DEPARTMENT OF JUSTICE SEIZURE AND DISPOSAL
FOR THE BICYCLE CLUB CASINO
Audit Report 98-06, (2/98)
TABLE OF CONTENTS
FINDINGS AND RECOMMENDATIONS
1. PRESEIZURE PLANNING WAS NOT ADEQUATE
Recommendation and Status
2. DISPOSAL PROCESS WAS INADEQUATE
Recommendations and Status
3. THE DEPARTMENT USED COURT-APPOINTED TRUSTEES TO MANAGE AND DISPOSE OF THE BICYCLE CLUB
Recommendations and Status
4. USMS MANAGEMENT CONTROLS NEED STRENGTHENING
5. OVERALL CONCLUSION AND LESSONS LEARNED
APPENDIX I - The Department of Justice Asset Forfeiture Program
APPENDIX II - Audit Objectives, Scope, and Methodology
APPENDIX III - USMS Annual Receipts and Expenses Related to the Bicycle Club Asset
APPENDIX IV - Government Revenue and Replacement Successor Trustee Compensation and Expenses May 1996 to July 1997
APPENDIX V - Prior Reviews of the Asset Forfeiture Program
APPENDIX VI - Statement on Compliance with Laws and Regulations
APPENDIX VII - Criminal Division Comments - Not available at this time.
APPENDIX VIII- OIG Analysis and Rebuttal of Criminal Division Comments
Depriving criminals of profit is a major goal of the Department's asset forfeiture program.1 In 1990, as a result of a money laundering investigation in Florida,2 the Department of Justice (Department) seized the Bicycle Club (Club), a card casino in Bell Gardens, California. Seven years later the Department still holds the asset. Throughout this period, allegations of mismanagement and criminal activity at the Club have been a source of controversy for the Department. As of December 1997, an agreement to dispose of the government's interest is pending.
In brief, our audit determined that the seizure of the Bicycle Club effectively deprived criminals of substantial profits. As of December 1997, the Department has received over $30 million through its ownership of the Club. These funds have been used to fight crime instead of to fund an ongoing criminal enterprise.
Under the best of circumstances, the Bicycle Club would be a difficult asset to manage and sell because it is an operating business with a complex partnership structure in a highly competitive, specialized industry. In our judgment, however, the Department's actions further complicated seizure and disposal efforts.
The Department's preseizure planning efforts were virtually nonexistent. The United States Attorney's Office (USAO) for the Southern District of Florida did not adequately consider the potential management and disposal difficulties related to the Bicycle Club. In addition, the USAO did not coordinate its efforts with the United States Marshals Service (USMS), the Department's custodian of seized property, in the decision to seize the entire operating asset. We believe the lack of preseizure planning to be the root cause of virtually all other findings contained in our report. In the future, the costs and benefits of seizing complex, controversial assets like the Club should be weighed against other alternatives before any seizure occurs. Such assets should not be seized until: (1) the risks of seizing and holding the asset are fully evaluated; and (2) all components with responsibilities in the seizure and disposal efforts are adequately consulted.
The Department's process for disposing of the asset has been inadequate. At various
times, Department components have disagreed over when to sell the Club, whom to sell it
to, and how to accomplish a sale. Litigation has also complicated disposal efforts. In our
judgment, the Department should have moved more decisively to sell its interest in the
asset. This was particularly true in 1993, after the general partnership interest was
forfeited to the government. Unfortunately, holding assets for long periods of time --
especially complicated ongoing businesses like the Club --presents risks. The pending
agreement (now almost two years old) to dispose of the government's interest, indicates
that the value of the government's interest appears to have decreased significantly since
1993.3 In the future, the Department should sell assets like the
Club as promptly as possible in order to avoid the risks inherent in holding them for long
periods of time.
Although the asset forfeiture statutes vest the Attorney General with the responsibility to dispose of forfeited assets, the Department continued to request court-appointed trustees to manage and dispose of the Bicycle Club. Since 1990, there have been three court-appointed trustees charged with oversight of the casino. We identified several control weaknesses with the court-appointed trustees including vague duties and responsibilities, at least the appearance of conflicting duties, and generous compensation arrangements. Over the seven-year period, court-appointed trustee duties have varied widely and their compensation has grown exponentially. Compensation has ranged from about $2,000 per month for the first trustee, to an average of about $21,000 per month for the second trustee, to an uncapped flat rate of $350 per hour for the current trustee that has averaged $60,000 per month, excluding expenses. We are concerned about the compensation arrangement for the current trustee and the maximum amount he can charge the Department. In our judgment, the trustee's compensation arrangement creates at least the appearance of a conflict because it could provide a disincentive for the trustee to sell the government's interest in the casino.4
Departmental officials agreed with our recommendations but not all of our findings. They also had explanations for why certain actions were either taken or not taken. We have included their views within the report's findings. In addition, Criminal Division officials wanted their written comments included in the report and they appear in Appendix VII.
Our audit objectives, scope, and methodology are in Appendix II. A chronology of significant events is set forth in the Introduction. The details of our work are contained in the Findings and Recommendations section of the report.
The Office of the Deputy Attorney General (DAG) requested that we review the Department's seizure, management, and disposal attempts relative to the Bicycle Club, an operating card casino in Bell Gardens, California. The Club is a joint venture consisting of the LCP Limited Partnership (65 percent ownership) and the PPA Limited Partnership (35 percent ownership). The Department has had a complex and troublesome relationship with the Bicycle Club that began seven years ago when the Club was seized in connection with a money laundering investigation. Our audit analyzed the Department's handling of the Bicycle Club over the past seven years and assessed the lessons to be learned for the handling of similar assets in the future.
The history of the Department's management of the Bicycle Club is marked by numerous legal entanglements, complex ownership arrangements, unsuccessful attempts to liquidate, and generous compensation rates for the interim management of the Club. To give the reader a better understanding, we have provided the following chronology of significant actions and events relative to the Bicycle Club seizure. Our findings and recommendations for corrective action follow the chronology.
· June 1986 -- Internal Directive Issued
The Department of Justice issues an internal directive to all United States Attorneys entitled: "Anticipating and Avoiding Problems Relating to the Management and Disposition of Seized and Forfeited Assets." The directive requires coordination between the USAOs and the USMS prior to seizure of an asset. It also warns about potential long-term problems that may arise when complex assets such as businesses are seized.
· November 1987 -- Indictment of Certain Individuals Linked to the Bicycle
An indictment is returned in Miami, Florida, following a money laundering investigation conducted by the USAO for the Southern District of Florida. The indictment names individuals with links to the Bicycle Club casino.
· March 1990 -- Bicycle Club Affiliates Convicted
Individuals with links to the Bicycle Club are convicted for laundering drug smuggling profits. All convictions are related to the LCP Partnership.
· April 1990 -- Department of Justice Seizes Bicycle Club
The Department seizes the entire Bicycle Club, including the LCP and PPA Partnerships. The court directs the manager of the Bicycle Club to continue managing the daily operations of the Club and appoints a trustee, the City of Bell Garden's Finance Director, to protect the interests of the potential claimants (e.g. the innocent partners). The trustee's duties are minimal and compensation is approximately $2,000 per month.
· May 1990 -- PPA Partnership Returned
The Department returns the PPA Partnership's original 35 percent ownership, leaving the Department with 65 percent ownership of the Club's assets pending the outcome of further legal action with LCP partners.5
· August 1991 -- Settlement Confirmed; Attempts to Sell Club Unsuccessful
The United States District Court, Southern District of Florida, confirms a settlement agreement, which along with its earlier court decision, returns 35 percent of the Club to certain LCP partners. This leaves the Department with 30 percent ownership of the Club's assets, including 6 percent subsequently appealed by one of the partners.
In the summer and fall of 1991, representatives of the Department and the USMS explore the possibility of selling the government's interest to the other partners. Subsequent offers from various partners to buy the government's interest in the Bicycle Club are made in June 1992, December 1992, June 1993, March 1995, November 1995 and January 1996. According to Department records, the partners did not tender viable offers, or provide evidence of sufficient financing.
· April 1992 -- Bankers Tell DOJ: Non-Controlling Interest Decreases Ownership Value
Two years after the seizure of the Club, representatives from the Criminal Division's Asset Forfeiture Office (AFO), the Antitrust Division, and the USMS contact investment bankers to explore the possibility of selling the government's interest. According to the Asset Forfeiture Office, the bankers advise that because the government does not have management control, it will be difficult to sell the government's interest, and the value of its interest is substantially reduced from what it would be if it had such control.
· June 1992 -- Management Weaknesses at Club; Trustee Replacement Decided
A consultant, Kenneth Leventhal & Co., completes a USMS-requested review of the Bicycle Club. The review finds that the Club's financial controls and procedures are inadequate to ensure that improprieties do not occur. Based on the report and a potential conflict of interest issue resulting from the trustee's employment with the City of Bell Gardens, which benefits directly and substantially in taxes from the Club revenues, the Department decides to replace the interim trustee.
· June - October 1992 -- Court-Appointed Trustee Arrangement Continues
The involved Department components debate how to replace the trustee. Two major issues surface: (1) whether the replacement should be a contractor working under the control of the USMS or another court-appointed trustee; and (2) whether there should be more than one trustee. The Department decides to continue using a single court-appointed trustee and selects the individual in October 1992. The USMS is assigned the task of drafting the court order.
· March 1993 -- Trustee's Pay Grows; IG Criticizes USMS Asset Management
After several months' delay within the Department, the court order appointing the successor trustee is submitted to the court and approved in March 1993. The trustee's duties increase over time. His compensation is $116,610 in 1993, $254,950 in 1994, and $322,500 in 1995.
The Office of the Inspector General issues an audit report entitled: Contract Services for the Management of Seized Assets. The audit discloses that the USMS is not adequately monitoring contractor performance and that assets under USMS management are deteriorating in value.
· August 1993 -- Civil Forfeiture Brings Department Ownership to 36%
A related civil forfeiture in the Central District of California results in an additional 6 percent government interest in the Bicycle Club. This gives the Department 36 percent ownership of the Club's assets, including 6 percent still under appeal.
· November 1993 -- Government Confirmed as General Partner
The court rules that, based on the August 1993 civil forfeiture, the government is the general partner of LCP and the administrative officer of the Bicycle Club joint venture. As the general partner, the government now has exclusive control over the business of the partnership and fiduciary responsibilities to the other partners. The court also rules that the trustee is to assume, on behalf of the government, the LCP general partner position and authorizes the trustee to sell all of the government's interest. The USMS Office of General Counsel opposes the appointment because it believes a conflict of interest exists between the duties of a general partner, and the trustee's fiduciary duty to protect the interests of the government.
· March 1994 -- Asian Games Manager Arrested; IG Criticizes USMS
The Bicycle Club's Asian games manager is arrested at the Club and later convicted of loan sharking and extortion.
The Office of the Inspector General issues an audit report entitled: United States Marshals Service Maintenance and Disposal of Seized Assets. The audit discloses that material weaknesses continue to exist in the maintenance and disposal of seized and forfeited assets, including the USMS' practice of holding assets for long periods of time after forfeiture.
· May 1994 -- Decision Is Made to Remove Club's General Manager
The Department and other LCP partners agree that the Club's general manager should be removed due to allegations of criminal activity, mismanagement, and failure to implement the trustee's recommended internal control improvements.
· July 1994 -- Bids for Club Solicited
The trustee solicits bids for the purchase of the government's interest in the Club. Nine bids are received and reviewed.
· August 1994 -- Attempt to Sell Club Fails; General Manager Resigns
The USMS awards the winning bid for the purchase of the Club. Because the Club's revenues are declining, the bidders request more time to obtain financing, which leads to delays in finalizing the sale. Eight months later, the offer is withdrawn due to a lack of financing.
The general manager resigns and the trustee is appointed by court order as the Club's interim general manager. This appointment further increases the trustee's power and authority. He now functions as the Club's general manager, sales broker for the government's portion of the Club, general partner, and joint venture administrative officer.
· July 1995 -- Consultant Reviews Bicycle Club Operations
At the request of the City of Bell Gardens, a consultant, John Van de Kamp, a former California State Attorney General, reviews the Club's operations. The consultant makes recommendations for improvements in the following areas: marketing, internal controls, surveillance, security, and personnel. The consultant observes that: (1) when the trustee became the temporary general manager the relationship between the Club and law enforcement agencies began to improve, and (2) the trustee and his replacement general manager have undertaken initiatives to enhance the image of the Club in order to remain competitive.
· November 1995 -- Offer To Buy Club Received
The USMS interviews three investment banking firms with the hope of finding an acceptable approach to the sale of the Club. Shortly after interviewing the investment banking firms, the USMS, the LCP, and the PPA partners receive an unsolicited offer to buy the Bicycle Club. The range of the offer for the government's 30 percent controlling interest (excluding 6 percent on appeal) is between $19 million and $25 million.
· January 1996 -- More Reviews of Bicycle Club-Related Activities
At the request of the USMS, the consulting firm of Don Kelly and Company evaluates the operations of the Bicycle Club and the business performance of the trustee. The firm concludes that declining Club revenues are due to increased competition and that the trustee is doing a good job of managing Club personnel.
At the request of the USMS, Price Waterhouse reviews the trustee's billings to the USMS. Total billings during the review period were $1.6 million. Price Waterhouse tests billings for about half of this amount and notes only minor errors or unsupported billings. However, Price Waterhouse also reports that in some instances it is unable to determine if expenses were reasonably consistent with the duties assigned based on the court order.
The USMS performs an internal review of its oversight of the Bicycle Club and notes numerous instances of poor internal controls and lack of specific guidelines for monitoring and directing trustee activities.
The court decides that the 6 percent ownership under appeal is not subject to forfeiture. This decision leaves the Department with 30 percent ownership of the Club's assets. In March 1996, the government files a petition for rehearing on the 6 percent ownership interest.
· February 1996 -- Review Finds that Trustee Lacks Specific Guidelines
At the request of the USMS, another consultant, Legalgard, evaluates billings by the trustee's legal counsel and finds that the USMS had not developed specific guidelines for the trustee to follow in defining allowable expenses. Legalgard therefore concludes that it cannot make determinations regarding the reasonableness and proper categorization of the billings.
· March 1996 -- Senate Hearing Held; CBS' 60 Minutes Covers Bicycle Club; Deputy Attorney General's Office Assigned Oversight
The Senate Permanent Subcommittee on Investigations, Committee on Governmental Affairs convenes a public hearing on the USMS' management of the Bicycle Club. Several witnesses, including some current and former employees of the Club, detail persistent management problems and allegations of criminal activity at the Club, including skimming of profits, drug dealing, extortion, loan sharking and money laundering. The Director of the USMS is criticized for ignoring criminal activity at the Club and for not selling the government's interest in the asset.
Department representatives contest statements made at the hearings and also state that many referrals to state, local, and federal law enforcement agencies have been made regarding alleged criminal activities at the Club. According to Department officials, the USAO for the Central District of California organized a task force to review every criminal allegation. The task force was comprised of Federal, state, and local law enforcement officials, who determined that none of the allegations were prosecutable.
CBS' 60 Minutes airs a highly critical account of the Department's involvement with the Bicycle Club, including videotape of alleged drug trafficking and money laundering at the Club. The report suggests that the Department is condoning ongoing criminal activity at the Club because, having earned over $30 million6 for the Department, it amounts to a "cash cow." The broadcast also criticizes the qualifications of the second court-appointed trustee, his management of the Club, and his recent annual compensation of over $300,000. The USMS and the Criminal Division's AFO prepare a rebuttal to statements made during the broadcast but the Department decides not to circulate it.
In response to the Senate Hearing and the 60 Minutes story, a senior official in the Deputy Attorney General's Office is assigned the responsibility for disposal of the asset.
· April 1996 -- Club Managers Denied Gaming Licenses; Trustee Resigns
The State of California Attorney General's Office denies the license applications of three senior managers involved in the operations of the Bicycle Club. The state also serves the trustee with notice of its intention to withdraw his gaming license. The general manager, the Asian games manager, and another employee are barred from entering the Club. About the same time, the USMS, in consultation with the Deputy Attorney General's Office, accepts the resignation of the trustee, effective upon selection of a replacement.
Club managers obtain counsel and within weeks secure restraining orders against proceedings to revoke the licenses of the Club executives prior to court hearings. Later, in 1997, an administrative law judge in California rejects the California Attorney General's claims. The California Attorney General has the option to pursue the matter further. Also in 1997, the notice of intention to withdraw the former trustee's gaming license is settled. The settlement provides no payment for allegations against the former trustee and contains no findings of wrongdoing.
· June 1996 -- Trustee Replacement Approved With No Limit on Earnings
The court approves the Department's selection of the replacement trustee effective May 1996. The trustee's compensation is set in the court order at $350 per hour with no cap on annual earnings. Earnings from May 1996 through July 1997 are $894,235.
· July 1996 -- Department Has an Agreement to Dispose of Club
The Department advises the court that it has a signed agreement to dispose of the government's interest in the Club. The agreement is the culmination of the November 1995 offer.
· August 1996 -- Partnership Approves Disposal Agreement
In a partnership vote, 89 percent of the Government's partners (all except one) accept the disposal agreement and it is submitted to the court.
· December 1996 -- Registration Application Rejected
The Gaming Registration Office of the California Department of Justice rejects the registration application of the offering party to operate the gaming tables. This is because the offeror is a publicly traded corporation and it holds out-of-state gambling interests.
The court holds a hearing on the agreement to dispose of the government's interest.
· February 1997 -- Disposal Agreement Progresses
The trustee, his advisors, the California Attorney General, and the offeror discuss the best manner to resolve the registration issue and submit the proposed agreement to the Office of Gaming Registration of the California Department of Justice.
· March 1997 -- Court Approves Disposal Agreement
The court approves the sale agreement, which includes leasing as a means of disposing of the Government's interest in the Bicycle Club. Lease negotiations with potential gaming operators commence. The California Deputy Attorney General states the Office of Gaming Registration will have no objection to the disposal agreement provided that it contains an arms length lease agreement.
· April 1997 -- $3 Million Deposit for Disposal Agreement
The offeror pays $3 million to extend the disposal agreement closing date until October 14, 1997.
· July 1997 -- Disposal Agreement Process Continues
Negotiation for a lease of the gaming operations of the Bicycle Club is completed.
· September 1997 -- Registration Application Submitted
The Government signs an agreement allowing a third entity to operate the gaming tables as part of the disposal agreement. The lessee submits gaming registration application to the California Gaming Registration Office. California authorities indicate the review of the lease and application will require at least 90 days.
· October 1997 -- Agreement Still Pending
At the conclusion of our audit, the process for completing all elements to close the disposal agreement were continuing.
1 The Department of Justice Asset Forfeiture Program is described in greater detail in Appendix I.
2 The forfeiture for this asset was pursuant to 18 U.S.C. Section 1963(a)(3) as a result of convictions for violation of the Racketeer Influenced and Corrupt Organizations Act (RICO).
3 This analysis is based upon fair market value as determined by a USMS contractor in 1993. Since a sale did not occur at that time, we cannot say with certainty that the Government could have sold its interest in the Club for the contractor's estimated fair market value. In our judgment, however, the estimate is the best available data to identify the value of the government's interest at the time.
4 Our audit did not include an assessment of the diligence of the current trustee's disposal efforts. However, no instances of conflict of interest for this trustee were brought to our attention during the audit.
5 Documentation reviewed during the audit expressed government ownership percentages in terms of either the club or the LCP Partnership. For simplicity and consistency, the ownership percentages we refer to in the report are for the overall Bicycle Club and have been rounded.
6 The Department's annual receipts and expenses for the Bicycle Club are contained in Appendix III.