FINDINGS AND RECOMMENDATIONS

1. PRESEIZURE PLANNING WAS NOT ADEQUATE

The USAO for the Southern District of Florida did not adequately consider the difficulty of managing and disposing of the Bicycle Club before effectuating its seizure. The USAO also did not coordinate its efforts with the USMS prior to the seizure, even though the USMS was the agency that would ultimately be responsible for disposing of the asset. Consequently, seven years later, the Department continues to own a stake in and operate a controversial gaming casino.

Department policy requires preseizure planning to identify problems in advance of seizing an asset. It also requires coordination between the USAOs and the USMS before seizure occurs. In cases involving assets that require complex or long-term management responsibilities, anticipating problems is an absolute necessity. The Department's June 25, 1986, directive describes situations in which seizure is likely to lead to problems.

Examples of such situations include instances in which: (1) liabilities exceed assets; (2) the nature of ownership is such that it is difficult to manage the property; (3) a business may be involved in activities the nature of which would be inappropriate for the government to sponsor for any length of time; (4) the nature of the asset is such that it is beyond the capacity of the government to manage or rapidly dispose of it; and (5) the nature of the business is such that the government would become involved in lengthy collateral litigation as a defendant.

With the exception of Item 1, this directive accurately summarizes the features of the Bicycle Club partnership forfeiture. Specifically: (1) the operating business is owned by a joint venture of two limited partnerships; (2) the Bicycle Club is a gaming business; (3) the gaming business requires state and city license approvals and attracts criminal activity; and (4) LCP partners have been in ongoing litigation with the government over the forfeiture of partnership shares.

According to the USAO for the Southern District of Florida, no substantial preseizure planning was performed. Our review confirmed that preseizure planning was minimal and included the gathering of only basic information regarding the asset, such as location of bank accounts, the cost of obtaining a financial audit, and access to financial statements.

The 1986 directive includes the following list of alternatives if it is determined that forfeiture is not desirable:

• Impose a fine amounting to double the proceeds of the illegal activities, and impose a lien on any of a defendant's assets pending payment of the fine. If the asset had been sold at a profit by the defendant or by the defendant's business, the United States could then have collected the fine and the defendant would have been deprived of the proceeds of his unlawful activity.
• Restraint of the property subject to criminal forfeiture pending the outcome of the case. In some instances, the procurement of a restraining or similar order may obviate the need for a parallel civil forfeiture case in which the United States must take custody of the property.
• Proceed with a criminal prosecution without forfeiting the asset as part of the prosecution, and later forfeiting the asset through civil proceedings when circumstances are more propitious.
• Decline forfeiture.

In our judgment, the USAO for the Southern District of Florida did not consider these or other alternatives, such as seizing only the forfeitable partnership shares and associated profits, before deciding to seize the entire operating business. According to the prosecutor, the entire Bicycle Club was seized because there was some uncertainty over which partners were criminally involved. The USAO for the Southern District of Florida did not consult with the USMS concerning the feasibility of the Department operating and disposing of a complex, ongoing business, such as the Bicycle Club.7 Moreover, and perhaps most important, once the USAO decided to seize the entire Club, it failed to confer with the USMS concerning the best and most efficient means for operating and disposing of the Club once the seizure had been effectuated.

Department of Justice Component Comments:

We discussed our findings and recommendation with Department officials. Officials from the DAG's office, the USMS, the Criminal Division, and the Executive Office for U.S. Attorneys concurred with our recommendation. The DAG's office and the USMS concurred that preseizure planning was inadequate. The Criminal Division and EOUSA did not agree that preseizure planning was the root cause of problems and stated that even if preseizure planning had occurred it likely would not have prevented the eventual problems with the Bicycle Club. Officials from the Criminal Division stated that the alternatives, listed in the 1986 guidelines, to immediate seizure of the entire club were not options in the Bicycle Club case. Two reasons were offered as to why the options were not available: (1) Club ownership was not clearly identified, and (2) there was uncertainty over whether other partners were criminally involved. In addition, Criminal Division representatives stated that the ancillary hearings provided the innocent owners with the opportunity to reclaim their property.

An official from the USAO for the Southern District of Florida stated that although documentation was scarce on preseizure planning, it did not mean that the process was not accomplished without thought, care, and attention. It is clear, for example, that extensive discussions took place with representatives from the City of Bell Gardens, California who already had in place a system for monitoring revenues and operations at the Bicycle Club. The official further stated that it was clear that the proper course of action was followed in the Bicycle Club case and that no other option could have achieved the law enforcement purposes of the RICO forfeiture statute under the circumstances of this case.

An official from EOUSA stated that awareness on preseizure planning had improved since the time the Bicycle Club was seized and that serious efforts had been made to address these areas through training, and by dedicating staff specializing in asset forfeiture. A USMS official also stated that preseizure planning had improved but that there were still occasions when the USMS is not consulted by the USAOs and others prior to seizure of an asset.

OIG Conclusion

In our judgment, the failure to conduct adequate pre-seizure planning in coordination with the USMS as provided for in the 1986 Department policy is the root cause of virtually all other findings contained in this report. Two and a half years ensued between the money laundering indictments in 1987 and the seizure in 1990. The USAO for the Southern District of Florida knew since at least 1989 that the targets of the money laundering case had some ownership interest in the Bicycle Club. This was adequate time for the prosecutors to assess fully the complexity of the asset, consider alternatives to seizure of the entire asset, and coordinate with the USMS and the Criminal Division's AFO regarding post-seizure management.

In short, the USAO's pre-seizure conduct should have been more sensitive to both the practical problems and the public perception associated with the Department's ownership and operation of a gaming casino for an extended period of time. Long-term ownership of controversial assets, such as the Bicycle Club, can undermine public confidence in the Department and its enforcement of the nation's asset forfeiture laws.

Recommendation and Status:

We recommend the Deputy Attorney General:

1. Require all components, including United States Attorneys, to follow Department policy on preseizure planning.

Resolved. In order to close this recommendation, please provide us with documentation demonstrating that the requirements for preseizure planning have been communicated to all law enforcement and litigating components within the Department.

2. DISPOSAL PROCESS WAS INADEQUATE

Over the last seven years, components within the Department have disagreed over when to sell the Club, whom to sell it to, and how to sell it. We believe the Department should have moved more decisively to sell its interest, particularly after it became the LCP general partner in November 1993. There are risks involved in holding assets for long periods of time. The pending agreement for the government's interest in the Club reflects a significant decline in value since 1993. Although the decline appears to be at least partially attributable to increased competition in the gaming industry, the government's seizure of the casino and allegations of criminal activity at the Club may also have played a part.

Guiding the Disposal Process

Under normal circumstances, management and disposal of seized and forfeited assets rest entirely with the USMS. In the case of the Bicycle Club, however, prosecutors in the USAOs and officials in the Criminal Division were also involved. Accordingly, ongoing communication and careful coordination among all the components involved was essential. In an attempt to achieve this coordination, an informal group, later known as the "working group," began meeting in 1991. Although the group membership was never formalized, our interviews and review of available documentation identified the following individuals and/or offices as represented:

Office of the U.S. Marshal, Central District of California
U.S. Marshals Service, Seized Asset Division, HQ
U.S. Marshals Service, Office of the General Counsel
Criminal Division, Asset Forfeiture Office
U.S. Attorney's Office, Southern District of Florida
U.S. Attorney's Office, Central District of California
U.S. Attorney's Office, Southern District of Illinois
The Court-Appointed Trustee
Antitrust Division, Corporate Finance Unit
Internal Revenue Service, Criminal Investigations Division

The first six offices listed were the major participants and their representatives generally attended most meetings. The remaining participants, as well as the City of Bell Gardens' legal counsel and the other Bicycle Club partners and their attorneys, attended meetings periodically when a particular issue of interest surfaced.

The Department component representatives stated they began meeting because there was ongoing litigation involving three different USAOs, including appeals, additional indictments, jury verdicts, and settlements.8 According to participants, the earliest meetings were "crisis meetings" in which representatives from the various components would meet to discuss the immediate legal, disposal, and management issues that had arisen. None of the participants in the group had either the ability to bind the group or to ensure that any decisions made by the group or any subset of its members were actually implemented.

Our review of the records and our discussions with the participants identified this lack of decision-making authority as a major weakness in the group. The largest and most important disagreements between group members involved sale of the Club. The USMS and AFO wanted to dispose of the Club as quickly as possible after the 1991 settlement agreement that returned 35 percent of the Club ownership to certain LCP partners. Over an extended period -- four to five years -- the USAO for the Southern District of Florida opposed sale of the Club because of the possibility of protracted litigation. Other disagreements occurred over such matters as the continued use of court-appointed trustees and who should be permitted to buy the Club.

We asked representatives if the group had blurred the lines of authority or responsibility over the asset's management and were told that the group had no overall authority. The group participants only had authority for the component or sub-component they represented. In our judgment, the group considered critical issues affecting the management of the Bicycle Club seizure, and we believe that some of the problems encountered could have been avoided if the group had been headed by someone with the authority to make decisions and impose solutions. We were told that the group stopped meeting in 1995. Based on the March 1996 Senate hearings and the 60 Minutes broadcast, a senior official in the Deputy Attorney General's Office was assigned responsibility to dispose of the government's interest in the Club. The senior official stated that, depending on the circumstances, he devoted significant portions of his overall time on efforts related to management and disposal of the Club. In our judgment, this arrangement belatedly fulfilled the decision making role that was lacking in the Department's working group.

Efforts to Locate a Buyer

Despite the disagreements over when to sell the Club, several attempts at a sale were made. The more significant efforts did not occur until the Department's position as general partner of the LCP was clarified by the court in November 1993. The following is a chronology of events regarding the Department's disposal efforts, both before and after obtaining the LCP general partner interest.

• In October 1991 and April 1992, Department representatives interviewed several investment bankers to explore the ability of the government to sell its interests to outside investors. According to the USMS, investment bankers advised that because the government could not offer management control of the LCP Partnership to a potential buyer, it would be difficult to sell the government's interest, and that such a sale could likely be accomplished only at a substantial discount. The investment bankers agreed that to maximize the value of the government's share, controlling interest was necessary. To obtain the assistance of the investment bankers in securing a sale would have cost about $250,000 to $500,000 in expenses plus a 10 percent commission. According to USMS personnel, the government did not retain the bankers' services because of the high cost.
• In the summer and fall of 1991, representatives of the Department explored the possibility of selling the government's interest to some of the other PPA or LCP partners. The USMS records show several such attempts to negotiate failed generally due to offers that were not viable and the partners' inability to provide evidence of financing. In addition, sales to certain partners were opposed by the USAO for the Southern District of Florida, which believed certain partners may have acted in concert with the defendants and were therefore not eligible to purchase the forfeited property.
• The PPA managing partner made offers to buy the government's interest in November 1991, June 1992, December 1992, June 1993, and March 1995. On at least one occasion, negotiations were in process but the USMS' records show that the partner failed to provide evidence of financing.
• On November 22, 1993, the court ruled that the government was the general partner of LCP, thereby awarding it controlling interest. In the same ruling, the court authorized the trustee to sell the government's interest in the Club.
• Following this ruling, the trustee solicited bids. Nine formal bids were reviewed in July 1994, six of which included earnest deposit checks for $1 million. The bids averaged about $1 million per percentage point of Club ownership.9 The USMS awarded the winning bid in August 1994. In March 1995, the offer was withdrawn. According to the offeror, financing could not be obtained because of an apparent decline in Club revenue and possible lawsuits.
• The USMS continued to consider retaining an investment banking firm to assist with a sale, and in March 1995, officials interviewed three firms. Thereafter, the USMS decided to continue using the trustee to sell the Club, and to hire a transactional attorney to assist him. The transactional attorney was to draft a bid package, advise on the methodology for marketing the government's interest, provide advice on a purchase agreement, and review applicability of Securities and Exchange Commission regulations.
• In November 1995, the government received an unsolicited offer for its share. Pursuant to an earlier court order, the government submitted a notice to the court in July 1996 advising the court that it had entered into an agreement to sell its interest in the Club. In March 1997, the court authorized the government to proceed with the offer. As of December 1997, the process to close the disposal agreement awaited the State of California's registration of new gaming operators, who would operate the club following the completion of the transaction.

As the previous discussion details, the Department did not move to sell the asset as decisively as it should have and spent significant time considering offers from entities that did not have sufficient funds, did not submit viable offers, or may not have been eligible to purchase the property. In our judgment, the Department should have contracted with a professional broker to attempt to sell its interest in the Club immediately following the initial forfeiture but clearly no later than November 1993, when the government became the LCP general partner.

The following strategies designed to expedite a sale should have been considered either prior to or shortly after the initial forfeiture of the asset, rather than initiated after the settlement agreements over a year after the forfeiture:

• Evaluate the government's forfeited interest to determine what the defendants owned.
• Evaluate the partnership and joint venture agreements to anticipate sale complications related to California partnership and gaming law requirements.
• Hire a professional broker with expertise in partnership and gaming sales because brokers have an incentive to sell and are skilled at finding qualified buyers.
• Determine valuation of the asset based on the circumstances existing when the asset was forfeited, such as a non-controlling interest.
• Analyze terms relative to the remaining partner's right of first refusal. Advise all potential buyers of these rights.
• Decide which partners, if any, would not be permitted to buy the government's ownership share.
• Pursue other offers while conducting on-going sales negotiations.
• Consider selling current interest and include "put and call" clauses.10

Unfortunately for the Department, holding the asset for an extended period presented substantial risks, many of which materialized. During the last seven years, increased competition in the gaming industry and other factors appear to have had an adverse effect on the value of the Club. It should be noted that the purpose of the following discussion is not to suggest that the Department should attempt to time its disposal of assets to maximize profits. We believe that assets should be disposed of promptly.

Estimated Value of the Government's Interest Appears To Have Declined

At various times, the USMS has contracted with consultants to estimate the value of the government's interest in the Club. The following table shows these valuations as well as the estimated value of the current agreement. According to the USMS, the estimated value of the current agreement is comparable to two other offers received by the USMS at about the same time. The valuations performed in 1992, 1993, and 1995 were based on what contractors believed was the Club's fair market value at the time. Since a sale did not occur, we cannot say with certainty that the government could have sold its interest in the Club for these amounts. We can say that the contractor valuations are the best data available from which to analyze what appears to have happened to the value of the club while the Department has held it.

ESTIMATED VALUE OF GOVERNMENT INTEREST IN THE BICYCLE CLUB

Column A identifies the source and date of each valuation, as well as the date of the current agreement amount. Column B details the percentage of the Club upon which the valuation was based and whether it was for controlling or non-controlling interest (i.e., the LCP general partnership). Columns C and D identify the low and high dollar amount of the valuation. Columns E and F are our calculations of the value of a one percent interest in the Club. The one percent interest calculations are necessary for purposes of comparison because the valuations assumed different government ownership percentages.
As the table shows, the value of a one percent interest in the Bicycle Club has fluctuated widely between valuations. Numerous factors can affect valuation such as revenues, competition, litigation and whether controlling interest is considered. It appears, however, that the value of the current agreement for 30 percent of the Club with controlling interest is roughly equivalent to the value of the government's 20 percent non-controlling interest in 1992. The estimated value of the Club peaked in September 1993, which is within a few months of when the LCP general partner interest was forfeited to the government and the court authorized the trustee to sell the government's interest in the Club. Based on the pending agreement amount, and the consultant's best estimate of what the Club's value was in 1993, a one percent interest in the Club with controlling interest has declined over 50 percent since September 1993.

Department of Justice Component Comments:

We discussed our findings and recommendations with Departmental components. All components agreed with our recommendations. The components also agreed that the current arrangement where the DAG's office has control was necessary for this asset and would be useful for future problem assets.

An official from the Criminal Division stated that, in retrospect, it would have been a better alternative to hire investment bankers to pursue the sale of the government's interest in the Club in 1993 even though it would have been costly. Officials from the USMS and Criminal Division indicated that, at various times, the strategies we identified to expedite a sale had been part of their sales efforts. They also noted their belief that these strategies would not necessarily have resulted in a more timely disposal of the asset. An official from the Deputy Attorney General's office indicated that the asset had continually earned monthly distributions for the United States. He stated that this helped to offset the apparent decline in value of the Club, but noted that the Department may not always be as fortunate with other assets.13 Further, the official agreed that maximizing revenue should not be a goal of the Department and that it should dispose of assets promptly.

The USAO for the Central District of California commented that, from the time of the office's initial involvement, it had urged a prompt sale of the government's interest in the asset but that there were many complicating factors. These factors were:
(1) changing ownership interests, (2) potential for fiduciary liability to non-government owners, (3) allegations of criminal activity related to the Club, (4) lawsuits filed by various parties, including lengthy Equal Employment Opportunity Commission litigation, (5) the State licensing process and limitations on State licensing, (6) the revenue the City of Bell Gardens derives from the Club's operations, and (7) the Club's employment of approximately 2,000 people.

An official from the USMS had the following comments related to disposal of the asset, valuation of the club, and factors in evaluating disposal offers. The USMS has a backup plan to hire a broker to dispose of the government's interest if the current agreement does not materialize. The official also indicated that the value of the government's interest in the Club is virtually impossible to determine with any precision because California law prohibits publicly traded corporations from owning an interest in a California card club gaming operation. This severely restricts the market for these clubs. There are only a handful of clubs comparable to the Bicycle Club in California, and they have never been sold publicly, so market comparators do not exist. The Securities and Exchange Commission advised the USMS that the ownership interest held by the United States is a "restricted" security and cannot be publicly sold. The interests held by the United States are highly indirect ownership interests that depress market interest.

The USMS official also stated that experts in the investment community would value the interest of the United States at a standard multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA). That multiple is in a range of 3 to 5 times EBITDA. Based on that yardstick, the accepted offer was fairly valued at the time the letter of intent was accepted and is an extremely good offer at the present time. While it is possible that a more open marketing of the United States' interest might have brought a higher offer, that hope must be balanced against several other factors including the financial strength of the offeror, the character of the offeror, the ability of the offeror to secure registration with the state and licensing by the City of Bell Gardens. Even if the accepted offer had been lower in price, the nature of the company, its financial strength and its commitment to the transaction, coupled with its strong presence in the California gambling market made it an ideal business partner for this transaction. Simply put, price is just one term in a business transaction and not necessarily the most important. Particularly where, as here, it is occurring in a complicated, controversial, highly regulated and litigious environment, price may be less important than other factors.

OIG Conclusion

In November 1993, the court ruled that the government was the general partner of the LCP Partnership. Although there was some uncertainty over whether the Department could sell its interest in the Club prior to this ruling, almost four years have now passed, and the Department has yet to dispose of its interest. Department components disagreed over when to sell the asset and to whom to sell it. There was also indecision over how to sell it. The Department's "working group" was not effective in guiding disposal efforts because there was no mechanism to resolve differences of opinion among its constituent members. The most notable difference of opinion was the USMS's and AFO's desire to sell the asset and the desire of the USAO for the Southern District of Florida to hold the asset until litigation was complete. The pending agreement suggests that the final sales price may be much lower than earlier valuations.

We acknowledge that the Bicycle Club has been a unique, highly problematic asset. In our judgment, this is a major reason why the Department should have hired a broker to sell its interest in the Bicycle Club immediately after the initial forfeiture, but definitely no later than November 1993. By doing so the Department may have avoided the controversy and risks associated with holding the Club for a long period of time. The risks include: (1) deterioration of asset value while under USMS control,14 (2) possible legal responsibility should the asset take a financial downturn, and (3) indefinite ownership and operation of a controversial business like a casino. If the current agreement for the disposal of the government's interest in the Bicycle Club is not closed, the USMS should immediately contract with a broker to sell its interest in the Club. Although it may be more expensive in the short term, we believe this approach is more likely to result in a sale than the continued use of highly paid court-appointed trustees.

Recommendations and Status:

We recommend the Deputy Attorney General:

2. Designate an official with overall decision-making authority if the group management concept is used to deal with future problem assets. The process should be similar to the process currently used for the Bicycle Club.

Resolved. In order to close this recommendation, please provide documentation demonstrating implementation of this policy.

3. Require a formal disposal plan for future problem assets. At a minimum, the plan should include a consistent disposition strategy and a firm time frame for disposal.

Resolved. In order to close this recommendation, please provide documentation demonstrating implementation of this policy.

4. Require monitoring of the disposal plan by top-level management.

Resolved. In order to close this recommendation, please provide documentation demonstrating implementation of this policy.

5. If the current agreement for the Bicycle Club does not result in disposal of the asset, immediately contract with a broker with expertise in marketing and disposing of this type of asset.

Resolved. In order to close this recommendation, please provide documentation indicating that either: the asset has been sold, or a contract to dispose of the government's interest in the Club has been awarded to an appropriate broker.

7 A 1996 General Accounting Office review entitled "Preseizure Planning Practices in the Department of Justice" (GAO/GGD-97-19R) reported that USAOs were still not adequately consulting with the USMS prior to initiating the seizure of assets.

8 The U.S. Attorney, Southern District of Florida prosecuted the money laundering case. The U.S. Attorney, Southern District of Illinois prosecuted a related drug smuggling case. The U.S. Attorney, Central District of California prosecuted a civil forfeiture case.

9 For example, 30 percent ownership would bring in $30 million.

10 This type of sale agreement guarantees that the buyer may purchase any additional shares obtained by the government at the previously agreed upon price.

11 The Houlihan study only had one estimate.

12 According to the USMS, this amount is the trustee's estimate of the minimum the government could receive.

13 The financial impact of the estimated loss in value to the Government has been offset slightly by income generated from the club. The table on the preceding page indicates the estimated value of the government's interest in the Club has decreased about $35 to $40 million since late 1993. From the receipt and expense amounts in Appendix III, we estimate that the Club has generated about $10 million in net revenue for the Department since that time.

14 OIG Reports 93-10 (Contract Services for the Management of Seized Assets, March 1993) and 94-14 (USMS Maintenance and Disposal of Seized Assets, March 1994) identified instances where the USMS had held assets for as long as 8 years after forfeiture and assets held had deteriorated in value.

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