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Investors Suing Over Losses at the Stalled $2.9 Billion Fontainebleau Las Vegas
Project Discover Internal Documents Detailing Alleged Cost
Overrun Cover-Up of Up to $450 Million

By Steve Green, Las Vegas SunMcClatchy-Tribune Regional News

Feb. 06, 2012--Investors suing over losses at the stalled $2.9 billion Fontainebleau Las Vegas casino-resort say they've uncovered startling internal documents detailing how its developer allegedly covered up cost overruns and other problems at the project.

Among them, according to documents filed by attorneys last week in a Clark County District Court lawsuit, are internal memos recovered from Turnberry West Construction Inc., Fontainebleau's general contractor.

One memo details how Fontainebleau executives, including owner Jeff Soffer, allegedly directed Turnberry West to manipulate cost estimates so the executives could hide cost overruns and meet the project's budget.

Up to $450 million in allegedly hidden cost overruns are at the heart of the lawsuit.

Investors holding $700 million of Fontainebleau's debt are the lawsuit plaintiffs. They say Fontainebleau never would have been allowed to borrow that money if the lenders would have been aware of the cost overruns. That's because cost overruns would have been a signal Fontainebleau was on track to fail and the lenders wouldn't be repaid.

The numbers had to be manipulated, the investors charge in the lawsuit, because Fontainebleau as designed couldn't be built with its construction budget -- and this fact allegedly was hid from lenders who financed the project.

If the charges are true, Turnberry West executives likely complied with the alleged directive to manipulate the numbers since Turnberry West, like Fontainebleau, is owned by the prominent Miami businessman Soffer.

"The deception of Fontainebleau Resorts began when the project budget and schedule was developed by Turnberry West Construction and presented to Fontainebleau Resorts management for approval," says a memo filed in court last week. "Jeff Soffer (and executives) Albert 'Sonny' Kotite, Glenn Schaeffer and other Fontainebleau senior management insisted the budget and schedule must meet cost and schedule guidelines that would satisfy financial support and funding for the project. Despite months of rebuttal and supporting documentation, Fontainebleau Resorts insisted that Turnberry West Inc. must manipulate the cost and schedule estimates and projections to meet the guidelines dictated by Jeff Soffer, Sonny Kotite and Glenn Schaeffer."

"During monthly (loan) draw reviews conducted by (contractor) Inspection Valuation International on behalf of the lenders, Fontainebleau Resorts repeatedly misrepresented cost and schedule information," the memo continues. "This charade began in August 2007 and continued until January 2009. Turnberry West repeatedly warned Fontainebleau Resorts that the farce was ill advised."

Fontainebleau Resorts LLC is a nonbankrupt sister company of the bankrupt Fontainebleau Las Vegas company.

Another potential bombshell that was revealed in the investors' lawsuit last week was that in November 2008, Turnberry West CEO Robert Ambridge told Soffer and other executives he would not sign a "General Contractor's Advance Certificate" to be presented to lenders for funding "because he believed it to be false."

"Soffer then signed the certificate," inducing the lenders to pump more money into a project that -- unknown to them -- was headed toward bankruptcy, the investors charge.

The lawsuit also details evidence collected so far by the investors that includes what they call false sets of construction drawings that were produced to obtain building permits to keep the job on schedule, as well as information that Fontainebleau Las Vegas had two budgets: A false "Bank Budget" that Soffer showed to bankers and the real budget or "Jeff's Budget" detailing the massive cost overruns.

Work on the 3,815-room hotel-casino was halted in 2009, Soffer put it into bankruptcy protection and some 3,000 construction workers lost their jobs.

Investor Carl Icahn eventually bought the unfinished project out of bankruptcy with plans to hold on to it until the economy turns around.

Besides the investors' lawsuit in Las Vegas, a Fontainebleau Las Vegas bankruptcy trustee ( in Miami is pursuing a suit against Soffer and several other executives claiming Fontainebleau's development was mismanaged and that some of its funds were diverted to non-Fontainebleau Las Vegas entities.

Soffer and his companies have denied wrongdoing, saying Fontainebleau was a victim of the recession and the 2008 bankruptcy of a key lender, Lehman Brothers Holdings. The Lehman Brothers bankruptcy left that investment bank unable or unwilling to continue funding its share of Fontainebleau.

In the Clark County District Court lawsuit, Judge Mark Denton in December denied motions by Soffer, Fontainebleau executive James Freeman and Australian gaming titan and Fontainebleau Las Vegas investor James Packer that they be dismissed from the suit.

Denton did grant dismissal motions by several Fontainebleau executives including Kotite, Schaeffer, Ray Parello, Bruce Weiner, Deven Kumar, Howard Karawan and Whitney Their.

The purpose of last week's court filing by the investors detailing the alleged cost overrun coverup is because they're trying to drag those executives -- except Parello and Their -- back into the lawsuit as defendants.

The more defendants there are for the investors to sue, the greater the damages or settlements the investors may win from the executives and their insurers.

Kotite, Schaeffer and the other executives continue to deny wrongdoing.

Some of their attorneys filed their own motions last week, asking Denton to grant a renewed motion by Soffer that the lawsuit be dismissed.

Soffer is arguing the suit should be thrown out since the plaintiffs are not among the original lenders to Fontainebleau Las Vegas but rather are investors that purchased the defaulted debt. His attorney says Nevada law doesn't allow litigation of tort (wrongdoing) claims by assignees.

In another development, attorneys for the investors last month asked the Nevada Supreme Court to overturn a decision by Denton dismissing Union Labor Life Insurance Co. from the lawsuit.

The investors claim the insurance company fronted some money to Fontainebleau Las Vegas that helped Soffer hide the project's financial problems. Union Labor denies it was involved in any misrepresentations.

It's unknown when Denton will rule on the investors' motion to file an amended lawsuit bringing the dismissed defendants back into it or on Soffer's renewed dismissal motion. It's also unknown when the state Supreme Court will rule on the Union Labor Life issue.


(c)2012 the Las Vegas Sun (Las Vegas, Nev.)

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