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TRIBAL GAMBLE: THE SERIES

Day One, 12/10/00
Casino boom benefits non-Indians

The $800 million deal for outsiders at Mohegan Sun

Day Two, 12/11/00
Few tribes share in casino windfall

Gaming success helps tribe gain community acceptance

California tribes hit the jackpot with gaming vote

Day Three, 12/12/00
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Day Four, 12/13/00
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Trump plays both sides in casino bids

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The Boston Globe OnlineBoston.com Boston Globe Online / Nation | World

Tribal gamble

Law skirted in Mohegan deal, former overseer says

Investors got $1 billion

By Sean P. Murphy, Globe Staff, 5/14/2001

he group of investors that backed the Mohegan Sun casino in Connecticut relied upon an evasion of federal law to deliver a $1 billion payday for themselves, the former head of the federal Bureau of Indian Affairs said in an interview last week.

''They clearly evaded the law to get more money than the law was supposed to permit,'' said Kevin Gover, who headed the bureau at the time of the deal.

The Bureau of Indian Affairs reviewed the Mohegans' deal with the investors in 1998, but its lawyers, unaware of the entire scope of the deal, gave it only a cursory review.

Now apprised of the full details of the tribe's deal with the investors, known as Trading Cove, Gover spoke out against it.

''There's no question the deal was structured to avoid federal review,'' he said. ''But why the Mohegan tribe went along with it, I don't know. They had to have had their business reasons. A desire to avoid litigation, maybe.''

Gover became the first government official in office at the time of the Mohegan deal to say that the government was outmaneuvered by non-Indian investors who fragmented the deal into components, thereby avoiding a congressional limit on profits.

Trading Cove and the tribe declined comment. They have previously said the deal complied with all federal laws.

Gover, until January the government's top-ranking official on Indian policy, commented after a detailed review of the deal.

Without the maneuver, Gover acknowledged, the Mohegan tribe would have received as much as $450 million in additional profits - money now going to a half-dozen entrepreneurs headed by Sol Kerzner, the international gambling mogul who built Sun City in South Africa.

And while the Mohegans themselves are now quite rich without that money, Gover agreed that there are plenty of worthy causes in the Native American community for which $450 million would seem like a staggeringly large amount.

Despite the success of Indian gaming, poverty among Indians remains dire. Two-thirds of Indians still receive no benefit from gaming, and just 2 percent of Indians claim over 50 percent of the gaming profits left over after non-Indians investors take their cut.

Gover said Congress should act quickly to prevent future evasions. ''There needs to be a better law,'' he said.

The Globe first reported in December that Trading Cove received as much as $450 million above the ceiling for profits permitted by law for non-Indian developers. At the time, Gover, Mohegan leaders, and Trading Cove defended the deal.

But Gover, now a partner in a leading law firm in Washington, said last week he had a new understanding of the deal.

Ralph Sturges was the Mohegans' chief-for-life when Trading Cove approached him in 1993 with a proposal for a casino like Foxwoods, which was raking in hundreds of millions of dollars for the Mashantucket Pequot tribe in nearby Ledyard, Conn.

Sturges soon agreed to cede all development rights at the casino site in exchange for Trading Cove's promise to develop, build, and manage a casino and hotel, according to documents.

As generous as the deal was to Trading Cove, however, it would mean nothing if it was not approved by the federal government. Wary of tribal exploitation, Congress had for many years required the Bureau of Indian Affairs to review contracts negotiated by non-Indians with tribes.

And nowhere was the need for such review thought to be more urgent than in Indian casino deals, Congress believed. Tribes desperate for even a modest trickle of economic activity struck notoriously lopsided deals in the 1980s, giving up to 90 percent of profits to non-Indian partners.

''Tribes had no money, and when developers came around offering to finance gaming enterprises, the developers made darn sure they got a huge cut of the profits,'' said Frank Ducheneaux, the former House Indian Affairs majority counsel who helped draft the Indian Gaming Regulatory Act of 1988.

The law drafted by Ducheneaux and others was supposed to end exploitation. Poor tribes needed capital and know-how to start casinos of their own, Congress acknowledged. But the developers/investors who assisted were to receive no more than 40 percent of profits, for only the casino's first seven years.

Non-Indian developers were supposed to instruct tribes on casino management during a transition period. The law also required review of ''side agreements'' to prevent evasion of its limits, and created the National Indian Gaming Commission to enforce rules.

This was the law confronting Trading Cove after its successful negotiations with Sturges.

Trading Cove wanted the maximum compensation for creating a casino and hotel on the tribe's newly acquired reservation in Montville, Conn., directly between the big population centers of Boston and New York.

But before making its final submission to the commission, Trading Cove and the tribe did something that would ultimately provide hundreds of millions of dollars in extra compensation to Trading Cove: They unhooked the hotel proposal from the rest of the deal and let it stand as a separate contract, unreviewed by federal regulators.

Removing the hotel at first looked like it would cost Trading Cove money. An on-site hotel presumably would put more patrons in the casino, the main profit generator of any resort. And Trading Cove owned 40 cents on every dollar at the casino.

But Trading Cove actually had put itself on a path to much greater profits.

Legally, compensation was limited to 40 percent no matter whether the developer was credited with developing both a casino and hotel, or just a casino.

Thus, any value Trading Cove had gained for itself by obtaining the hotel rights from Sturges back in 1993 would be rendered worthless if the hotel remained a part of the overall resort deal and was approved as a package by the National Indian Gaming Commission.

''The commission simply can't give more than 40 percent,'' said Michael Cox, commission general counsel until 1996.

Yet, Trading Cove was obliged under the law to submit for the panel's review any ''side agreements'' it had with the tribe so that the commission could be assured the ceiling on non-Indian profits was complied with, Cox said.

Trading Cove made no such submission on the hotel, Cox said.

Despite postponement of the hotel's development, the tribe made no attempt to renegotiate for a lower percentage of profits owed Trading Cove. At the time, the tribe was relying on advice from a law firm being paid by Trading Cove, which was also funding a sizeable salary for Sturges.

Contacted after a Globe report first raised questions about the Trading Cove deal, Carlisle Fowler, the tribe's former treasurer, confirmed his own misgivings about the deal. Without the hotel, he said, the tribe was not getting the full measure of its development deal. He assumed the hotel would become a part of a promised second phase of development.

Indeed, after the casino opened as a booming success in 1996, Fowler pressured Kerzner and his partner, Len Wolman, for the hotel. But Trading Cove spurned such entreaties, Fowler said. And then negotiations became so private that even Fowler - still the tribe's treasurer - was cut out of them.

Trading Cove and Roland Harris, who succeeded Sturges as tribal chairman, finally announced a deal in 1998.

On the face of the deal, the Mohegans were taking control of their own destiny by buying out the four remaining years on Trading Cove's contract to ''manage'' the casino, and by buying back the hotel rights traded away by Struges in 1993.

The financial terms of the deal were obscure, expressed in percentages, some on net revenues and others on gross revenues, ranging over periods of up to 15 years.

The National Indian Gaming Commission spent months analyzing the deal before concluding that it was too rich for Trading Cove. But Barry Brandon, the commission's general counsel, discovered that it didn't matter: The commission no longer had authority over the deal. Jurisdiction ended when the tribe bought out the four remaining years on Trading Cove's contract to manage the casino, Brandon ruled.

According to public filings of financial documents, the terms were these: Trading Cove exchanged a contract obligating the Mohegan tribe to pay it $240 million for one obligating the tribe to pay it $690 million.

Why the $450 million difference in the two contracts exchanged?

Jeffrey Hartmann, the chief financial officer of Mohegan Sun, said in an interview in November that the extra $450 million represented hotel and other development rights the tribe was buying back from Trading Cove - the rights obtained from Sturges back in 1993. The buyout agreement plainly stated Trading Cove's release of its hotel rights to the tribe.

After the deal was first questioned, Trading Cove told the Globe that no money was exchanged for hotel rights. In flatly contradicting Hartmann, Trading Cove said the two sums - $240 million and $690 million - were roughly equivalent since the larger sum was to be paid out over a longer period of time.

Mohammad J. Abdolmohammadi, chairman of the Accountancy Department at Bentley College, said the $690 million represents the value today on payments to be received years hence, eventually totaling well over $1 billion.

Sean P. Murphy can be reached at [email protected].

This story ran on page A01 of the Boston Globe on 5/14/2001.
© Copyright 2001 Globe Newspaper Company.