Soffer, Packer accused of concealing Fontainebleau cost overruns

/ Las Vegas Sun

The stalled Fontainebleau project is seen Jan. 15, 2010.

With the Fontainebleau Las Vegas bankruptcy case in its 20th month, lenders to the stalled casino-resort project are now asserting fraud and conspiracy claims against the original developers and investors.

A new lawsuit focuses on information about cost overruns that allegedly was hidden from lenders — and charges false architectural drawings were created so the resort could receive construction permits and financing.

The allegations were denied Wednesday by the defendants.

“These allegations are baseless and meritless. This is nothing more than an attempted shakedown by a group of offshore hedge funds who will say anything to make a profit. As everybody knows, the real downfall with Fontainebleau Las Vegas was the bankruptcy filing by Lehman Brothers and the wrongful termination of an $800 million loan commitment by a group of lenders,” said a statement issued on behalf of the defendants.

Construction on Fontainebleau was halted in the summer of 2009, and its initial developer, Fontainebleau Las Vegas, filed for bankruptcy after banks halted funding for what had been envisioned as a $2.9 billion, 3,815-room resort.

The project was hurt by declining revenue projections because of the recession, an associated lack of condominium sales and cost overruns. Costs to finish the project could reach $1.5 billion, bankruptcy court filings say.

Investor Carl Icahn bought the property during a bankruptcy auction for $148 million and has signaled construction won’t resume until the economy turns around.

Banks, term lenders, mortgage holders, contractors and Fontainebleau’s initial developers remain tangled in litigation around the country over the collapse of the company and the billions of dollars in losses — and Fontainebleau’s Chapter 7 trustee is preparing to investigate and possibly assert “preference” and “fraudulent transfer” claims against unspecified parties.

Such claims are typically made in bankruptcy cases against parties that received money from an entity that was insolvent — but not yet bankrupt — at the time of the transfer.

In the latest lawsuit, a group of about 45 term lenders in Fontainebleau’s $2.84 billion credit facility filed suit March 25 in Clark County District Court in Las Vegas against defendants including Miami developer Jeff Soffer; Las Vegas gaming executive Glenn Schaeffer, who resigned from Fontainebleau’s board of managers in May 2009; and investors Australian gaming titan James Packer and Packer’s company Crown Ltd.

In 2009, Crown wrote off its $250 million investment in Fontainebleau Las Vegas.

Also sued were several Soffer companies including Fontainebleau Resorts LLC, Turnberry Ltd. and Turnberry West Construction, general contractor for the resort.

Another defendant is Union Labor Life Insurance Co. (ULLICO) of Washington, D.C.

Represented by Las Vegas attorney Taylor Randolph, the suing lenders include Brigade Leveraged Capital Structures Fund Ltd., the first named plaintiff. These lenders say they provided part of the project’s $1.05 billion in term loans — with revolving bank lenders and mortgage lenders providing the rest of the $2.84 billion in financing. These lenders are also assignees of the original term lender, Bank of America, the lawsuit says.

The lawsuit says that prior to committing funds to Fontainebleau, the lenders were misled by Soffer and others during presentations including one during a March 2007 meeting at the Intercontinental The Barclay Hotel in New York.

“Defendants presented a budget for the hard and soft costs to construct the project of $1.89 billion (excluding the retail portion),” the lawsuit says.

Internal information not disclosed to lenders showed the actual cost to finish the project was at least $100 million higher than what was disclosed in 2007, the lawsuit said.

It claimed Fontainebleau insiders had two budgets — one shown to lenders called the “Bank Budget” and the actual budget hidden from lenders called “Jeff’s Budget,” “Soffer’s Budget” or the “Real Budget.”

“Soffer told the other Fontainebleau defendants and the Turnberry defendants that he intended to raise additional equity at some point in the future to cover the anticipated $100 million shortfall,” the lawsuit says. “He said that he wanted to wait to do so, however, because he believed that it would be easier and less dilutive of his own equity to raise funds after the financing deal had closed and substantial construction of the project had been completed.”

If the true cost of the project had been disclosed, the financing would not have closed, the lawsuit says.

The suit also alleges the defendants misrepresented that the construction drawings for the resort were substantially complete.

This is important to lenders because “construction drawings allow contractors to understand exactly what they will be required to do and ensure that the construction bids and contracts finalized on the basis of the drawings are accurate and complete,” the suit said.

An insider has told the Las Vegas Sun that much of Fontainebleau was designed well after construction had started.

The new lawsuit claims Fontainebleau directed the architect for the project to produce false sets of drawings to maintain the permit process so that the company could start construction and meet its November 2009 opening date.

Unnamed architects at Bergman, Walls and Associates Ltd. (BWA) are quoted in the lawsuit as saying, “For more than 12 months BWA was updating and revising two separate and distinct sets of construction documents, thus doubling our man-hours. These sets consisted of false permit documents and construction documents for the contractor.”

The suit further alleges Soffer and others misrepresented they had “substantial committed contracts” with subcontractors for substantial parts of the resort, which is important to lenders because committed contracts reduce the risk of cost overruns.

The lenders further allege that after the closing of the financing, costs rose dramatically because of Fontainebleau’s unilateral and undisclosed decision to upgrade and expand various parts of the resort — lifting the cost to more than $300 million more than what had been disclosed to lenders.

The Fontainebleau board of managers, aware of this situation, required Soffer in November 2008 to provide a “comfort letter” agreeing, at the future request of the board, to invest up to an additional $75 million in the project and not to sell certain assets prior to completion of the resort including a $178 million yacht, a $57 million Boeing 737 jet and interests in various companies valued at $116 million, the lawsuit says.

The Fontainebleau defendants are accused of keeping multiple sets of books and change order logs to hide the alleged cost overruns — some for internal use and some for lenders that would falsely indicate the project was within its budget.

In order to draw funds from the credit facility, Fontainebleau had to submit status reports with funding requests and comment on the project during conference calls with lenders. False statements were made in these reports and comments as well, the lawsuit charges.

“On these calls, defendants consistently stated, incorrectly, that the project was ‘on time and on budget,’” the lawsuit says.

The lawsuit claims Packer personally conspired with Soffer to conceal the cost overruns as Packer “recognized that if the lenders learned the truth about the project, the lenders would cease funding and the value of Crown’s investment in Fontainebleau would plummet.”

During a meeting in late 2007 or early 2008 in Las Vegas, “the Packer defendants agreed and conspired with the Fontainebleau defendants to continue to misrepresent the financial status of the project to the lenders,” the lawsuit alleges.

The lawsuit claims that during a meeting at Soffer’s home in Aspen, Colo., in October 2008, Soffer and Fontainebleau executives discussed funding shortfalls ranging from $325 million to as much as $375 million and that by February 2009 the shortfall had increased, according to internal estimates, by another $100 million.

The failure of Wall Street investment house Lehman Brothers Holdings in September 2008 had dealt a blow to the project as Lehman was the largest lender for the retail portion of the resort — but Fontainebleau executives actively concealed how this would affect the overall resort, the lawsuit says.

With Fontainebleau covering the funds Lehman was no longer providing, Fontainebleau arranged with ULLICO to pay Lehman’s portion of the retail costs with Soffer or Fontainebleau reimbursing ULLICO within 30 days, the lawsuit says.

“By “fronting’ payments on behalf of Fontainebleau and Soffer, ULLICO helped create a false impression that an existing, institutional lender had or would be willing to step in to take over Lehman’s commitment,” the lawsuit alleges.

This allegedly hidden arrangement caused lenders including Bank of America — which handled draw requests — to continue approving draw requests under the credit facility, the lawsuit charges.

“Had ULLICO, the Fontainebleau defendants and the Turnberry defendants disclosed the true nature of their scheme to the lenders, B of A could not have hidden from the conclusion that the conditions precedent to funding under the loans had not been satisfied and the borrowers would not have been able to access plaintiffs’ funds,” the lawsuit says.

Bank of America, the lead Fontainebleau lender, has said it halted funding to Fontainebleau in 2009 after learning of problems with the project including cost overruns — assertions denied at the time by Fontainebleau.

“While there are a number of factors that can affect the timing and cost of a major construction project, especially one as large and ambitious as Fontainebleau, we do not believe that either fast-tracking or any cost-related issues gave Fontainebleau’s revolver lenders an ‘opening’ or a justification not to fund their commitments,” Howard Karawan, at the time Fontainebleau Las Vegas’ chief restructuring officer, said in 2009.

Last week, Karawan was named as a defendant along with Soffer and the others in the new lawsuit.

This is not the first time Fontainebleau’s disclosures to lenders has been called into question.

Bank of America has said in court filings that Fontainebleau missed its budget and was insolvent on March 3, 2009.

The bank in 2009 also accused Fontainebleau of making “materially inaccurate” statements about its financial condition before March 3 — charges denied by Fontainebleau.

The new lawsuit, seeking unspecified damages, asserts allegations including fraud against Soffer, the Fontainebleau and Turnberry entities, Packer, Crown and ULLICO.

The defendants are also accused of negligent misrepresentation and conspiracy to commit fraud/abetting fraud.

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