems Heritage encountered, Goldstein said “Virtually

all of the facilities substantially exceeded the construction budget and took

substantially more time to complete than was originally envisioned.” Sarasota

went over budget by 50% and was still never finished. He said all of the Texas

facilities relied too heavily on Medicaid and did not meet its maximum

occupancy quickly enough. Fort Worth was particularly troublesome in that

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


costs overruns of 100% were experienced, which delayed the opening by

nearly one year and thus depleted the working capital. Furthermore, once

opened, the cost of continual repairs and the energy costs were exorbitant, and the

building was inefficient. Many of the facilities did not have a budget for a kitchen

renovation and equipment. As for the Rancho Hospital, HCH added numerous

programs, which incurred substantial staffing and furnishing costs, and of course,

additional management fees were charged for each program. Medicare disallowed

costs and fees over a 3 year period, resulting in the hospital owing Medicare

millions. In February 2000, the hospital lost $225,000 a month, and it was unable

to pay its bills, resulting in the bankruptcy filing.

SUMMARIES OF DISCREPANCIES IN THE TAX RETURNS

407. Despite the fact that the same CPA firm, Sobelman Cohen, prepared

tax returns for the various Heritage Entities, a review of the returns revealed

glaring inconsistencies. The following lists the transfer discrepancies, which were

obvious from the tax returns:

a. The tax return for Heritage 7-Texas City showed that Heritage

8-Houston owed Heritage 7-Texas City $154,677 in both 1998 and 1999. The tax

return for Heritage 8-Houston corresponded in 1998, but in 1999 it stated it owed

Heritage 7-Texas City $191,330.

b. Heritage 7-Texas City stated that it borrowed $929,270 from

HHD in 1998 and by 1999 Heritage 7-Texas City allegedly owed HHD

$1,963,311. The 1998, 1999, and 2000 HHD returns showed no corresponding

receivable.

c. In 1999, Heritage 7-Texas City stated it loaned $20,000 to

Heritage Rancho, but Heritage Rancho showed no corresponding loan.

d. In 1999 Heritage 8-Houston stated that Heritage 9-Ft. Worth

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


owed it $7,800, but Heritage 9-Ft. Worth listed the payable as $8,869.

e. Heritage 8-Houston stated that it borrowed $88,966 from HHD

in 1998 and in 1999 it was $2,549,890; the 1998 HHD return listed $102,140 due

from related parties (there was no delineation); the 1999 return listed $2,742 due

from related parties; and the 2000 return listed no monies due.

f. In 1998 and 1999 Heritage 9-Ft. Worth stated that it owed

Heritage Chicago $427,244, but Heritage Chicago accounted for a loan of

$448,166.

g. Heritage 9-Ft. Worth stated it borrowed $1,155,787 from HHD

in 1998, but as noted above, all HHD listed as due from affiliated Entities was

$120,140. By 1999, this amount was allegedly $3,583,078 according to Heritage

9-Ft. Worth.

h. Heritage 9-Ft. Worth stated that it loaned $22,454 to Heritage

America in 1999, and Heritage America listed $40,999 due to related Entities.

i. Heritage 9-Ft. Worth stated that it loaned $250,000 to Heritage

Rancho in 1999, but there was no corresponding payable on the Heritage Rancho

return.

j. Heritage Sarasota stated that it borrowed $3,212,892 from

HHD in 1998 and showed that amount as still due in 1999. HHD had no such loan

outstanding on its 1998 return, in fact, it listed only $102,140 as due from related

parties, and in 1999 it showed $2,742 due from related parties.

k. Heritage Rancho listed $147,861 as loaned to Heritage

Research in 1998, and the Heritage Research return listed a payable of that same

amount. However, the 1999 Heritage Research return showed an anonymous

donation of $147,861 in 1999, and the 1999 Heritage Rancho return no longer has

a loan due from Heritage Research.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


l. The Heritage Rancho return showed that HHD owed it $2.812

million in 1998, but the 1998 HHD return listed no corresponding payable.

m. The 1998 Heritage Rancho return listed a note due from

Heritage Acceptance of $3.272 million. In 1999 the Heritage Rancho return stated

that the note was paid off, but Heritage Rancho had to guarantee a note of

$4,322,503 in return.

n. Heritage Rancho stated that it owed $1,116,197 to a

management company in 1998, and this increased to $5,535,723 in the 1999

return. This was the approximate amount Heritage Rancho promised to pay

Kasirer and his management companies in January 2000 as a contract termination

fee.

o. In 1999, Heritage Rancho listed a loss on affiliates of

$5,351,000!

p. Thus, in 1998, HHD stated that it was owed $102,140 from

related parties yet the returns of the other Heritage Entities proclaimed to owe

HHD $929,217 (Heritage 7-Texas City), $1,155,787 (Heritage 8-Houston), and

$3,212,892 (Heritage Sarasota).

q. In 1998 HHD stated that it owed nothing to related parties.

However, in 1998, Heritage Chicago stated that HHD owed it $1,445,316,

Heritage Rancho stated that HHD owed it $2,812,040, and Heritage America

stated that HHD owed it $2,239,159.

r. In its 1999 return, HHD stated that it owed nothing to related

parties. However, according to the 1999 returns Heritage Chicago claims it was

owed $1,525,315 and Heritage America stated that it is owed $8,705,963!

s. In 1999, HHD claimed it was owed $2,742 but the 1999

returns of Heritage 8-Houston say it owed HHD $2,549,890, Heritage 7-Texas

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


City stated that it owed $1,963,311, Heritage 9-Ft. Worth stated that it owed

$3,583,078 and Heritage Sarasota stated that it owed $3,212,892.

t. The 1999 HHD return also revealed that it had $1,189,409 in

revenues but lost $646,888. It paid Goldstein $271,771, Underwood $119,837 and

Lim $46,226. It also took a charge of $581,522 for “abandoned projects” and paid

$16,045 in “consulting fees.” In addition, the return stated that HHD dissolved as

of December 31, 2000.

408. The sum total of the monies that disappeared through loans that

one Heritage Entity reported and another Heritage Entity had no record of

equals $21,540,449! This discrepancy is hard to fathom considering the fact that

each of the Heritage Entities were managed by the same Executives and used the

same CPA firm. It was as if Goldstein and Sobelman, as representatives of one

Heritage Entity, would say “I loaned you money” and then in the same breath, as

representatives of another Heritage Entity, would say “I did not borrow any

money.”

409. Without new money to sustain the purportedly separate and self-

sustaining projects, the entire scheme collapsed. By 2000, each Heritage Entity

defaulted on the repayment of its bonds (rendering the bonds virtually worthless),

were in receivership, and foreclosure procedures were initiated. Rancho Hospital

filed for bankruptcy protection in August 2000.

THE COVERUP BY U.S. TRUST

410. In a series of letters to bondholders regarding the eleven (11)

offerings at issue in this case, U.S. Trust advised bondholders that it was

conducting an investigation into reports of inappropriate financial transactions and

would represent them by asserting any justifiable claim that existed against viable

persons or Entities. This course of conduct was designed to lull Plaintiffs into

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


inaction in reasonable reliance upon U.S. Trust. Through this action, U.S. Trust

assumed fiduciary obligations to all bondholders, representing that it was

protecting their interests. In reality, U.S. Trust intended to insulate itself from

liability and fraudulently conceal Plaintiffs claims.

411. U.S. Trust made misrepresentations in these written communications

dated September 7, 1999, November 22, 1999, June 29, 2000, November 15, 2000,

and April 9, 2001 with respect to (1) its effort to investigate the misappropriation

of bond proceeds, (2) the claims to be asserted in the best interest of the

bondholders, (3) the settlement agreement it entered into with certain Defendants

relating to the offer and sale of Heritage bonds and the use of Heritage bond

proceeds, and (4) the management of the properties. These representations

effectively induced Plaintiffs’ reliance. It was through these representations and

actions that U.S. Trust assumed fiduciary obligations (if it did not already have

them).

412. The U.S. Trust letters dated September 7, 1999 (letters with the same

language were issued in connection with all of the offerings) contained the first

indication of financial impropriety. The September 7, 1999 letter began :

To Holders of RecordThis notice is for your information only, no action is required.

413. It went on to state that Heritage “may have engaged in a system of

cash management whereby funds from this bond issue were utilized in other

Facilities related to Heritage and/or whereby funds from other such Facilities were

utilized for this Facility.” The letter also indicated that the Trustee did not receive

certain compliance documentation including financial reports. The letter falsely

assured the bondholder, that U.S. Trust would determine the scope of the problem,

“possible remedies for any such problems” and would keep the bondholders

informed.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 127 Again, the same letter was sent regarding all offerings.FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 250

As timely as possible, U.S. Trust will be endeavoring to determine towhat degree these matter will affect the Bonds, the possible remediesfor any such problems, the ability of Heritage and its principals toremedy these situations, and what action should be taken in the bestinterest of the holders of the Bonds. We will keep you informed ofour review of these matters.

414. Furthermore, many bondholders, including Plaintiffs, routinely did

not receive correspondence from U.S. Trust until a time well after it was dated.

A September 27, 1999 letter from Dlugosch of Miller& Schroeder to bondholders

was also sent. The purpose of this letter was to encourage reliance upon U.S.

Trust. The letter stated:

According to this notice, the Indenture Trustee is investigating theseand other matters and studying what actions to take in the bestinterest of the holders of the bonds.

We cannot predict when the Indenture Trustee will complete itsanalysis of this situation or what the outcome might be. At present weare not trading any of the Heritage - Related Bonds and will not be ina position to do so until the matters addressed by the IndentureTrustee are resolved.

We will keep you advised of further information as it becomesavailable.

415. By letter dated November 22, 1999, U.S. Trust notified bondholders

that the Heritage Private Issuers indicated that they would comply with U.S.

Trust’s request to stop inter-company transfers.127 However, the Heritage Entities,

as noted above, continued to commingle funds for at least 10 more months. The

letter from U.S. Trust discussed a letter from the Heritage Entities which was

enclosed with the U.S. Trust letter, to wit:

ATTACHED COMMUNICATION FROM HERITAGE

Heritage has indicated to the Indenture Trustee that Heritage isexperiencing problems with its ability to comply with all the terms of

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


the financing documents due to, among other things, the financialcondition of this Facility and the industry in general. The IndentureTrustee is examining the basis for the various statements of Heritage.The Indenture Trustee has invited Heritage to provide acommunication to you regarding the issues raised in our September7th Letter. In addition, the Indenture Trustee has requested Heritageto describe for you the expectation Heritage has with regard to futuredebt service payments on these Bonds. Enclosed for your review is acopy of the response that Heritage wishes be provided to you (the“Heritage Statement”).

The attached Statement from Heritage represented that there were no “missed note

payments,” and that Heritage took the position that the intercompany transfers

were appropriate, but it would cease future intercompany transfers at the request

of U.S. Trust. Heritage indicated that the failure to send financial reports resulted

from a misunderstanding as to whether Miller & Schroeder was forwarding the

documents to U.S. Trust. This letter was deliberately false as the Heritage Entities

did not intend to cease the intercompany transfers. However, it caused lawyers for

Miller & Schroeder to analyze the bond documents. An attorney hired by Miller

& Schroeder wrote a memo dated December 2, 1999 which summarized the

requirements under the various Loan Agreements and master trust

indenture. This memo noted that Heritage was to submit a certificate of

compliance with the loan agreements within 150 days of the fiscal year end and

prompt written notice of any default. In addition, Heritage was to provide the

trustee and the underwriter with monthly and quarterly financial reports

within 30 days of the end of the month or quarter and was to file an annual

disclosure report under Rule 15c2-12 to “each repository.” The master

indenture required a certificate of compliance with debt tests, compliance with the

“MTI” and financial statements within 150 days of fiscal year end.

416. By letter dated June 29, 2000, U.S. Trust advised the bondholders of

default of each Entity and of a settlement agreement whereby certain Heritage

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

128 The Sarasota Facility had ceased operations in February 2000 and inMarch 2000 U.S. Trust declared a Default and Acceleration relating to thatFacility and sent out notice to those bondholders.


Directors and Officers promised to cooperate with U.S. Trust.128 The bondholders

were advised that U.S. Trust “retained counsel and PricewaterhouseCoopers to

advise us regarding the Bonds.” U.S. Trust also advised that it commenced legal

proceedings seeking the appointment of a receiver and judicial foreclosure of

most, if not all, of the Facilities. The letter concluded:

In our capacity as Trustee, we will continue to monitor developmentsin this matter and inform you as we deem appropriate.

417. This statement was false and misleading as U.S. Trust intended to and

did act in its own self interest, utilizing its position of superior access to

information and bond funds to the bondholders’ detriment. As mentioned above,

many bondholders routinely did not receive correspondence from U.S. Trust until

a time well after it was dated. In fact, one of the Plaintiffs in the putative Class

Action, Barrett Anderson, received two (2) envelopes, which had a September 12,

2001 postmark for a letter dated June 29, 2001!

418. The June 29, 2000 letter from U.S. Trust Company was followed by a

July 13, 2000 letter from Clarey of Miller & Schroder stating:

As the Notice indicates, the Trustee has been working directly withHeritage Healthcare of America, Inc. (“Heritage”) on behalf of thebondholders to try to obtain the best possible outcome for thebondholders in this situation. The Trustee has indicated that it willcontinue to inform bondholders of developments as it deemsappropriate, and that it intends to call a meeting of bondholders. Wedo not know when such a meeting will take place, but we expect thatthe Trustee will communicate further on that subject.

419. Plaintiffs reasonably relied upon the representations in the above two

letters that U.S. Trust would continue to inform bondholders of significant

developments and protect their interests. However, this was false and misleading

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


as U.S. Trust and many of the other Defendants purposefully concealed

information from the bondholders in an attempt to limit their exposure for this

debacle by delaying and possibly avoiding litigation.

420. The settlement agreement referenced in, but not attached to the June

29, 2000 letter from U.S. Trust contained several significant provisions which

were fraudulently concealed from bondholders, including:

a. The parties to the June 8, 2000 settlement agreement included

the Heritage Entities, Goldstein, Underwood, Ostlund, Lim and U.S. Trust

Company of Texas. The settlement agreement provided that it would become

effective upon obtaining an “Approval Order,” a judicial order that U.S. Trust

Company of Texas “may properly enter into and consummate this Settlement

Agreement as Indenture Trustee and on behalf of the holders of the Bonds.”

(emphasis added). This settlement agreement was Defendants’ plan to limit their

exposure and responsibility for the fraudulent Heritage bond offerings, by limiting

information to bondholders while settling their claims.

b. The settlement agreement contained a provision which

purported to compromise bondholder claims against the individuals signing the

agreement. Article V. COVENANT NOT TO SUE, stated:

Section 5.01. Covenant Not to Sue Individuals. For each respectiveBond Issue, subject to (a) approval by a Court of CompetentJurisdiction and approval by the required holders of the Bonds underthe relevant documents, and (b) so long as the conditions set forth inSection 5.02 below have been met and continue to be met, U.S. Trustas Trustee agrees in good faith to obtain as an aspect of the ApprovalOrder, following notice to the holders of the Bonds, an order of aCourt of Competent Jurisdiction approving, after notice and anopportunity to be heard, a covenant not to institute any action or suitat law or in equity nor institute, prosecute or aid in the prosecutionagainst the Individuals (each a “Covenantee”) in connection with anyclaim or cause of action arising out of or with respect to (a) theBonds, (b) the Indentures, (c) violations of any federal or statesecurities law or other claim arising out of or relating to theissuance, offering for sale, purchase or holding of the Bonds, (d)any claim for breach of fiduciary duty relating to the Projects, the

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Indentures or the Bonds, or (e) any claim arising out of or relatingto employment by or service as an Officer or Director of any of theHeritage Entities (“Covenant Not to Sue”). Upon the entry of such anApproval Order with respect to at least seven of the Bond Issues, suchCovenant Not to Sue shall be binding on U.S. Trust as Trustee andU.S. Trust Company of Texas, N.A. individually, and, if the ApprovalOrder so provides, the holders of the Bonds, for those Bond Issues ineach case subject to the respective Covenantee’s compliance withSection 5.02. (emphasis added).

c. The conditions that were set forth in Section 5.02 included

continuing cooperation, and payment to the Individual Covenantees of $50 per

hour, per person “except Goldstein, whose reasonably hourly rate shall be subject

to mutual agreement between U.S. Trust as Trustee and Goldstein. . . ”. These

payments were to come from and did come from the bond funds held by U.S.

Trust.

d. The June 8, 2000 Settlement Agreement included a covenant

that the settling parties would not institute or aid any prosecution of an action

against U.S. Trust.

Section 5.03. Covenant Not to Sue in Favor of U.S. Trust asTrustee. Expressly conditioned upon obtaining the Approval Orderby the Approval Order Deadline for seven of the Bond Issues, fromand after the date of this Settlement Agreement, the Heritage Entities,Heritage and the Covenantees agree not to institute any action or suitat law or in equity nor institute, prosecute or aid in the prosecutionagainst U.S. Trust as Trustee, U.S. Trust Company of Texas, N.A.individually and its Officers, employers, Directors or agents or theholders of the Bonds in connection with any claim or cause of actionarising out of the Bonds, the Indentures or the Projects provided if theApproval Order is not obtained for a Project by the Approval OrderDeadline or the required number of Approval Orders are not obtainedand the Covenant Not to Sue of the Covenantee is not effective, thenthis Covenant shall not be effective. (emphasis added).

June 8, 2000 Settlement Agreement at p. 31. Thus, the consideration for the

agreement by U.S. Trust not to sue the named individuals included an agreement

from those same individuals not to assist in an action against U.S. Trust.

e. The June 8, 2000 Settlement Agreement further provided for

the express tolling of the statute of limitations as to the individuals who signed

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


the settlement agreement, but not as to U.S. Trust.

The Covenantees agree that from the date of the execution of thisSettlement Agreement until U.S. Trust as Trustee takes the positionthat the Covenants Not to Sue will not become effective pursuant tothe provisions of Article V or are no longer effective, the statute oflimitations for any causes of action which exist against theCovenantees in favor of U.S. Trust as Trustee for the Bondholders aretolled from May 1, 2000 to thirty days after the date U.S. Trust asTrustee takes such position in writing due to the terms of provisionsof Article V. or the termination or violation of this SettlementAgreement as to any or all of the Projects.

June 8, 2000 Settlement Agreement at pages 32-33.

421. The Defendants concealed these provisions of the settlement

agreement to limit their own exposure to litigation which would naturally arise if

bondholders learned the true state of affairs, including the information which had

been provided to the Defendants by LAWCO nearly one year before this

settlement agreement.

422. The tacit agreement between the fiduciaries of the bondholders (U.S.

Trust and Miller & Schroeder) to act in a manner designed to limit the likelihood

that bondholders would obtain information on which they might institute litigation

is reflected by an October 16, 2000 letter from Bill Barber of U.S. Trust to Clarey

of Miller & Schroder. Mr. Barber’s letter contained undisclosed information

concerning the competence and integrity of the Heritage Officers and Directors

and the misrepresentations in the Official Statements:

Court appointed Receivers were obtained for the operating Projects,but only after U.S. Trust as Trustee encountered intense resistancefrom various creditors who claimed an interest in the relevant Projector its properties, which purported interest was at odds with therepresentations made in the offering documents for the respectiveBond Issues. The competence and skill of the Obligor’s personnel,even on a transition basis prior to the appointment of a Receiver, wasquestionable and was characterized by an inability to properly processpayment requests for government financing through state regulatoryagencies.

None of this should be new or surprising to you because you were

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


informed of these matters, and you were aware of these difficulties. Infact, you and your consultants probably knew of many of thedifficulties which U.S. Trust as Trustee would encounter from youranalysis of the situation back in the Spring and Summer of 1999.Unfortunately, the Trustee was left to discover many of theseproblems through its own efforts. You should be aware that some ofthe difficulties in the foreclosure proceedings are because contractsanticipated in the Bond documents are not in reality the contractsthat are in place. Only through the foreclosure actions have thoseissues been raised, all of which has contributed to delay as thesevarious, complicated legal issues must be resolved. (emphasis added).

One may raise the question of why, at this time, a party who clearlyknows what has transpired and has had a significant role in theissuance of the Bonds for these very troubled Projects would bewriting the letter that you wrote. Holders to whom we have spokenand who have attempted to work with U.S. Trust as Trustee to realizea value for these Projects have not raised the Questions and issuesthat you have raised. (emphasis added).

Those who are responsible will and should be held accountable forthose actions. There may be legitimate explanations for the failure ofthe Projects. Then again, there may be reasons which might lead tocauses of action. The Trustee has begun the process of identifyingadditional areas in which the Trustee, on behalf of theBondholders, can obtain a recovery other than from the Projectsthemselves.

. . . .

Instead, certain parties who were involved with the Obligors inconnection with the issuance of the Bonds or the operation of theProjects may very well be held to answer as to why such transactionsoccurred. The Trustee does not presently believe that the onlyrecovery that the Bondholders will have is from the Projects. TheTrustee is of the current view that certain of these other persons andEntities connected with the Obligors and the issuance of the Bondsmay be an additional source of recovery.

It is extremely surprising that we would receive such a letter fromMiller & Schroeder, since it was Miller & Schroeder who put thesetransactions together with the Obligors. (emphasis added).

423. U.S. Trust continued to fraudulently conceal the findings of the

LAWCO report as well as its own findings of misrepresentations in the Official

Statements, which it claimed to have discovered for the first time during the

foreclosure process.

424. By letter dated November 15, 2000, U.S. Trust provided a further

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


update to bondholders (again similar letters were sent in connection with all of the

bonds).

The Trustee continues to investigate potential causes of actionagainst solvent third parties involved in the issuance of the Notesand the operation of the Facility that would have the potential toenhance recoveries to the holders of the Bonds. As we indicated inour letter to you of September, 1999, it appears that Heritage wasinvolved in some questioned transfers with its affiliates. Because itappears that the value of the Facilities owned by Heritage and itsaffiliates will not be sufficient to discharge the indebtedness securedby the relevant Facility, any claim by or against Heritage or itsaffiliates on account of these questioned transfers will be anunsecured claim against Heritage or the appropriate affiliate(s). Further it does not appear that there will be monies available to payunsecured creditors of Heritage or its affiliates. Therefore it does notappear that prosecuting the questioned transfers as amongHeritage and its affiliates should be a first priority since suchwould be unlikely to result in a recovery to the relevantbondholders.

The Trustee’s priorities continue to be to First: Secure andappropriately maintain the Facility, Second: Sell the Facility andThird: Prosecute any actions against third parties that appeareconomically and legally viable. (emphasis added)

425. In an attempt to limit its own liability, U.S. Trust counseled against

litigation and concealed the terms of its June 8, 2000 settlement agreement, which

attempted to compromise the claims of all bondholders. Furthermore, U.S. Trust

expressly assumed fiduciary duties in the promises made in the letters to

bondholders noting that it would file actions against responsible solvent parties.

However, U.S. Trust breached this duty by failing to institute any litigation until

February 16, 2001, despite the fact that U.S. Trust had information prior to that

date which justified filing suit against Miller & Schroeder, Kasirer, and his

management companies, Goldstein, Bertolini, other Heritage Executives,

numerous attorneys, SCS, the appraisers, and possibly even the Municipal Issuers.

Moreover, U.S. Trust further breached its fiduciary duties when it finally instituted

litigation by only filing suit against certain Heritage Directors and Officers rather

than the entire group of potentially liable parties. Indeed, it did so on the last day

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


that the insurance policy that provided coverage for them was in effect!

426. The Bond Trustee’s letter dated November 15, 2000, was not

forwarded to Heritage Bondholders by Clarey of Miller & Schroder until, at

the earliest, November 29, 2000. The letter stated:

The Notice contains important information about the status of thebonds, and we urge you to review it carefully.

We are not aware of any further information the Trustee may be in aposition to communicate at this time, but if you have any questions ofthe Trustee, you may contact Mr. William Barber at U.S. TrustCompany of Texas, whose telephone number is. . . If you havequestions or need further information from us, please call yourrepresentative or me at . . .

427. Contrary to the position in his letter, Clarey was in receipt of “further

information the Trustee may be in a position to communicate” including the terms

of the settlement agreement of June 8, 2000 and the Covenant Not to Sue. Clarey’s

attention was previously called to this provision in a letter dated August 24, 2000.

Re: Heritage Bonds

Dear John:

I am enclosing a copy of the Heritage Settlement Agreement,without exhibits, which I just received from Ann Acker. I haven’ttaken the time to review it yet, but from a quick glance it looks likeSection 5, the Covenant Not To Sue, may bear some careful review.

428. All Defendants realized that the primary goal of the settlement

agreement was to prevent bondholder litigation. Thus, Defendants worked

together to fraudulently conceal the factual basis for bondholder claims and

limited the information available to bondholders while attempting to create the

impression and belief that all legal actions, which were in the bondholders best

interest, were being vigorously pursued by U.S. Trust.

429. In early 2001, Plaintiff David Sinow contacted Bill Barber of U.S.

Trust and requested information regarding the present status of each of the

Heritage Facilities including information on the balance of each of the bond fund

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

129 The bond funds eventually failed in part due to their investment inHeritage bonds and were taken over by an S.E.C. appointed receiver, who thenfiled suit against U.S. Trust in Chicago, which case was recently transferred to thisCourt.


accounts remaining under the “protection” of the Trustee. Mr. Barber indicated

that the information would be forthcoming within a few days. Mr. Sinow never

received a reply from Mr. Barber, despite continued attempts to obtain the

requested information.

430. In March of 2001, Heartland Advisors, which was the manager of

three bond mutual funds, attempted to obtain information from U.S. Trust.129 In an

April 9, 2001 letter, U.S. Trust stated that there were strategic reasons for not

disclosing certain information. U.S. Trust alleged that disclosure of the

information would adversely affect bondholder interests because:

In order to enhance the recovery to Bondholders, the Trustee hasinstituted an action against, among others, the Officers and Directorsof Heritage (the “Officer and Director Litigation”). . . . The Trusteecurrently is examining other causes of action it may have on behalf ofthe Bondholders against other parties who may be responsible for thelosses suffered by the Bondholders.

The information currently being sought by Heartland had a strongpossibility of complicating and interfering with the Trustee’sresolution of the mechanics lien matters and other matters couldpossibly result in reduction in the ultimate recovery to allBondholders. The Trustee is not required under the terms of theIndenture to provide this type information to Heartland, SWIB, Miller& Schroeder and the “Committee.” The time and expense thatwould be required to compile this information could adverselyeffect the ability of the Trustee to focus on the Director andOfficer litigation and other litigation it is contemplating againstthe parties who were responsible for this Bond Issue. Moreover,the release of information might prejudice the actions being takenby the Trustee and adversely impact the recovery to theBondholders. The Trustee is concerned that Heartland andcertain members of its Committee may be reluctant to see theTrustee proceed to prosecute those claims for the benefit of theBondholders. Moreover, even if proper indemnity is offered to theTrustee, if the proposed action appears to be adverse all Bondholders,

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


the Trustee may not follow any instructions given.

In our letter to you dated November 15, 2000, we indicated that thepriorities of the Trustee were to (1) secure and appropriately maintainthe Facility, (2) sell the Facility and (3) prosecute any actionsagainst third parties that appeared economically and legallyviable. The Trustee has accomplished the first objective. The Trusteeis in the process of negotiating the receipt of an offer which mayresult in the satisfaction of the second objective. The Trustee hasinstituted one piece of litigation against certain third parties andis at work on other law suits for the benefit of the Bondholders.The Trustee contends that this plan of action is the responsiblemethod of dealing with this default situation. After the mechanics lienclaims have been resolved and the Facility has been sold, the Trusteewill consider an interim distribution to Bondholders that providesan adequate reserve to the Trustee to vigorously prosecuteactions against third parties. Moreover, at the appropriate time,the Trustee will report to the Bondholders regarding the factsand circumstances surrounding the issuance of the Bonds and theconstruction of the Facility that the Trustee has been able todetermine. However, this will be accomplished in a manner thatwill not complicate litigation against third parties. The Trusteebelieves that it is in the best interest of the Bondholders to continuethe focus on the objectives we have outlined and that the directionsreceived from Heartland are contrary to such interests.

In our capacity as Trustee, we will continue to monitor developmentsin this matter and inform you as the proceedings develop. (emphasis added).

431. The April 9, 2001 letter provided proof that U.S. Trust was using

funds held on behalf of all bondholders to pay their professional advisors

(including accountants and lawyers) and for litigation reserves. Further proof was

found in the letter sent to all bondholders of the same date, which specifically

stated that after the mechanics liens were resolved and the Facilities were sold,

U.S. Trust would consider an interim distribution that provided an adequate

reserve to the Trustee to “vigorously prosecute actions against third parties.”

432. Because U.S. Trust assumed responsibility to prosecute any and all

claims arising out of the Heritage offerings, they assumed fiduciary obligations to

all bondholders. However, the real purpose of filing suit against a few Officers

and Directors of the Heritage Entities, and not against Kasirer, his management

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


companies or others, was not to recover money for the bondholders, but to lull

bondholders into inaction, fraudulently conceal the factual basis for the assertion

of claims against itself and the other Defendants herein, and to have taken some

action (despite the fact it was essentially meaningless) that U.S. Trust could point

to as proof it fulfilled its fiduciary obligations. In essence, it was a blatant

protective measure.

433. In October 2001, an article appeared in Forbes magazine which

discussed the Heritage debacle. It reported that the Betker action was filed and

that other investors were pursuing arbitration claims against Miller & Schroeder.

The article noted that U.S. Trust believed it bore zero responsibility. Bill Barber,

of U.S. Trust, was quoted in the article as saying, “I am not required or

supposed to investigate.” (emphasis added). The article criticized U.S. Trust for

failing to perform its duties as Trustee. For example, Chicago’s operating reserve

fund was depleted before the Facility opened. The article also noted that

Medicare attorneys accused Rancho Hospital of “overstating” reimbursable

Medicare costs by at least $8.7 million over three years.

434. Bondholders were notified on or about November 5, 2001, that The

Bank of New York, Inc. (“BNY”), succeeded U.S. Trust as bond Trustee.

Heritage bondholders received updates from BNY with respect to certain

foreclosure proceedings. In a letter dated January 2, 2002, BNY informed

Brownsville bondholders that their collateral was gone because the “holder of the

mechanic’s lien was the successful bidder at the foreclosure auction” and the

amount left in the bond fund could not be distributed because the reserves were

held for BNY’s legal expenses and the claim of US Trust for reimbursement of

expenses it was incurring in the various lawsuits against it exceeded the amount

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28130The mechanics lien was superior to bondholders and the title insurance is apparently

not paying a penny.FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 262

left in the bond fund. 130

435. In April 2003, the Seminole facility was sold for $1.050 million.

$589,534 was distributed (the rest was held in reserve for the payment of expenses

for the various matters in litigation). Thus, the owners of the Seminole bonds

received a distribution of $0.07 cents on the dollar from the sale of that Facility.

Sarasota bondholders received roughly $.20 on the dollar for their investment after

the facility was sold.

436. In April 2003 the Rancho Hospital was sold for $8 million, resulting

in a distribution of $5.195 million, or approximately $0.20-$0.24 on the dollar.

About $2.4 million was held in the reserves for future fees of BNY, and the claim

of U.S. Trust for reimbursement. The remaining properties continued to be

marketed for sale, it is proving to be very difficult. Numerous buyers declined to

purchase the Chicago Facility (first for $5.5 million, then for $4.5 million, then

$3.3). Another buyer refused to buy all the remaining Texas Facilities for $12

million.

FIRST CAUSE OF ACTIONVIOLATION OF RULE 10b5 AND SECTION 10 (b)OF THE SECURITIES EXCHANGE ACT OF 1934

[Against Goldstein and Kasirer for the final three offerings; Bertolini for theE. Houston and Seminole offerings]

437. Plaintiffs incorporate by reference the allegations above, as if fully set

forth herein.

438. Defendants violated Section 10(b) of the Securities Exchange Act of

1934 and rule 10-b-5 by:

a. employing devices, schemes, and artifices to defraud;

b. making untrue statement of a material fact and omitting to state

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


material fact necessary in order to make the statements made, in the light of the

circumstances under which they were made, not misleading; and

c. engaging in acts, practices, and courses of business which

operated as a fraud or deceit upon the Class in connection with their purchases of

Heritage bonds.

439. As alleged above, Heritage Entities offered and sold bonds based

upon Official Statements that these Defendants knew to be false and misleading,

primarily due to the plethora of material information that was omitted. Despite

numerous opportunities to correct these Official Statements, these Defendants

perpetuated falsehoods in one offering after another, in a deliberate and systematic

attempt to deprive investors of material facts concerning the risk of the

investment. The undisclosed adverse information concealed by Defendants is the

type of information that is expected and required under SEC regulations to be

disclosed. Class members have suffered damages in that they would not have

purchased the Heritage bonds at all because the bonds would have been

unmarketable, or would have been purchased at very different prices, if the Class

members had been aware of the misleading statements and omitted material

information.

SECOND CAUSE OF ACTION"CONTROL PERSON" LIABILITY UNDER SECTION 20

OF THE SECURITIES EXCHANGE ACT[Against Kasirer, Goldstein and the Miller& Schroeder Principals for the

final three offerings]

440. Plaintiffs incorporate by reference the allegations in the preceding

paragraphs, as if fully set forth herein.

441. According to section 20(a) of the Securities Exchange Act of 1934:

"Every person who, directly or indirectly, controls any person liableunder any provision of this Act or of any rule or regulation thereundershall also be liable jointly and severally with and to the same extentas such controlled person to any person to whom such controlled

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


person is liable, unless the controlling person acted in good faith anddid not directly or indirectly induce the act or acts constituting theviolation or cause of action."

442. As alleged above, Kasirer (see, among others, ¶¶ 137-38, 150-51,

168, 170, 190-91, 195-199, 381), and the identified Heritage Officers (see ¶¶152,

214, 235-37, 256, 395) were Principals of the Heritage organization and shaped

the direction of Heritage’s management and policies. Kasirer had extensive

dealings with Miller & Schroeder to determine a strategy for the structure and

marketing of the Heritage bonds. Through his management companies, HCH,

CareContinuum, and Iatros, and by virtue of his control over Heritage’s

investment opportunities, Kasirer exercised further control over the Heritage

Entities, including financial and operational management. Goldstein and Lim

exercised control over the Heritage Entities through their positions as Principal

executive Officers and Directors of HHD and the Heritage Entities.

443. In addition, Kasirer and Goldstein actively promoted the Heritage

bonds in conjunction with Miller & Schroeder. They, and representatives of the

Municipal Issuers, reviewed and approved the Official Statements, along with the

agreements and other matters affecting the Heritage Entities. Goldstein signed the

Official Statements. Their high-level actions subject them to "control person"

liability under Section 20 for the primary violations of the Heritage Entities.

444. Although, no claim for violation of Rule 10(b) is asserted against

Miller & Schroeder due to its bankruptcy, Plaintiffs contend that Miller &

Schroeder violated Rule 10(b).

445. Miller & Schroeder Principals influenced Miller & Schroeder's

underwriting of the Heritage bonds, as follows:

a. James E. Iverson was an Executive Vice President of Miller &

Schroeder and the branch manager of Miller & Schroeder's Solana Beach office.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Iverson supervised, and was knowledgeable about and responsible for, the

financing, structuring, and marketing of the Heritage bonds. Correspondence to

him also show that Iverson ratified the concealment of problems related to the

Heritage offerings, including problems brought to his attention through dealings

with Kasirer and through his supervision of Dhooge.

b. Victor P. Dhooge was the lead investment banker for Miller &

Schroeder in connection with the Heritage bonds. He was principally responsible

for conducting due diligence documentation, preparing the Official Statements and

presenting the underwriting" deal to Miller & Schroeder's Credit Committee.

Miller & Schroeder documents show Dhooge to have had extensive

communications with Heritage Principals, particularly Kasirer, on promotion and

marketing of the Heritage bonds.

c. John M. Clarey was, at all relevant times, an Executive Vice

President and the Chief Operating Officer of Miller & Schroeder. He also served

as Chairman of Miller & Schroeder's Credit Committee. Through the Credit

Committee, Clarey had "gatekeeper" responsibility for reviewing Iverson and

Dhooge's due diligence, documentation, the Official Statements, and approving

the offer and sale of the Heritage bonds.

d. James F. Dlugosch was the Chief Executive Officer of Miller &

Schroeder and a member of its Credit Committee, which reviewed and approved

the due diligence documents, the Official Statements, and the offer and sale of

Heritage bonds.

e. Edward J. Hentges was an Executive Vice President and the

Chief Compliance Officer of Miller & Schroeder. He was responsible for

ensuring Miller & Schroeder's compliance with securities laws, including its

compliance in connection with the Heritage offerings.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


f. Kenneth R. Larsen was the Chief Financial Officer of Miller &

Schroeder with knowledge and ability to influence corporate affairs in connection

with the financing, structuring, and marketing of the Heritage bonds.

g. Jerome E. Tabolich was an Officer of Miller & Schroeder and a

member of the Credit Committee with responsibility for reviewing the due

diligence documentation, the Official Statements, and approving the offer and sale

of the Heritage bonds.

h. Steven W. Erickson was an employee of Miller & Schroeder

and a member of its Credit Committee with the responsibility for reviewing the

due diligence documentation, the Official Statements, and approving the offer and

sale of the Heritage bonds.

i. Paul R. Ekholm was a Senior Vice President of Miller &

Schroeder and a member of its Credit Committee with responsibility for reviewing

the due diligence documentation, the Official Statements, and approving the offer

and sale of the Heritage bonds.

j. Kenneth E. Dawkins was a Director and control person of

Miller & Schroeder with knowledge and ability to influence corporate affairs in

connection with the financing, structuring, and marketing of the Heritage bonds.

446. As alleged above, the Miller Schroeder Principals exercised "control"

over Miller & Schroeder's management policy. The conduct and influence of the

Miller & Schroeder Principals was a primary factor in the decision to underwrite

the Heritage offerings. As such, the Principals listed above bear "control-person"

liability for their company’s primary violations of Section 10(b) and Rule 10b-5 in

the preceding paragraphs, as if fully set forth herein.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28131 This claim is asserted against Goldstein for actions taken in his role as

an Officer and executive of the Heritage Entities.FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 267

THIRD CAUSE OF ACTIONCONTROL PERSON LIABILITY UNDER CALIFORNIA

CORPORATIONS CODE SECTION 25504[Against Kasirer, Goldstein131,

Emery Rubin, Bertolini and Miller& Schroeder Principals] 447. Plaintiffs incorporate by reference the allegations in the preceding


448. According to California Corporations Code Section 25504:

Every person who directly or indirectly controls a person liable underSection 25501 or 25503, every partner in a firm so liable, everyprincipal executive Officer or Director of a corporation so liable,every person occupying a similar status or performing similarfunctions, every employee of a person so liable who materially aids inthe act or transaction constituting the violation, and every broker-dealer or agent who materially aids in the act or transactionconstituting the violation, are also liable jointly and severally withand to the same extent as such person, unless the other person who isso liable had no knowledge of or reasonable grounds to believe in theexistence of the facts by reason of which the liability is alleged toexist.

449. No claim is plead in this complaint for violation of § 25501 by the

Heritage Entities because they are suspended corporations . However, Plaintiffs

contend that the Heritage Entities violated § 25501. As alleged above, the

identified Defendants exercised ''Control" over the Heritage Entities. They shaped

the direction of management and policies. Kasirer through his daily oversight

responsibilities, Goldstein, Bertolini, and E. Rubin through supervision of high-

ranking personnel, and Goodman (see ¶¶ 298, 341) and Lim as the principal

accounting personnel. These Defendants reviewed and approved the Official

Statements, along with the agreements and other matters affecting the Heritage

Entities. In addition, Goldstein and Bertolini signed the Official Statements, acted

as Principal executive Officers and Directors of the Heritage Entities, actively

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28132 Goldstein is being sued for actions taken as a Heritage executive and as

counsel to the Heritage Entities. FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 268

promoted the Heritage bonds, and participated in the strategy and structuring of

the offerings. As such, these Defendants bear "control" person liability under

section 25504 for the violations of Section 25501 by the Heritage Entities.

450. No claim is plead in this complaint for violation of § 25501 as the

claim is barred against Miller & Schroeder, due to its bankruptcy. However,

Plaintiffs contend that Miller & Schroeder violated § 25501. The Miller &

Schroeder Principals bear liability under Section 25504 for Miller & Schroeder's

violation of Section 25501. These Principals exercised "control" over Miller &

Schroeder's management and policy, and served as, or performed functions similar

to, principal executive Officers or Directors of Miller & Schroeder, as alleged

above. Given their positions of influence, the Miller & Schroeder Principals bear

"control" person liability under Section 25504 for Miller & Schroeder's violations

of Section 25501.

FOURTH CAUSE OF ACTIONJOINT AND SEVERAL LIABILITY UNDER

CALIFORNIA CORPORATIONS CODE SECTION 25504.1 [Against Kasirer, Dierckman, Goldstein132, Bertolini, Iverson, Dhooge,

and The Attorney Defendants]



452. According to California Corporations Code section 25504.1:

"Any person who materially assists in any violation ofSection . . . 25401, . . . with the intent to deceive ordefraud, is jointly and severally liable with any otherperson liable under this chapter for such violation."

453. Kasirer (see, among others, ¶¶ 5-8, 70, 128, 130, 150, 170-73, 231),

Goldstein (¶¶137, 168, 196, 223, 231, 381, 395), and Bertolini (¶¶ 57, 137, 152,

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


171, 231), materially assisted in the solicitation of the Heritage bonds. They

communicated with Iverson, Dhooge, and other Miller & Schroeder Principals.

They reviewed and approved marketing materials and gave presentations at "road

shows" in support of the offerings. In addition, they materially contributed to the

preparation of the Official Statements that contained important information they

knew to be false and misleading, as alleged above, in an attempt to both deceive

and defraud investors.

454. Iverson and Dhooge materially assisted in the offer and sale of the

Heritage bonds with similar intent to deceive or defraud. For example, they knew

that the liabilities of the Heritage Entities was greater than stated in the Official

Statements because these figures did not include Miller & Schroeder's undisclosed

$500,000 loan to the Heritage organization which they themselves had approved.

They further knew (based upon communications with Kasirer, Management

Company Executives, and Heritage Principals), that the Heritage organization had

been diverting funds among projects, contrary to the representations each Official

Statement. They knew that, contrary to intimations in the Official Statement that

each Facility would be self-sustaining, the viability of the Heritage organization

depended on continued bond offerings. Thus, based upon their due diligence and

direct knowledge, Iverson and Dhooge knew the proposed Official Statements

were materially false and misleading nonetheless authorized them to be finalized

and published without correction.

455. The Attorney Defendants are liable for materially assisting in the

violations of Section 25401 (See among others, ¶¶ 94-97, 145, 152, 170-71, 292).

Each Attorney Defendant was aware that the information set out in the “Sources

and Uses of Funds” section of the Official Statement was materially misleading,

because no Official Statement disclosed Heritage’s prior diversion of bond

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


proceeds or its clear intention to continue diverting bond proceeds in the future.

456. Boehm was also the named recipient of bond counsel's admonishment

that project funds were not to be commingled. Boehm also received a copy of

Goldstein’s September 1998 letter that "surplus funds" were being, and would

continue to be commingled among the various Heritage Entities. Boehm also

knew of Kasirer’s litigation background and the allegations of fraud and improper

conduct against him. Therefore, the representations that Kasirer and his

management company were capable of responsibly operating the Facilities was

false and misleading. (See ¶¶ 147, 170, 214, 226, 284-85).

457. Moreover, through their ongoing communications with Miller &

Schroeder executives, Kasirer, and Heritage executives, the Attorney Defendants

drafted the Official Statements knowing the disclosure misrepresented and

concealed numerous material facts, including but not limited to:

a. the risk each Facility’s fiscal integrity posed by the

intercompany transfers;

b. the extraordinary unlikelihood of project construction being

completed within the time frame and budget promised;

c. the undisclosed profit Kasirer was reaping from each property

sale, coupled with the fact of his having the ability to control each Heritage Entity;

d. the fact that Kasirer, with his enormous profit motive, was also

deeply involved in supplying basic information regarding property valuations,

marketing, and feasability data;

e. the fact that the Heritage Entities borrowed “seed money” from

the Underwriters;

f. the fact that the Heritage Entities engaged in related party

transactions on a continual basis;

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


g. the fact properties were encumbered by deed restrictions; and

h. the fact of managements’ continuous historic inability to

produce viable ongoing Facilities. See ¶¶ 267, 298.

458. In addition, Boehm was aware of Platt’s charges regarding the

misappropriation of funds, having monitored the Platt lawsuit. Therefore, he was

aware that the Official Statements falsely stated that there was no material

litigation pending against the Heritage Entities. See ¶ 163.

459. Although the Attorney Defendants had knowledge of the numerous

misrepresentations in the Official Statements they made no efforts to ensure that

the information was corrected prior to dissemination to the investors. The

Attorney defendants consciously determined that it was in their best interests to

allow the false and misleading Official Statements to be disseminated. In fact,

they were the ones who devised the plan for use of the “Master Indenture” as a

means for various Defendants to attempt to escape liability for the improper

transfers among the Facilities. The Attorney Defendants did this in order to

continue to receive the lucrative fees associated with the bond offerings.

Therefore, the intent of the Attorney Defendants to deceive the investors was

motivated by their desire to line their own pockets. See ¶¶ 152, 238, 249, 375.

////

////

////

////

////

////

////

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28133 Goldstein is being sued for actions taken as executive, officer, director

and counsel to the Heritage Entities.FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 272

FIFTH CAUSE OF ACTIONNEGLIGENCE

[Against Kasirer, the Management Defendants, the Heritage Officer & Director Defendants133, Miller Schroeder Principals,

Attorney Defendants, Berman and Bertolini and Appraisal/FeasibilityDefendants]

460. Plaintiffs reallege and incorporate by reference all previous

allegations.

461. Defendants knew that prospective investors would rely upon the

Official Statements. Thus, these Defendants owed a duty to Plaintiffs and the

Class to exercise due care, in accordance with the standards utilized by reasonable

prudent professionals, with respect to the investigations for and the drafting of the

Official Statements, including but not limited to, the appraisals and the market

feasibility studies. See ¶¶ 158-61, 162, 168, 244, 247.

462. As the underwriter and the underwriter’s counsel, respectively, the

Principals of Miller & Schroeder and the Attorney Defendants had a duty to

investigate to ensure that all material information concerning the Heritage Entities

and the management companies were clearly and concisely disclosed in the

Official Statements. In addition, each Defendant had a duty to ensure the accuracy

of the appraisal and feasability report. See ¶ 258, 261.

463. The Attorney Defendants knew that the Heritage Entities were

commingling bond funds and intended to do so with the funds raised in the

Chicago offering. As discussed in ¶255, changes were made to the Deed of Trust

by Foley to allow loans of “surplus funds.” They further recognized the risk that

this practice posed for the investors. Boehm instructed other counsel to insert a

“Risk Factor” in the Official Statement that addressed this possibility, yet no “Risk

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Factor” ever appeared in the final version of the Official Statement.

464. The Appraisal/Feasibility Defendants had a duty to investigate the

Heritage Facility proposals, to compile data necessary to forecast the financial

success of the Heritage Facilities, to take reasonable steps to ensure that the

feasability studies and appraisals were based on reliable sources, to analyze data in

a reasonable and professional manner. For the feasability studies, Valuation

Counselors (for Austin, Fort Worth No. 2, Rancho No. 2, East Houston, Seminole

and Brownsville), Zelenkofske (for Rancho No. 1, Texas City, Houston and Fort

Worth No. 1), Mark Roth and Capital Consulting Inc., (for Sarasota) and HFS

Consultants (Sarasota, Austin, Chicago, Rancho #2, Seminole, Brownsville, Fort

Worth #2, and East Houston) (the Appraisal/Feasibility Defendants) had a duty to

investigate each of the proposed programs Heritage proposed to run at the

facilities, to compile the data necessary to forecast the financial success of the

Heritage Facilities and to analyze the data in a reasonable and professional

manner. Valuation Counselors and Capital Consulting had a duty to appraise the

properties in a reasonable and professional manner. These Defendants failed to

conduct independent investigations or compile an independent report. Instead they

relied upon data and information provided to them generated under Kasirer’s

direction. Defendant CBIZ assumed the existing liabilities of its wholly-owned

subsidiaries Valuation Counselors and Zelenkofske upon acquisition, and

thereafter these subsidiaries became the alter ego of CBIZ for all practical

purposes, as these subsidiaries’ client files were commingled with those of CBIZ,

the subsidiaries operated under the direction of CBIZ officers, and the subsidiaries

guaranteed obligations of CBIZ without receiving any consideration in return;

thus, there exists a unity of interest and ownership between CBIZ and both VC

and Zelenkofske. This unity is such that any individuality and separateness

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


between the parent and its subsidiaries has ceased, and each subsidiary is the alter

ego of CBIZ.

465. Berman & Bertolini had a duty to supervise construction and oversee

the process and progress of each project in a manner and at a cost reasonably

related to that set out in the Official Statement. However construction costs

greatly exceeded projections, liens were placed on various properties due to failure

to pay sub-contractors, and damages clauses contained in construction bonds were

not enforced. See ¶¶ 105, 177.

466. Kasirer, the Management Defendants and the Heritage Officer &

Director Defendants had a duty to ensure that all material disclosures were made

in the Official Statements, that the Heritage Entities fulfilled their duties to file

quarterly and/or annual reports with Federal and State agencies and that the

Heritage Facilities were operated in a reasonable manner, consistent with industry

standards. See, e.g., ¶¶ 312, 325, 341 (as to Goodman); ¶¶ 152, 171, 214 (as to

Bertolini); ¶¶ 63, 189 (as to Saltzman); ¶¶ 66, 168, 169, 170 (c) (as to Chalker); ¶¶

65, 197, 201(a), 214-216, 229-231, 313, 331, 332, 339-340, 381 (as to Medill); ¶¶

121, 147, 148, 150, 152, 157-58, 159, 162, 170-173, 183, 210, 298, 356, 406

(generally as to all).

467. Defendants breached their duties owed to Plaintiffs and the Class by

failing to adequately perform all appropriate investigations and analysis required

to determine the legitimacy and feasibility of the proposed plans under each of the

bond offerings and/or failing to include the discoverable and known adverse

information in the respective Official Statements. They also failed to cause

Heritage to file the annual reports, as required by the Official Statements and SEC

rules (pe r John Orr, bond counsel). See ¶¶ 134, 158, 159, 190-91, 200, 381.

468. After Underwood became CFO, despite the fact there had been

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


repeated warnings about the impropriety of commingling bond funds, Underwood

and Lim, the two primary financial executives at Heritage, continued to do so.

They also continued the practice of engaging in transactions with related parties,

which, per notes from Underwood, the accountants raised as “self dealing issues.”

Furthermore, as the date for Rancho filing bankruptcy approached, Underwood,

Lim and Goldstein planned to accumulate as large a cash surplus as possible prior

to filing so that they could seek large fees for themselves from the Bankruptcy

Court. They would do this by, among other things, stop paying U.S. Trust and

DVI and vendors. They also decided to pay off all company credit cards they held,

pay all of the management fees due Kasirer, including a month in advance, prepay

HHD its fees, and tried to transfer all cars leased by HHD into Rancho. Moreover,

just before filing for bankruptcy, Underwood gave himself a bonus and Lim,

Goldstein, and Underwood each increased their salaries in violation of their duties

to all creditors. See ¶¶ 317, 374, 385, 393, 396, 397.

469. The Heritage Officers and Outside Directors present at the January

21, 1998 Heritage Board meeting were made clearly and unequivocally aware by

Bertolini that the operations were in essence, a mess. Bertolini further informed

them that it would get worse if they continued to raise money and start new

projects. Each of them was informed that they had a duty to correct the problem,

not by “borrowing” the proceeds of new offerings, but by taking corrective actions

in the existing businesses. Despite this, rather than holding off on future offerings

until the current problems could be brought under control, the Officers and

Directors present (Bertolini, Kornreich, E. Rubin, L. Rubin, Medill, and

Saltzman), approved future offerings and took no steps to correct the problems.

They also did not act as a reasonably prudent person when they, despite being

informed of excessive management fees, decided not to fire the management

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


companies, nor to negotiate lower fees. The Officers and Directors compounded

this problem by approving the Chicago, Austin, Rancho No. 2 and Ft. Worth No. 2

offerings on April 20, 1998, despite being informed that the first three projects

were going to be even more over budget than estimated in the January 1998

meeting. Present at this meeting were Medill, Bertolini, Saltzman, Goldstein, Lim

and Kasirer. See ¶¶ 13, 58, 214, 229, 339, 356.

470. Many of these Defendants had undisclosed conflicts of interest either

because they were (1) profiting from the scheme (Chalker sold insurance to the

Heritage Entities, Saltzman received lucrative fees from the sale of receivables,

equipment leases and other contracts with the Heritage Entities) or (2) because

they were beholden to Kasirer (Medill loaned Kasirer money, Saltzman borrowed

money from Kasirer, Lim worked for Kasirer in addition to working for Heritage,

Medill and Saltzman were on the Board of Directors of Mishkan Healthcare). See

¶¶ 32, 138, 124.

471. The promotional information packet distributed by Heritage America

in 1999 stated that it “is governed by an independent Board of Directors. The

members of the Board of Directors are responsible for overseeing and managing

the affairs of Heritage.” These Defendants did not fulfill the duties they

specifically represented they had undertaken.

472. Plaintiffs and the Class have suffered damages as a direct and

proximate result of the wrongful conduct, actions and/or omissions of these

Defendants.

SIXTH CAUSE OF ACTIONBREACH OF FIDUCIARY DUTIES

[Against Robert Kasirer,the Miller Schroeder Principals and Berman and Bertolini]


allegations. Each of these Defendants owed a duty to the members of the Plaintiff

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Class to act in good faith and with prudent care.

474. Each of the Defendants breached his duty of good faith and/or

prudent care, by among other things:

a. Failing to act in the best interest of the members of the Plaintiff

Class, based upon their own self-interest in protecting their standing and

reputation in the community, and their interest in being able to fund additional

projects and on information and belief with respect to Kasirer, the Miller

Schroeder Principals and Berman and Bertolini, their own direct or indirect

economic self-interest;

b. By failing to carry out their duty(ies) in good faith, to the injury

of the Heritage Entities and the members of the Plaintiff Class;

c. By failing to be informed or failing to take prudent action with

information reasonably available to them at the risk of injury to members of the

Plaintiff Class;

d. By abdicating responsibilities and duties as people who owed

fiduciary duties to Plaintiff Class. See ¶¶ 12, 32, 58, 133, 138, 147, 151-53, 157,

162, 170-74, 186, 209-10, 243-44, 247, 267, 385.

e. By failing to ensure the disclosure of all material information in

the Official Statements and by failing to file annual reports, as promised in the

Official Statements and as required by SEC rules (per John Orr, bond counsel).

475. Defendants breached their duties by failing to determine at the outset

the true costs of construction and by using wholly unrealistic projections and

assumptions for (a) how long it would take to stabilize operations of the Facilities,

(b) the revenues which could be derived from operations, and (c) the costs and

expenses of renovating and operating a long term care Facility.

476. Defendants also breached their duties by permitting certain Heritage

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Entities to transfer funds for the benefit of other Facilities and individuals with no

reasonable basis for believing the transfers would be repaid. Such transfers also

wholly violated the terms of the Indentures.

477. Defendants further breached their duty by failing to adequately

monitor construction to ensure that the Facilities would be completed on time and

within budget and by failing to adequately monitor the operating Facilities to

ensure that they were properly managed and the requirements of state and federal

law were followed. For example, the Texas City Facility was nearly shut down and

Rancho Hospital was committing Medicare fraud.

478. The Defendants' actions or decisions were well outside the bounds of

normal or reasonable business judgment, and/or were taken or omitted to further

the Defendants' own interest in protecting their standing and reputation in the

community, and/or their ability to fund further projects. These decisions were not

consistent with the purposes of not-for-profit Entities. Moreover, certain

Defendants enjoyed direct or indirect financial gain by reason of Defendants'

actions or decisions. See ¶¶ 121, 127, 158, 159, 162, 170, 199, 288-89, 367, 391.

479. Kasirer, HCH and CareContinuum, the Miller Schroeder Principals

and Berman and Bertolini voluntarily assumed a fiduciary position by agreeing to

act in capacities which required them to look out for the interests of the

bondholders.

a. Kasirer had access to all of the bond funds, directed how those

funds be used, was responsible for managing the facilities (which needed to

generate enough cash flow to cover the operating costs and interest payments on

the bonds) and was involved in determining what disclosures were made (and

what information was withheld) in the Official Statements.

b. HCH undertook fiduciary obligations to the bondholders

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


pursuant to the management agreement because it had responsibility for all debt

service payments, draw requests for construction and disbursements for cost of

operations. HCH and CareContinuum assumed fiduciary obligations to the

bondholders pursuant to the management agreement because they had

responsibility for all debt service payments, draw requests for construction and

disbursements for cost of operations. They failed in their responsibilities to

properly manage the day-to-day operations of the Heritage facilities.

c. The Miller Schroeder Principals had the ability to refuse to do

bond offerings, and to dictate the disclosures in the Official Statements, yet never

informed investors about their loans to Heritage.

d. Berman and Bertolini was hired to supervise construction and

approve renovation estimates, which were unreasonable and in some cases, such

as Chicago, deliberately understated.

480. Plaintiff Class has the right to monetary damages in an amount

determined at trial.

SEVENTH CAUSE OF ACTIONAIDING AND ABETTING

BREACH OF FIDUCIARY DUTIES [Against the Miller Schroeder Principals]


allegations.

482. The Defendants in the prior cause of action have violated the

fiduciary duties of due care, candor, diligence, fair dealing and good faith owed to

the Plaintiff Class, as set forth above.

483. As the Certified Public Accountant for each of the Heritage Entities,

Sobelman and SCS had access to all of the financial information regarding the

Heritage Facilities, including but not limited to the requisition certificates and the

information regarding the transfers to other Heritage Entities and third parties.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


The Management Company Defendants (who were responsible for overseeing

operations) and the Miller Schroder Principals had access to this information as

well, knew of the false and misleading nature of the Official Statements and

moreover, knew that the Facility renovations were not being adequately

supervised, were going over budget and were delayed.

484. Management Company Defendants and Miller & Schroeder

Principals knew of the problems with operations, delayed openings, cost overruns,

commingling of funds, and diversion of proceeds. They knew of the primary

wrong and assisted in order to retain their jobs and continue receiving monies.

485. All of these Defendants knew that a fiduciary relationship existed

between the Plaintiff Class, the Heritage Entities, Miller Schroeder, Kasirer,

Berman and Bertolini and U.S. Trust. These Defendants assisted the breaches of

fiduciary duties by these Defendants. All of these Defendants were aware of the

primary wrong and actively assisted the Defendants. For example, SCS was aware

of the fact the Kasirers and Emery Rubin were billing large amounts for consulting

fees, despite performing no work that justified these fees, and insisted some of the

amounts be reclassified as loans, later reclassifying the loans as due from another

Heritage Entity (usually Heritage V) or just wiping the loans off the books and

having the individual recognize “other income” on their personal tax returns.

Sobelman and SCS issued an unqualified audit opinion for Rancho Hospital for

use in the Rancho No.2 offering. By engaging in these actions, Sobelman and

SCS engaged in far more than routine professional services. Sobelman and SCS

engaged in these actions because by allowing the fraudulent Heritage organization

to continue to exist and do more bond offerings, they were obtaining a direct

financial interest in the misconduct. By enabling Heritage to continue to raise

money, they enabled themselves to continue to perform extremely lucrative work.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


SCS received fees of over $800,000 from the Heritage Entities and Kasirer from

1996 through 2001. See ¶¶ 107, 162, 158, 179, 193-94, 223, 226, 249, 270, 272,

296, 367.

486. Alternatively, if any of these Defendants did not know of the primary

wrong, it was due to their willful blindness, which resulted in them failing to take

any action to prevent the wrongdoing. The non-action of these Defendants

facilitated the improper use of bond proceeds and constitutes a knowing

participation of the Defendants’ breaches of their fiduciary duties, from which

these Defendants benefitted.

487. Defendants are therefore liable for aiding and abetting the breaches of

fiduciary duty.

EIGHTH CAUSE OF ACTIONNEGLIGENT MISREPRESENTATION

[Against Sobelman and SCS for Rancho No. 2 Offering]


paragraphs as if fully set forth herein.

489. The audited financial statements included in the Rancho Official

Statement were false and misleading as described above at ¶270-71. Sobelman

and SCS had no reasonable grounds for believing their representation that the

audited financials presented fairly, in all material respects and in conformity with

GAAP, the financial position of Heritage Rancho as of December 31, 1997 and

March 31, 1998. The fraud was so pervasive that Sobelman and SCS should have,

if they had adequately exercised their duty of care, discovered it. If they had

discovered it, their duty of care would have required them to either (1) refuse to

issue financial statements or (2) issue them with sufficient disclosures regarding

the conduct and include a going concern qualification. In fact, not only should a

going concern qualification have been issued, but higher reserves should have

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


been taken for the Medicare liabilities.

490. Sobelman and SCS knew or recklessly disregarded that it had violated

GAAS while falsely representing to investors that it had complied therewith.

Sobelman and SCS knew or recklessly disregarded that Rancho’s financial results

were not presented in accordance with GAAP and knew or recklessly disregarded

that it should not have issued unqualified audit opinions. SCS and Sobelman’s

actions in holding themselves out to the public as experts that had conducted the

audits in accordance with GAAS and that their opinion that the financial

statements complied with GAAP were intentionally aimed at inspiring confidence

about the accuracy of the financial statements amongst investors and regulators.

SCS knew or recklessly disregarded Rancho’s true financial and operating

condition, and intentionally failed to take steps which, as its auditor, it could and

should have taken to fully and fairly disclose the true facts to the public. See ¶¶

270-275.

491. Sobelman and SCS were also negligent in not discovering the fraud

because when they booked the numerous adjusting journal entries (designed to

hide the theft of bond funds by the Kasirers and E. Rubin) their duty of care

required them to have an understanding of the transactions and substantiated the

reasons for the adjusting entries. Their audit did not include any review for fraud,

which, as alleged above, was rampant. These false representations were made

with the intent to induce Plaintiffs and the Class to rely on them in investing funds

in the Rancho No. 2 offering. Plaintiffs and the Class did reasonably and

justifiably rely upon these representations to Plaintiff's and the Plaintiff Class's

detriment.

492. In making such representations of fact, and in suppressing and failing

to disclose material facts as described above, Sobelman and SCS negligently

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


misled the Plaintiffs and the Plaintiff Class.

493. Sobelman and SCS knew, or reasonably should have known, that

Plaintiffs and the Plaintiff Class would rely upon these representations and act

upon them to their detriment. These defendants thus assumed a duty to use due

care in performing their obligations with respect to the audits of Heritage Rancho.

The purpose of the audits was to ensure that the interests of the bond purchasers

and holders were protected and not injured. In doing the things alleged above

SCS failed to use due care. They were careless, if not reckless, and failed to

prepare reports and make disclosures that were accurate and not misleading. In

allowing false and misleading information to be published to investors Sobelman

and SCS acted without regard to the interests of investors and with the knowledge

that their actions would cause investors foreseeable injury. As a result of such

actions, Plaintiffs were injured as alleged herein.

494. As a direct, foreseeable and proximate result of Defendants'

negligent misrepresentations, Plaintiffs and the Plaintiff Class have suffered, and

continue to suffer, substantial losses in an amount according to proof at time of

trial.

NINTH CAUSE OF ACTIONCONSPIRACY TO COMMIT FRAUD

[Against E. Rubin, Jerold Goldstein, Herb Saltzman, Stephen Goodman, theAttorney Defendants, the Kasirer Defendants, CBIZ Accounting, Tax &

Advisory, Inc., Mark Roth, Capital Consulting and CBIZ Valuation Group,Inc.]



496. These Defendants knowingly and willingly conspired and agreed

among themselves to perform the acts alleged above by, among other things,

acting in furtherance of a scheme to hinder, delay, or defraud Plaintiffs and other

Heritage Entity creditors, and acting in furtherance of a scheme to perpetrate such

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


fraud including the above transfers.

497. Pursuant to a wrongful scheme to frustrate the claims of Plaintiffs and

others, these Defendants, and each of them, acting in concert, improperly

commissioned and prepared feasibility studies and appraisals, prepared and

published the Official Statements, and sold bonds under false pretenses. The

Attorney Defendants, the Kasirer Defendants and Defendant E. Rubin, and

Defendant Jerold Goldstein, formed (or participated in the formation of) each

successive Heritage Entity for the purpose of obtaining new investor funds, using

some of those funds to pay principal and interest on prior bond obligations, as well

as paying themselves via excessive salaries, illusory consulting fees, undisclosed

profits to Kasirer on the purchase of the facilities from Columbia, excessive

management fees and large professional fees in the process. These Defendants

knew of Kasirer’s prior failed bond deals which resulted in allegations of fraud

and misappropriation of funds and of Platt’s allegations of theft of bond funds yet

the Defendants purposefully decided not disclose this information in any Official

Statement disseminated to the bondholders. See ¶¶ 121-126, 159-162. These

Defendants also knew that the Heritage facilities were not self sufficient and could

not sustain the excessive salaries and fees paid to each member of the conspiracy.

See ¶ 236. Defendants Virgil Lim, Herb Saltzman, Stephen Goodman and Jerold

Goldstein were aware that the diversion of bond proceeds among supposedly

independent companies was inappropriate, but nonetheless they themselves

authorized those diversions and at times participated in the practice in consort with

one another and Kasirer. See ¶ 238, 255, 284, 287, 348. Goldstein himself

actually co-signed some of the most egregious fraudulent requisitions along with

Kasirer or those acting under Kasirer’s direction, (See ¶ 295) and was copied on

most transfer requests. See ¶¶ 152(e), 152(g), 186, 234, 237(e), 255(b), 255(d), fn

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

134Deposition of Stephen Goodman, 6/8/04, pp. 72-75.

135Deposition of Herb Saltzman, 4/12/04, pp. 207-08.FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 285

89, 284, 287, 295, 298, 299, 320, and 348. All the while, Goldstein reassured

outsiders the practice was legal when, in fact, he knew it was not. See ¶¶ 186,

284, 285. Defendant Stephen Goodman testified in deposition that, during his

tenure as CFO of Heritage, with responsibility for the management of Heritage

funds, he was aware that bond proceeds were being diverted to projects and for

purposes other than as disclosed in the Official Statements.134 Defendant Herbert

Saltzman testified in deposition that, during his tenure on the Heritage board of

directors, he “took on [the] responsibility” of oversight of the intercompany

advances.135 Defendant Jerold Goldstein, in a letter to Susan Weis of the

Securities and Exchange Commission, dated December 28, 2000, acknowledged

that he himself either requested or approved of these transfers at various times, and

that these funds were diverted “to make up shortfalls in debt service payments,

working capital, and construction moneys.” (Emphasis added). They therefore

participated in a plan to misappropriate proceeds from successive bond offerings

without disclosing same to investors.

498. Each of these Defendants furthered the conspiracy by cooperating

with, lending to, encouraging, ratifying or adopting the acts of the Heritage

Entities, Management Companies and other Defendants, such that each of them

facilitated the other Defendants’ attempts to hinder, delay, or defraud Plaintiffs

and the other Heritage Entities’ creditors.

499. Plaintiffs are informed and believe that the conspiracy to defraud and

conceal the fraud continued though 2000. During that time, the Heritage facilities

were failing and winding down while, at the same time, the amount of money

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


being transferred out of the Heritage Entities was drastically increasing. The

results left all of the Heritage Entities without sufficient assets to continue

operations or repay bond obligations.

500. Defendants have engaged in this conspiracy, and have otherwise

frustrated the efforts of Plaintiffs and other creditors to obtain payment of their

lawful and proper debts, all pursuant to a common scheme fully described above.

Each Conspiracy Defendant, as a co-conspirator, is fully liable for Plaintiffs’

damages, in an amount according to proof.

501. The Attorney Defendants played a special role in the conspiracy.

Although they were ostensibly acting as legal counsel for Miller & Schroeder, the

Attorney Defendants had an independent legal duty to the Heritage investors, such

as Plaintiffs and the Class. The Attorney Defendants knew investors would rely

on the Official Statements and rather than providing full and complete disclosures,

the Attorney Defendants prepared and published false and misleading Official

Statements, thus playing an active role in selling the Heritage bonds based upon

false pretenses. They further played an active role by assisting in the marketing

and promotion of the bonds to investors. Boehm had an office at the offices of

Miller & Schroeder in Solano Beach (including when he worked for Atkinson

Andelson, which claims this is the cause of their having misplaced all documents

relating to the bond offerings). By engaging in the promotion of the Heritage

bonds, Attorney Defendants conduct went beyond the role of legal representative.

They were also giving 40% kickbacks to Kasirer of all fees they earned from these

bond deals. The independent legal duty of the Attorney Defendants to investors

was recognized by this Court in its Order on April 28, 2003 in the Betker action,

and obviates any need to fulfill the requirements in Cal. Civil Code §1714.10

502. Zelenkofske performed the financial feasibility studies for the first

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


four offerings (Rancho No. 1, Texas City, Sam Houston and Ft. Worth No. 1),

which were done in 1996 and 1997, as well as other services for proposed deals

that never came to fruition. Through a related entity, ZA paid kickbacks to Kasirer

and his wife, and ZA’s principal, Steve Fishman, had numerous prior and

subsequent business relationships with Kasirer and Iatros, to such a degree that

Dan Gottleib of G&L Realty testified that he’d begun to question Fishman’s

ability to be independent and objective. In fact, in a letter dated July 22, 1997,

Goldstein recounted that ZA had threatened to withhold a report if assurance of

additional work was not given (see ¶ 99, above).

503. A Valuation Counselors employee, Mark Lussier, had a long

relationship with Kasirer, and was “invited” by Kasirer to attend the Hawaii

retreat, as a social guest. VC had performed work for Kasirer and his family for

years, beginning in the early 1990's. Valuation Counselors performed services ten

times for Kasirer and the Beverly Hills Medical Center, as well as performing

numerous assignments for Golden State, Jacob Kasirer’s company. Since forming

Valuation Information Group, Lussier and LoMonaco have continued to perform

services for Kasirer, appraising numerous hospital he owns. Lussier and

LoMonaco knew that Kasirer needed appraisals at certain prices so he could pull

money out at the closings, and accommodated this when Valuation Counselors did

the Sarasota and Chicago appraisals. Valuation Counselors billed at least $400,000

for its work for Heritage.

504. The Sarasota facility sold for $1,300,000 on January 3, 1997. The

land value for the subject was estimated to be $1,590,000 as of November 3, 1997

in the Valuation Counselors Incorporated Appraisal (VCIA). This would

represent a 22% increase in value assuming the property sold at its land value, i.e.

the improvements were considered of no value by the buyer and seller. The

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


appraisal states that the facility had been closed since 1994 and the interior was in

need of considerable repair and restoration. The City of Sarasota Assessor's Office

estimated the land value for the subject at $1,314,345 and the improvements at

$0.00 for the tax year 1996/97 according to the VCIA. These facts suggest that

without a substantial explanation, the reported "As Is" value of the subject of

$6,010,000 is highly unlikely, and in fact, even after some $7 million of

bondholders funds were invested in renovations, the building netted a paltry $4.2

million for the bondholders when it finally sold in 2001. The $6.01 million “as is”

appraised value specifically assumed the property was held “free and clear.” This

assumption waqs actually known to VC to be false, and they knew that any

appraisal based on it would be inaccurate and misleading. The appraisers were

further aware that their report would be used to induce the bondholders to invest in

the property. As a result of the inflated appraisal, Kasirer was able to reap

millions from the Sarasota transaction.

505. Valuation Counselors issued an appraisal report for the Chicago

property on April 17, 1998, in which the “as is” value of the property was given as

$4.23 million. This represents a significant increase over prior appraisals for the

same property conducted by VC. For example, in a letter dated Sept. 10, 1996

prepared for its client Columbia, Valuation Counselors valued the land, building

and equipment of the Chicago hospital (the “market value”) at $2.440 million,

broken down as $470,000 land, $1.845 building and site improvements and

$125,000 for equipment. In a separate letter dated May 20, 1997, Valuation

Counselors again valued the property at $2.440 million. Both of these letters

valued the property “as of March 1, 1996". The Chicago facility was sold to

Heritage for $2,500,000 on February 20, 1997. The land value for the subject was

estimated to be $1,000,000 as of November 3, 1997 in the Valuation Counselors

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Incorporated Appraisal (VCIA). The appraisal states that the facility had been

closed since 1996 and the interior was in average condition. The County of Cook

Assessor's Office assessed the value for the subject at $502,580 in 1997. Based on

assessment of commercial property at 38% of market value, an estimated market

value of $1,322,579 is implied by the assessor. The DRC of the existing buildings

is estimated to be $2,788,700. Considering that the improvements could no longer

be used for an acute care hospital, per deed restriction, it is doubtful that the

existing improvements which were specifically designed for use as an acute care

psychiatric hospital had a value greater than the sale price of the entire property.

The Chicago appraisal explicitly made mention of an examination of legally

permissible uses as including, inter alia, “deed restrictions,” but in deposition

testimony, LoMonaco was unable to recall performing such a review. The

appraisal further concluded that the property’s “highest and best use” would

exclude use as an acute care hospital because the property was unable to compete

with a nearby acute care hospital. Again, VC had no basis for making this

statement. These facts suggest that without a substantial explanation, the reported

"As Is" value of the subject of $4,230,000 is highly unlikely and to date, this

property remains unsold with the latest offer of $3.3 million having fallen through.

See ¶ 257 above. As a result of the inflated appraisal, Kasirer was able to reap

millions from this sale. Valuation Counselors also prepared market feasibility

studies which were virtually entire cut and past jobs, using a form, including most

of the contents, of a study earlier performed by Zelenkofske, then duplicated and

used by Capital Valuation. These studies used projections prepared by

management, with no analysis performed to determine the integrity of

management’s estimates. Similarly, no examination was done as to whether

proposed programs were ever put into operation in prior opened projects, nor was

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Heritage’s ability to successfully market or manage a facility ever examined. In

fact, the studies are so duplicative of the earlier studies that descriptions of entire

conversations and conclusions are simply reproduced verbatim, to such an extent

that some errors (such as the name of the wrong city) survived from project to

project. Testimony has revealed that Miller & Schroeder would not have marketed

the bonds without these strong positive marketing studies.

506. Mark Roth and Capital Consulting also appraised properties at far

above their true value on instruction from Kasirer and prepared a market

feasability study for the Sarasota offering which utilized information provided by

Kasirer. As a result of these inflated appraisals and flawed study, Kasirer was able

to reap millions from these transactions.

507. Kasirer was also receiving kickbacks from other persons involved in

the Heritage deals, such as the company that was involved in the sale of the

Guaranteed Investment Contracts, Chambers Dunhill & Rubin.

508. In doing the things alleged, Defendants, and each of them, acted in a

fraudulent manner, willfully, and with the intent to cause injury to Plaintiffs and

other creditors. Such malicious conduct warrants an assessment of punitive

damages in an amount appropriate to punish Defendants and deter others from

engaging in similar conduct.

TENTH CAUSE OF ACTIONUNJUST ENRICHMENT

[Against Debra Kasirer, JDDJ, BMH]



510. Debra Kasirer either individually or through a company called

Mishkan Healthcare, received almost $2,000,000 in 1996-1997 from HHD and

Heritage Rancho for consulting fees. She was also on payroll for Heritage Rancho

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


and HHD for certain time periods, and drove a car leased by HHD. She

performed no service that justified receiving this money. In addition, she received

$770,000 in January 1999 as a result of a number of wire transactions, as

discussed above. The above referenced transfers of $770,000 to Debra Kasirer’s

account were contrary to the terms of the bond offerings and without any evidence

of reciprocal value exchanged. Debra also received over $6 million from the

Kasirer’s various corporate entities, even though she performed no services for

them, and at her deposition testified all she knew about them were they were

affiliated with her husband.

511. JDDJ and thus BMH received money for selling the distressed

hospital properties to the Heritage Entities at a price that was above the fair value,

helped in part by the false appraisals.

ELEVENTH CAUSE OF ACTIONBREACH OF CONTRACT

[Against U.S. Trust)



513. In its capacity as Trustee of the bond Indentures, U.S. Trust assumed

a contractual duty to execute its Indenture and trustee duties with due care. The

direct and intended beneficiaries of the Trustee's obligations under the Indentures

and other bond documents were the Plaintiffs, and the other bond purchasers and

holders. Any condition precedent on the part of Plaintiffs was performed at the

time they became bondholders or was excused or waived.

514. U.S. Trust was charged with the following contractual duties, among

others:

a. to strictly comply with all procedures and requirements for the

release of bond proceeds;

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


b. to ensure that funds released for a designated purpose were in

fact being used for that purpose, as opposed to being diverted from one Heritage

Facility to another;

c. to promptly investigate and take appropriate action to stop

improprieties in the management or use of bond funds;

d. to keep bondholders timely informed of irregularities that could

materially threaten their investments;

e. and to generally use the Trustee powers to preserve the

integrity of the trust.

515. If U.S. Trust believed it was unable or unwilling to competently

perform these duties, for which it was duly compensated, then it had the duty to

replace itself with a competent successor trustee.

516. There should have been no question in the mind of U.S. Trust that

funds from one project were not to be diverted, under any circumstance, to another

project. That was the advice to William Barber of U.S. Trust when he received a

copy of a letter from bond counsel, John D. Bray of Fulbright & Jaworski, to

Boehm. The letter states: "As we are sure you are aware, the [Houston] bond

proceeds may not be used to repay the Heritage V Note." (emphasis in original.)

517. In controlling the release of bond funds, U.S. Trust was particularly

obligated to ensure that no funds were released without an appropriate Requisition

Certificate. The form of requisition attached to each Indenture required the

Heritage Entity requesting the funds to certify that (1) the amounts to be paid

under the Requisition was an amount actually incurred by the applicable Heritage

Entity; and (2) such payment was not being requested in advance of the time fixed

for payment. The Heritage Entity was also required to attach the payable invoices

to the Requisition Certificate.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28136 These letters were sent to bondholders of record, but most people held the bonds in

“street name" only, which caused the delay in receipt of the letters.FIFTH AMENDED CONSOLIDATED CLASS ACTION COMPLAI NT

5AC 12-6-04.wpd 293

518. Each Indenture specified that U.S. Trust must examine the

Requisition Certificates to determine, prior to the release of any funds, to

determine that they conformed to the requirements of the Indenture and Loan

Agreement. Each Indenture also authorized U.S. Trust to investigate the matters

set forth in the Certificate and to examine the books, records and premises of each

Heritage Facility.

519. In dereliction of the above duties, U.S. Trust allowed the Heritage

Entities to withdraw funds in advance of the time fixed for payment, based upon

Requisition Certificates that were inadequate on their face and in violation of the

Indentures, and permitted the Heritage Entities to transfer bond funds to other

Heritage Entities and third parties. See ¶¶ 264, 288, 295, 317.

520. By releasing bond funds in advance of the date fixed for payment,

U.S. Trust not only violated the express terms of the Indentures, they also forfeited

any meaningful control or oversight regarding the disbursement of funds by and to

the Heritage Entities.

521. The letters sent to bondholders by U.S. Trust did not disclose to

bondholders the full extent of the misappropriation of funds.136 The U.S. Trust

letters knowingly omitted any mention of their role in approving improper

Requisition Certificates and releasing funds before the time fixed for payment.

522. Notwithstanding the September 7 and November 22, 1999 letters -

which demonstrate U.S. Trust’s actual knowledge of the misappropriation of bond

funds, U.S. Trust allowed additional wrongful transfers of funds.

523. Had U.S. Trust exercised the degree of care incumbent upon it as the

master trustee, as the express terms of the Indentures required, it could have

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


prevented the misappropriation of funds before the bonds were materially at risk

of default. As a direct and proximate result of U.S. Trust’s carelessness, "free-

reign" was given to the Heritage Entities, the Officer and Director Defendants and

the Management Defendants to squander the bond proceeds by diverting funds to

other projects, persons, or Entities, ultimately resulting in the collapse of all the

Heritage projects and default on all bond repayment obligations.

TWELFTH CAUSE OF ACTIONNEGLIGENCE

[Against U.S. Trust]

524. Plaintiffs incorporate by reference the allegations the preceding


525. Each Indenture has provisions setting forth "Certain Duties and

Responsibilities." U.S. Trust acknowledged that, except for good faith errors, "no

provision of the Indenture shall be construed to relieve the bond Trustee from its

liability for its own negligent action, its own negligent failure to act, or its willful

misconduct."

526. At all relevant times, it was reasonably foreseeable to U.S. Trust that

the failure to use due care in performing its duties would result in injury to

Plaintiffs and the Class.

527. In doing the things alleged above, U.S. Trust failed to exercise

diligence and due care, and breached its duty to Plaintiffs by:

a. Failing to properly oversee the release of the bond proceeds by

the Heritage Entities; (see ¶ 367).

b. Approving Requisition Certificates which on their face failed

to comport with the terms of the Indentures;

c. Improperly disbursing and transferring bond proceeds contrary

to the legal advice of bond counsel; and

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


d. Withholding information from the bondholders.

528. Faced with Requisition Certificates that on their face disclosed an

improper use of bond proceeds, failing to exercise its authority under the Indenture

to investigate and make inquiry into the Heritage Entities' use of bond proceeds,

activities, and financial condition as a result.

529. As a proximate cause of U.S. Trust’s negligence, Plaintiffs sustained

substantial damages in an amount to be proven at trial.

THIRTEEN CAUSE OF ACTIONBREACH OF FIDUCIARY DUTY



paragraphs, as if fully set forth.

531. U.S. Trust was in a position to and did receive information

concerning the improper use of the bond funds, it was in a position to and did

monitor the activities of the Heritage Entities and reviewed financial and

operating reports relating to the Heritage Facilities. U.S. Trust voluntarily

assumed fiduciary duties to all bondholders by assuring them U.S. Trust was

taking all action necessary to protect their interests, including entering into

settlement agreements and initiating lawsuits. See ¶ 420.

532. Furthermore, at all relevant times, U.S. Trust had the duty,

opportunity and obligation to:

a. fully examine the Requisition Certificates;

b. investigate violations or inconsistencies; and

c. take appropriate and necessary actions to assure that the terms

of the Indentures were met and that the interests of Plaintiffs and bondholders

were protected.

533. As a result of its position, its duties and responsibilities under the

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Indentures, its assumption of control and responsibility over the Funds,

performance of the basic administrative service regarding the bonds, the trust

imposed upon U.S. Trust by bondholders, and the explicit promises of taking all

actions necessary to protect the bondholders interests, U.S. Trust assumed a

fiduciary relationship with the bondholders.

534. U.S. Trust breached their fiduciary duties by failing to properly

oversee release of bond proceeds by the Heritage Entities; approving Requisition

Certificates which on their face failed to comport with the terms of the Indentures;

improperly disbursing and transferring bond proceeds; withholding information

from the bondholders; and failing to exercise its authority under the Indenture to

investigate and make inquiry into the Heritage Entities use of bond proceeds,

activities and financial condition as a result of receipt of Requisition Certificates

which on their face disclosed an improper use of bond proceeds.

535. Further, because each Heritage Facility employed U.S. Trust as the

Indenture Trustee, U.S. Trust’s duties to the bondholders of each Heritage Facility

were in direct conflict. U.S. Trust’s duties were breached because it permitted the

transfer of bond funds for one Facility to other Facilities. Therefore, U.S. Trust

breached its duty to bondholders of every other Heritage Facility when U.S. Trust

permitted the transfer of bond funds between and among Heritage Facilities.

Moreover, U.S. Trust’s conflict of interest was not disclosed to the Plaintiffs and

to the other bondholders.

536. U.S. Trust’s express assertion that it would prosecute any claims

against any and all viable third parties created fiduciary duties owed to the

Plaintiffs and the Class. U.S. Trust’s failure to file suit against any and all viable

and responsible third parties was a breach of its fiduciary duties.

537. As a direct and proximate result of U.S. Trust’s breach of fiduciary

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


duty, Plaintiffs have suffered and continue to incur monetary damages. U.S. Trust

acted with reckless disregard to the bondholders' rights and interests when it

committed the aforementioned breaches of its aforementioned fiduciary duties.

Further, U.S. Trust’s breach of fiduciary duties subjected Plaintiffs to cruel and

unusual hardship, in conscious disregard of their rights, and for U.S. Trust’s

economic or other private gain. Such conduct justifies an award of exemplary and

punitive damages in addition to compensatory damages.

FOURTEENTH CAUSE OF ACTIONFRAUDULENT CONCEALMENT



paragraphs, as if fully set forth.

539. U.S. Trust had constructive, if not actual, knowledge that the Heritage

Entities were misusing bond funds as early as December 1997, when U.S. Trust

began facilitating the transfer of funds from one project account to another, in

violation of the terms of its Indenture. See ¶¶ 325, 348, 367, 368.

540. U.S. Trust wrote letters to the bondholders on September 7, 1999 and

November 22, 1999 because U.S. Trust feared that it could no longer keep its role

in the misappropriation of funds secret. This disclosure was not given in the

interest of bondholders, but instead was a bald faced attempt to put U.S. Trust in

the most favorable light in its role as Trustee. See ¶430.

541. Had U.S. Trust not concealed its knowledge about the

misappropriation of funds for as long as it did, Plaintiffs and other bond

purchasers and bondholders would have been able to take action to prevent further

abuse and degradation of their investments.

////

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


FIFTEENTH CAUSE OF ACTIONINTENTIONAL MISREPRESENTATION




543. The Official Statements and Indentures (among other Documents)

stated that the bond Trustee was to apply bond proceeds to the financing,

acquisition and/or renovation of the specific designated Facility. U.S. Trust knew

that prospective bond investors would rely on these provisions to conclude that the

risk of their investment was limited, and the financial losses of another Heritage

project would not impact the project in which they invested.

544. Charged with the responsibility to protect the bondholders'

investments, as alleged above, U.S. Trust had a continuing duty to communicate

with the bondholders any default, or an event that could or would become a

default under the Indentures, including the misappropriation of bond funds that

ultimately led to defaults on the bonds.

545. Despite actual and constructive notice of the improper commingling

of funds as early as 1997, U.S. Trust did not notify bondholders of a "potential"

problem until nearly the end of 1999. Even then, their September 7, 1999 letter to

bondholders of record states it was for "information only, no action is required."

U.S. Trust further represented that it was protecting the bondholders’ interests; and

that principal and interest payments were being timely made. In their November

22, 1999 communication to bondholders, U.S. Trust represented that it was

continuing all necessary activity it stated that it would commence in the September

7, 1999 communication. See ¶415.

546. U.S. Trust knew that its representations to bondholders were false and

misleading and omitted material facts. In particular, U.S. Trust knew and had

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


reason to know that:

a. In violation of the terms of the Indentures, U.S. Trust had been,

without good cause, honoring improper disbursement requests from the bond

funds;

b. Bond proceeds were being diverted from the intended and

designated specific Heritage Facilities and used to fund various other Heritage

Entities' projects, endangering the bondholders' investments and placing at risk the

financial condition of the intended and designated specific Heritage Facilities;

c. It failed to properly review and investigate the Requisition

Certificates it received from the Heritage Entities, and U.S. Trust further failed to

inform the bondholders that such improper requests were being received and

funded;

d. The Heritage Entities were in default or were about to be in

default at the time of the September 7, 1999 and/or the November 22, 1999

communications, and failed to disclose such material facts to the bondholders; and

e. It failed to follow up with the bondholders or take timely and

appropriate action and failed to inform bondholders of relevant facts in a timely

fashion after their September 7, 1999 and November 22, 1999 communications.

547. Despite knowledge of the above improprieties, U.S. Trust crafted its

representations to bondholders, including Plaintiffs, with the intention to deceive

and defraud them into taking no action on their part, but to instead continue

relying upon U.S. Trust to monitor or investigate, and take all appropriate action.

U.S. Trust sought to give bondholders a false sense of security so that bondholders

would initiate no action to protect their investments, including possible actions

against U.S. Trust for its dereliction of duties.

548. As a direct and proximate result of U.S. Trust’s fraud and deceit,

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Plaintiffs justifiably relied upon the representations and omissions of material

facts and acted to their detriment. Plaintiffs suffered and continue to suffer,

substantial losses in an amount to be proven at trial.

549. U.S. Trust knowingly misrepresented, deceived, and concealed with

the intent to deprive bondholders such as Plaintiffs of their property or otherwise

cause them injury. The conduct subjected Plaintiffs to a cruel and unjust hardship

in conscious disregard of their rights, so as to justify an award of exemplary and

punitive damages in addition to compensatory damages.

SIXTEENTH CAUSE OF ACTIONNEGLIGENT MISREPRESENTATION


550. Plaintiffs incorporate by reference the allegations the preceding


551. In making the representations above, and in suppressing and failing to

disclose facts material to Plaintiffs’ investments as described above, U.S. Trust

negligently misled Plaintiffs, if they did not intentionally misrepresent as

described in the prior cause of action.

552. U.S. Trust knew, or reasonably should have known, that Plaintiffs

would rely upon the representations and omissions and act upon them to their

detriment. Therefore, U.S. Trust’s correspondence to the bondholders, which

included assurances that all was well, induced reliance.

553. As a direct and proximate result of Defendant’s negligent

misrepresentations and omissions, Plaintiffs have suffered, and continue to suffer,

substantial losses in an amount according to proof at the time of trial.

/////

/////

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


SEVENTEENTH CAUSE OF ACTION

NEGLIGENT MISREPRESENTATION

[Against CBIZ Accounting, Tax & Advisory, Inc., CBIZ Valuation Group,

Inc., Capital Consulting and Mark Roth]



555. The Official Statements were false and misleading as described

above. The appraisals were cited in the Official Statements and the feasability

studies were attached thereto, and discussed in the Official Statements themselves.

The studies contained untrue statements regarding the value of the properties and

the feasability of the properties. These false representations were made with the

intent to induce Plaintiffs and the Class to rely on them to invest in the Heritage

offerings. Plaintiffs and the Class did reasonably and justifiably rely upon these

representations to Plaintiff's and the Plaintiff Class's detriment.

556. Zelenkofske performed the financial feasibility studies for the first 4

offerings (Rancho No. 1, Texas City, Sam Houston and Ft. Worth No. 1), which

were done in 1996 and 1997, as well as other services for proposed deals that

never came to fruition. ZA was paid at least half a million dollars by the Heritage

entities for its work. As described in detail above (see ¶¶ 99), ZA and its

principals had become so entangled with Kasirer and Iatros that Dan Gottlieb of

G&L Realty later testified he felt ZA personnel had lost independence and

objectivity.

557. As described above (see ¶ 503), a Valuation Counselors employee,

Mark Lussier, had a longstanding relationship with Kasirer. Lussier has performed

numerous services for Kasirer both prior to and subsequent to the Heritage

appraisals. Valuation Counselors billed approximately $400,000 for its work for

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Heritage.

558. As described above (see ¶ 504), the Sarasota facility was purchased

for $1,300,000 on January 3, 1997. The land value for the subject was estimated

to be $1,590,000 as of November 3, 1997. Thus, the reported "As Is" value of the

subject of $6,010,000 is highly unlikely, and in fact, even after some $7 million of

bondholders funds were invested in renovations, the building netted a paltry $4.2

million for the bondholders when it finally sold in 2001. As a result of the inflated

appraisal, Kasirer was able to reap millions from the Sarasota transaction.

559. As described above at ¶ 505, Valuation Counselors valued the land,

building and equipment of the Chicago hospital (the “market value”) at $2.440

million, broken down as $470,000 land, $1.845 building and site improvements

and $125,000 for equipment. In a separate letter dated May 20, 1997, Valuation





Incorporated Appraisal (VCIA). However, considering that the improvements

could no longer be used for an acute care hospital, per deed restriction, it is

doubtful that the existing improvements which were specifically designed for use

as an acute care psychiatric hospital had a value greater than the sale price of the

entire property. These facts suggest that without a substantial explanation, the

reported "As Is" value of the subject reported in April 1998 of $4,230,000 is

highly unlikely. In fact, notwithstanding the investment of some $8 million of

bondholder money for renovation, this property remains unsold with the latest

offer of $3.3 million having fallen through. See ¶ 257 above. As a result of the

inflated appraisal, Kasirer was able to reap millions from this sale. The Chicago

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


appraisal explicitly made mention of an examination of legally permissible uses as

including, inter alia, “deed restrictions,” but in deposition testimony, LoMonaco

denied performing such a review. The appraisal further concluded that the

property’s “highest and best use” would exclude use as an acute care hospital

because the property was unable to compete with a nearby acute care hospital.

Again, VC had no basis for making this statement. As discussed in detail above at

¶¶ 250-251, 257, 269, 294, 303, 308-310, 335-336, the market studies contained

numerous misrepresentations relating to the programs to be run, the market area,

the demand for such programs and the ability of Heritage to successfully draw

patients from competing facilities. In addition, the Forth Worth study indicated

that VC would be analyzing the Austin market area when, in fact, Austin was a

completely different geographical region. In the Duval study, VC opined that

obtaining managed care contracts was critical to the success of the programs.

However, VC did not conduct any inquiry into whether or not Heritage had

obtained such contracts (and in fact they had not).

560. As described above (see ¶ 506) Mark Roth and Capital Consulting

also appraised properties at far above their true value on instruction from Kasirer

and prepared a market feasability study for the Sarasota offering which utilized

information provided by Kasirer. As a result of these inflated appraisals and

flawed study, Kasirer was able to reap millions from these transactions.


to disclose material facts as described above, these defendants negligently misled

the Plaintiffs and the Plaintiff Class.

562. These defendants knew, or reasonably should have known, that

Plaintiffs and the Plaintiff Class would rely upon these representations and act

upon them to their detriment. These defendants thus assumed a duty to use due

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


care in performing their obligations with respect to their reports. In doing the

things alleged above, these defendants failed to use due care. They were careless,

if not reckless, and failed to prepare reports and make disclosures that were

accurate and not misleading. In allowing false and misleading information to be

published to investors, these defendants acted without regard to the interests of

investors and with the knowledge that their actions would cause investors

foreseeable injury. As a result of such actions, Plaintiffs were injured as alleged

herein.

563. As a direct, foreseeable and proximate result of Defendants'

negligent misrepresentations, Plaintiffs and the Plaintiff Class have suffered, and

continue to suffer, substantial losses in an amount according to proof at time of

trial.

EIGHTEENTH CAUSE OF ACTION

INTENTIONAL MISREPRESENTATION

[Against CBIZ Accounting, Tax & Advisory, Inc., CBIZ Valuation Group,

Inc., Mark Roth and Capital Consulting]



565. The Official Statements were false and misleading as described

above. The appraisals were discussed in the Official Statements and the feasability

studies were attached thereto, and discussed in the Official Statements themselves.

The studies contained untrue statements regarding the value of the properties and

the feasability of the properties. These false representations were made with the

intent to induce Plaintiffs and the Class to rely on them to invest in the Heritage

offerings. Plaintiffs and the Class did reasonably and justifiably rely upon these

representations to Plaintiff's and the Plaintiff Class's detriment. These defendants

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


knew that its representations to bondholders were false and misleading and

omitted material facts.

566. Zelenkofske performed the financial feasibility studies for the first

four offerings (Rancho No. 1, Texas City, Sam Houston and Ft. Worth No. 1),

which were done in 1996 and 1997, as well as other services for proposed deals

that never came to fruition. ZA was paid at least half a million dollars by the

Heritage entities for its work. As described in detail above (see ¶¶ 99 and 502),

ZA and its principals had become so entangled with Kasirer and Iatros that Dan

Gottlieb of G&L Realty later testified he felt ZA personnel had lost independence

and objectivity.

567. As described above (see ¶ 503), a Valuation Counselors employee,

Mark Lussier, had a longstanding relationship with Kasirer. Lussier knew that

Kasirer needed appraisals at certain prices so he could pull money out at the

closings, and accommodated this when Valuation Counselors did the Sarasota and

Chicago appraisals. Valuation Counselors billed approximately $400,000 for its

work for Heritage.

568. As described above (see ¶¶ 202, 504), the Sarasota facility was

purchased for $1,300,000 on January 3, 1997. The land value for the subject was

estimated to be $1,590,000 as of November 3, 1997. Thus, the reported "As Is"

value of the subject of $6,010,000 is highly unlikely, and in fact, even after some

$7 million of bondholders funds were invested in renovations, the building netted

a paltry $4.2 million for the bondholders when it finally sold in 2001. The $6.01

million “as is” appraised value specifically assumed the property was held “free

and clear.” This assumption waqs actually known to VC to be false, and they

knew that any appraisal based on it would be inaccurate and misleading. The

appraisers were further aware that their report would be used to induce the

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


bondholders to invest in the property. As a result of the inflated appraisal, Kasirer

was able to reap millions from the Sarasota transaction.

569. As described above at ¶ 505, Valuation Counselors valued the land,

building and equipment of the Chicago hospital (the “market value”) at $2.440

million, broken down as $470,000 land, $1.845 building and site improvements

and $125,000 for equipment. In a separate letter dated May 20, 1997, Valuation





Incorporated Appraisal (VCIA). However, considering that the improvements

could no longer be used for an acute care hospital, per deed restriction, it is

doubtful that the existing improvements which were specifically designed for use

as an acute care psychiatric hospital had a value greater than the sale price of the

entire property. These facts suggest that without a substantial explanation, the

reported "As Is" value of the subject reported in April 1998 of $4,230,000 is

highly unlikely. In fact, notwithstanding the investment of some $8 million of

bondholder money for renovation, this property remains unsold with the latest

offer of $3.3 million having fallen through. See ¶ 257 above. As a result of the

inflated appraisal, Kasirer was able to reap millions from this sale. The Chicago

appraisal explicitly made mention of an examination of legally permissible uses as

including, inter alia, “deed restrictions,” but in deposition testimony, LoMonaco

was unable to recall performing such a review. The appraisal further concluded

that the property’s “highest and best use” would exclude use as an acute care

hospital because the property was unable to compete with a nearby acute care

hospital. Again, VC had no basis for making this statement. As discussed in

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


detail above at ¶¶ 250-251, 257, 269, 294, 303, 308-310, 335-336, the market

studies intentionally misrepresented: (1) the ability of Heritage to implement the

programs which were critical to the success to the facility (according to the study);

(2) that VC had “assisted the management of the company and Health Care

Holdings in identifying and formulated its assumptions”; (3) that VC had

“conducted a series of interviews with area allied healthcare professionals” (4) that

Heritage was “a more sophisticated full service Alzheimer dieses provider which

could eclipse existing providers”; (5) the “campus platform” represented a

progressive and needed change to the delivery of Alzheimer’s services; (6) that

VC had analyzed “anecdotal evidence” which supported their conclusions; (7) the

extent of the market area and the demand for such programs and the ability of

Heritage to successfully draw patients from competing facilities; and ( 8)

miraculously, every study opined that it would be 17 months until the facility

reached 92% stabilized occupancy (the appraisals incorporated this mis-

information as well). In addition, the Duval Austin study intentionally

misrepresented that VC had analyzed the financial feasibility of the facility, the

Seminole market study claimed the proposal was viable when HCH had already

determined that it was not, and the Forth Worth study intentionally misrepresented

the fact that the area surrounding the facility was extremely economically

depressed.

570. As described above (see ¶ 506) Mark Roth and Capital Consulting

also appraised properties at far above their true value on instruction from Kasirer

and prepared a market feasability study for the Sarasota offering which utilized

information provided by Kasirer. As a result of these inflated appraisals and

flawed study, Kasirer was able to reap millions from these transactions.


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


to disclose material facts it knew, such as the fact ZA was giving Kasirer

kickbacks and Valuation Counselors was called in to give higher appraisals than

Capital had given for the Sarasota and Chicago properties, these defendants

intentionally misled the Plaintiffs and the Plaintiff Class.

572. These defendants knew that Plaintiffs and the Plaintiff Class would

rely upon these representations and act upon them to their detriment. These

defendants thus assumed a duty to use due care in performing their obligations

with respect to their reports. These defendants crafted their representations to

bondholders, including Plaintiffs, with the intention to deceive and defraud them.

573. As a direct and proximate result of these defendants fraud and deceit,

Plaintiffs justifiably relied upon the representations and omissions of material

facts and acted to their detriment. Plaintiffs suffered and continue to suffer,

substantial losses in an amount to be proven at trial. These defendants knowingly

misrepresented, deceived, and concealed with the intent to deprive bondholders

such as Plaintiffs of their property or otherwise cause them injury. The conduct

subjected Plaintiffs to a cruel and unjust hardship in conscious disregard of their

rights, so as to justify an award of exemplary and punitive damages in addition to

compensatory damages.

WHEREFORE, Plaintiffs pray for judgment, as follows:

1. Awarding compensatory damages in favor of Plaintiffs against all

Defendants, jointly and severally, for damages sustained as a result of Defendants’

wrongdoing, in an amount to be proved at trial;

2. Awarding punitive damages in favor of Plaintiffs, for damages

sustained as a result of Defendants’ wrongdoing in the Ninth and Eighteenth

Causes of Action herein;

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


2. Awarding Plaintiffs their reasonable costs and expenses incurred in

this action, including counsel fees and expert fees; and

3. Such other and further relief as the Court may deem just and proper.

JURY DEMAND

Plaintiffs hereby demand a trial by jury.

Dated: December 6, 2004 LAW OFFICES OF BRIAN BARRY

Original Signature on File With CourtBrian BarryJill Levine BettsKathleen LanganPaul Impellezeeri1801 Avenue of the Stars, Suite 307Los Angeles, CA 90067Telephone: (310) 788-0831Facsimile: (310) 788-0841

Lionel Z. GlancyPeter Binkow Kevin RufGLANCY BINKOW & GOLDBERG LLP1801 Avenue of the Stars, Suite 311Los Angeles, CA 90067Telephone: (310) 201-9150Facsimile: (310) 201-9160

COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C.

Steven J. TollDan Sommers1100 New York Avenue NWWest Tower, Suite 500Washington, DC 20005Telephone: (202) 408-4600Facsimile: (202) 408-4699

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


MILLER MILOVE & KOBBrian MillerThe Koll Center501 West Broadway, suite 1600San Diego, CA 92101Telephone: (619) 696-5200Facsimile: (619) 696-5393

BLAIES & HIGHTOWER, LLPGregory Blaies777 Main Street, Suit 1900Fort Worth, TX 76102Telephone: (817) 334-0800Facsimile: (817) 334-0574

Attorneys for Class Action Plaintiffs

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


PROOF OF SERVICE VIA ELECTRONIC TRANSFER

STATE OF CALIFORNIA, COUNTY OF LOS ANGELES

I, the undersigned, declare: that I am employed in the aforesaid County,State of California in the office of a member of the Bar of this Court at whosedirection the following service was made. I am over the age of 18 and not a partyto the within entitled action; my business address is: 1801 Avenue of the Stars,Suite 307, Los Angeles, California 90067.

On December 6, 2004, I served upon the interested parties in this action,pursuant to Fed. R. Civ. P. Rule 5(b) and Local Rule 5-3, the document describedas follows:

FIFTH AMENDEDCONSOLIDATED CLASS ACTION COMPLAINT

[X] by sending electronically a true and correct copy thereof to Verilaw forservice on all counsel of record (see attached service list) by electronicservice pursuant to the Order Re: Electronic Service.

By electronic transfer I sent said document to Verilaw Technologies, Inc.,located at 400 East Lancaster Avenue, Suite 300, Wayne, Pennsylvania 19087,www.verilaw.com, initiated on the Heritage Bond Litigation Website, before thehour of 6:30 PM.

I declare under penalty of perjury, under the laws of the State of Californiaand the United States of America, that the foregoing is true and correct. Executedon December 6, 2004, at Los Angeles, Los Angeles County, California.

Original Signature on File With CourtJill Betts

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


TABLE OF CONTENTS

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

JURISDICTION AND VENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

CHRONOLOGY OF THE HERITAGE BOND OFFERINGS . . . . . . . . . . . . . . 13

RELEVANT NON-PARTIES TO THE ACTION . . . . . . . . . . . . . . . . . . . . . . . . 16

THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23LEAD PLAINTIFFS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23ADDITIONAL CLASS REPRESENTATIVE PLAINTIFFS . . . . . . . . . . 23DEFENDANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

U.S. TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24HERITAGE OFFICER & DIRECTOR DEFENDANTS . . . . . . . . 25KASIRER DEFENDANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38MANAGEMENT COMPANY DEFENDANTS . . . . . . . . . . . . . . . 42MILLER & SCHROEDER DEFENDANTS . . . . . . . . . . . . . . . . . . 45ATTORNEY DEFENDANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47APPRAISER/FEASIBILITY DEFENDANTS . . . . . . . . . . . . . . . . 48

OTHER DEFENDANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62DOE DEFENDANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

CLASS ACTION ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

PRESUMPTION OF RELIANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

BACKGROUND REGARDING THE PRINCIPALS . . . . . . . . . . . . . . . . . . . . . 68

KASIRER HATCHES A PLAN TO ISSUE THE HERITAGE BONDS . . . . . . 74

THE PLAN IS SET IN MOTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

THE INITIAL RANCHO OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

THE PLATT LAWSUIT AND OTHER FISCAL PROBLEMS . . . . . . . . . . . . . 91

THE TEXAS CITY FACILITY OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94Material Omissions From the Texas City Official Statement . . . . . . . . . . 95Appraisals and Viability Studies of the Texas City Facility . . . . . . . . . . 102Construction Delays and Cost Overruns at the Texas City Facility . . . . . 104Financial Information Regarding Texas City . . . . . . . . . . . . . . . . . . . . . . 105

THE HOUSTON FACILITY OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106Omissions From the Houston Official Statement . . . . . . . . . . . . . . . . . . . 107Appraisals and Viability Studies of the Houston Facility . . . . . . . . . . . . 107Financial Information Regarding the Houston Facility . . . . . . . . . . . . . . 108Houston Facility - Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE INITIAL FT. WORTH FACILITY OFFERING . . . . . . . . . . . . . . . . . . . . 110

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


Omissions From the Ft. Worth Official Statement . . . . . . . . . . . . . . . . . . 110Appraisals and Viability Studies of the Ft. Worth Facility . . . . . . . . . . . 112Financial Information Regarding the Ft. Worth Facility . . . . . . . . . . . . . 113

THE 1997 HHD AUDIT BY SOBELMAN COHEN & SULLIVAN . . . . . . . . 114

KASIRER’S CONTROL OVER HERITAGE IS SOLIDIFIED . . . . . . . . . . . . 117

SARASOTA OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119Omissions From the Sarasota Official Statement . . . . . . . . . . . . . . . . . . . 120Appraisals and Viability Studies of the Sarasota Facility . . . . . . . . . . . . 122Construction Delays and Cost Overruns at the Sarasota Facility . . . . . . . 126Financial Information Regarding the Sarasota Facility . . . . . . . . . . . . . . 127

SUMMARY OF THE 1997 IMPROPER TRANSFERS . . . . . . . . . . . . . . . . . . 129

PROBLEMS ARE DIAGNOSED AND A PLACEBO IS ADMINISTERED . 129

THE PROBLEMS CONTINUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137

THE MASTER TRUST AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

THE CORNERSTONE LAWSUIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

THE AUSTIN OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146Omissions From the Austin Official Statement . . . . . . . . . . . . . . . . . . . . 146Appraisals and Viability Studies of the Austin Facility . . . . . . . . . . . . . . 149Construction Delays and Cost Overruns at the Austin Facility . . . . . . . . 150

THE CHICAGO OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151Omissions From the Chicago Official Statement . . . . . . . . . . . . . . . . . . . 151Appraisals and Viability Studies of the Chicago Facility . . . . . . . . . . . . 155Construction Delays and Cost Overruns at the Chicago Facility . . . . . . . 157

RANCHO HOSPITAL OFFERING NO. 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163Omissions From the Rancho No. 2 Official Statement . . . . . . . . . . . . . . 164Appraisals and Viability Studies of the Rancho Facility . . . . . . . . . . . . . 170The Rancho Audit Report and Audit Failures . . . . . . . . . . . . . . . . . . . . . 172Financial Information Regarding the Rancho Facility . . . . . . . . . . . . . . 178Rancho Facility - Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . 178

THE MAUI HAWAII TRIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180

THE IMPROPER TRANSFERS CONTINUED . . . . . . . . . . . . . . . . . . . . . . . . 182

FT. WORTH OFFERING NO. 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185Omissions From the Ft. Worth No. 2 Official Statement . . . . . . . . . . . . . 185Appraisals and Viability Studies of the Ft. Worth Facility . . . . . . . . . . . 187Financial Information Regarding the Ft. Worth Facility . . . . . . . . . . . . . 189

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


EAST HOUSTON OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189Omissions From the East Houston Official Statement . . . . . . . . . . . . . . . 190Appraisals and Viability Studies of the East Houston Facility . . . . . . . . 193Construction Delays and Cost Overruns at the East Houston Facility . . . 195

SEMINOLE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196Omissions From the Seminole Official Statement . . . . . . . . . . . . . . . . . . 196Appraisals and Viability Studies of the Seminole Facility . . . . . . . . . . . 198Financial Information Regarding the Seminole Facility . . . . . . . . . . . . . 200

THE 1998 IMPROPER TRANSFERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201Improper Transfers in 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202

WIDESPREAD FRAUD CONTINUED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

KASIRER CASHED IN THE ODAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204

THE MONEY IS GONE AND CONCERNS ARE NOTED BUT THE LAST OFFERING GOES FORWARD REGARDLESS . . . . 205

BROWNSVILLE - THE FINAL OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . 209Omissions From the Brownsville Official Statement . . . . . . . . . . . . . . . . 209Appraisals and Viability Studies of the Brownsville Facility . . . . . . . . . 211Financial Information Regarding the Brownsville Facility . . . . . . . . . . . 213

SELL THE BEDS AND LET THE GAMES CONTINUE! . . . . . . . . . . . . . . . . 214

THE 1998 SCS AUDITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216

SELL THE RECEIVABLES FOR A CASH INFUSION . . . . . . . . . . . . . . . . . . 220

MILLER & SCHROEDER PULLS THE PLUG AND INVESTIGATES THEIR LIABILITY . . . . . . . . . . . . . . . . . . . . . . 224

THE LAWCO REPORT AND THE AFTERMATH . . . . . . . . . . . . . . . . . . . . . 226

A LAST DESPERATE ATTEMPT TO SURVIVE . . . . . . . . . . . . . . . . . . . . . . 231

THE EXODUS BEGINS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234

THE 1999 IMPROPER TRANSFERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236

PREPARING FOR THE END . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237

SUMMARIES OF DISCREPANCIES IN THE TAX RETURNS . . . . . . . . . . . 245

THE COVERUP BY U.S. TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


FIRST CAUSE OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262VIOLATION OF RULE 10b5 AND SECTION 10 (b)

OF THE SECURITIES EXCHANGE ACT OF 1934

SECOND CAUSE OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263"CONTROL PERSON" LIABILITY UNDER SECTION 20

OF THE SECURITIES EXCHANGE ACT

THIRD CAUSE OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267CONTROL PERSON LIABILITY UNDER CALIFORNIA

CORPORATIONS CODE SECTION 25504

FOURTH CAUSE OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268JOINT AND SEVERAL LIABILITY UNDER

CALIFORNIA CORPORATIONS CODE SECTION 25504.1

FIFTH CAUSE OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272NEGLIGENCE

SIXTH CAUSE OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276BREACH OF FIDUCIARY DUTIES

SEVENTH CAUSE OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279AIDING AND ABETTING

BREACH OF FIDUCIARY DUTIES

EIGHTH CAUSE OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281NEGLIGENT MISREPRESENTATION

NINTH CAUSE OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283CONSPIRACY TO COMMIT FRAUD

TENTH CAUSE OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290UNJUST ENRICHMENT

ELEVENTH CAUSE OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291BREACH OF CONTRACT

TWELFTH CAUSE OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294NEGLIGENCE

THIRTEEN CAUSE OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295BREACH OF FIDUCIARY DUTY

FOURTEENTH CAUSE OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297FRAUDULENT CONCEALMENT

FIFTEENTH CAUSE OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298INTENTIONAL MISREPRESENTATION

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


SIXTEENTH CAUSE OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300NEGLIGENT MISREPRESENTATION

SEVENTEENTH CAUSE OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301NEGLIGENT MISREPRESENTATION

EIGHTEENTH CAUSE OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304INTENTIONAL MISREPRESENTATION

JURY DEMAND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309