Global Hospitality Advisor: Don, you've recently provided forensic consulting services and expert testimony on Woodley Road and on a handful of similar cases. just how widespread is this problem?
 

Don Winter: Regrettably, many hotel operators are guilty of improperly enriching themselves at the expense of the owner. The breadth and scope of these schemes are astounding. However, this much is certain  - wherever a hotel management company has violated its duty to serve as a faithful and trusted servant, the owner should hold the operator accountable for any misdeeds.

.

Don Winter, a member of ISHC, is one of the leading forensic and trial experts in the country, specializing in the leisure industries. In 1984 he founded The Winter Company - a cnsulting and litigation advisory company based in San Francisco.

Global Hospitality Advisor: Now did this all get started? Is this an old or a new problem?

Don Winter: I've specialized in hotel management contracts for more than 25 years and I have found evidence of improprieties going back more than 30 years, but the schemes have gotten bolder and more sophisticated. Some operators seem to believe, with some arrogance, that "The owner is lucky to have us - and as long as we're competitive' (whatever that means) or provide 'value' (which is the only reason they exist to begin with), we can take whatever we want."

Jim Eyster of Cornell and Jim Butler of JMBM have taught us that operators are the "agents" of owners. As such, they are legally obligated to work solely on behalf of the owners, and not on their own behalf- and this bedrock principle has remained unchanged for hundreds of years.

Global Hospitality Advisor: So, operators are pressured to grow revenues, but the fee and incentives growth potential is pretty flat. The pressure leads to creating other streams of management revenue...

Don Winter: Wait a minute! People can make up all kinds of excuses to justify their actions - some operators have convinced themselves that they "have the right" to scheme, create kickback systems and perpetrate other misconduct. What's wrong is wrong - and Woodley Road shows that owners will no longer tolerate this. The bottom line is that operators are not now, nor have they ever been, entitled to take anything of value that belongs to their principals, the owners. For those hotel management companies out there who, either never understood this, or, over time, "forgot" this immutable principle, the future is going to be rather unpleasant or perhaps disastrous.

Global Hospitality Advisor: To Woodley Road, your work focused primarily on rebates and kickbacks. What are you finding in purchasing, for example?

Don Winter: Purchasing is just one of the many areas where the operator might divert the owner's money. What is egregious is that some operators are soliciting sizable kickbacks on general commodity items that every hotel routinely orders and consumes on a daily basis. No special skill or effort is required in arranging for vendors to sell their wares to the managed hotels, yet very large sums are changing hands in what amounts to violations of the spirit and letter of the management agreement.

Global Hospitality Advisor: People might characterize that as simply "the cost of doing business.'' But, we've found many artful ways to increase operators income in the area of amenities, services, frequent traveler programs, brand development and other hidden areas, right?

Don Winter: Yes. Because the operator controls the asset, the on-site management and employees, the computer systems and the books and records, an "ideal climate" is created for engaging in manipulation and ... let's say misdirection of any oversight. If there is a conceivable way for an operator to divert an owner's money, some operator has probably attempted it. Over the years I have investigated schemes involving kickbacks, corporate misallocations, accounting improprieties, dummy companies, hidden barter arrangements, pricing differentials, diversions of business, self-dealing, related-party transactions, staffing irregularities, timing manipulations, overcharging - the list goes on and on.

Global Hospitality Advisor: And the other shoe? What's the Pandora's box that has yet to crack open?

Don Winter: Technology! And the other shoe will drop! Now, I expect I'll he spending the bulk of my time over the next several years representing owners and asset managers seeking to recover monies in the areas I've already mentioned here. But I am sure that in an upcoming suit a Court will grant authority to make discovery in areas of technology - management information systems, and computer support and administrative services. The potential for technology-aided fraud by hotel management companies is vast. And I'm sorry to say that there are many operators out there right now hunkering down in their honkers and waiting for the shelling to begin.

Global Hospitality Advisor: That's a pretty dismal picture, Don. What's the outlook, then, for operators?

Don Winter: First, the less-than-scrupulous operators will have to make restitution for past wrongdoing. Second, suspect operators will have to determine if they truly wish to be as honest and forthright as a fiduciary relationship absolutely demands. This duty will be especially challenging for hotel operators who manage their own portfolios as well as those of others, for they have a heightened duty of disclosure, fair dealing and freedom from conflicts of interest.

When you think about it, tough, the concept of the original Management Contract was a brilliant, pure and strikingly logical business arrangement between the parties - and when the owner prospers, through the skills, expertise and "management" of the operator, then the operator is also richly rewarded - and deserves to be. It may well be time time management companies to return to the core values of trust and fair dealing essential for a viable business relationship.

Global Hospitality Advisor: And how about owners and their advisors?

Don Winter: Remember that C-Corps, REITs and other owners of hotels owe a fiduciary duty to their own investors to optimize the value of the hotel investment. Asset managers and other advisors owe a similar fiduciary duty to the owners they advise. They will have to make their own assessments, but the best pragmatic advice I can give is to engage, in a timely fashion, highly experienced experts and hotel attorneys right from the outset. Get professionals who have a record of successfully navigating the complex paths of legal discovery procedure, investigation, fact finding and analysis  in order to formulate the best plan for recovering monies wrongfully taken.