Harrah’s buyers face $2.8 billion problem

updated 4:13 p.m. ET Oct. 28, 2007

LAS VEGAS - It garners a mere one-paragraph mention in the quarterly earnings report, but the private equity buyers of Harrah’s Entertainment Inc. could have a colossal $2.8 billion problem on their hands.

The world’s largest casino company by revenue inherited a legal quagmire that dates back to 2000.

That’s when Arthur Goldberg, then chief executive of Park Place Entertainment Corp., signed a deal with the St. Regis Mohawk Tribe to acquire the exclusive rights to jointly develop a casino in the Catskills in upstate New York, just a 90-minute drive from Manhattan.

The tribe’s current leaders say the deal was a sham, only meant to protect profits at four casinos in Atlantic City, N.J., now owned by Park Place’s successor company, Harrah’s.

It also pushed aside a deal the tribe had to build a casino in the Catskills, which seven years later, still has not been built.

Members of the tribe sued Park Place for its interference in 2000 and won a $1.8 billion default judgment in a tribal court mainly because Park Place lawyers did not show up. In July, the tribal court affirmed the judgment and tacked on $1 billion in interest owed.

The tribe sued again this summer, this time in U.S. federal court, to enforce the tribal judgment.

That could add a huge liability to the $13.9 billion in debt that Harrah’s private equity buyers, Apollo Management and Texas Pacific Group, agreed to take on in the $17.1 billion deal expected to close by early next year.

Analysts say it could make the buyout less viable.

“If you’re paying out the lawsuit in cash in one lump sum, it makes it very difficult to get your investment returns to work,” said casino analyst Dennis Farrell of Wachovia Securities.

The tribe’s lead lawyer, Dennis Vacco, the former attorney general for New York state, says Harrah’s has treated the case frivolously, by failing to respond to tribal court summonses and lobbying the government behind the scenes to have the tribal court annulled.

“The risk that they run in continuing to treat it as a frivolous matter is that they lose,” Vacco said. “If they lose, the judgment is growing by $440,000 a day.”

Harrah’s had no comment, citing its policy of not talking about pending litigation. It said in its earnings report it believed the case was without merit and would “vigorously contest” any attempt to enforce the judgment.

Part of what led to the tribe’s exclusivity deal with Park Place in 2000 was its money-losing Akwesasne Mohawk Casino in Hogansburg, N.Y.

The year-old casino was reportedly losing as much as $500,000 a month, plagued by cost overruns and too few customers.

Park Place’s Goldberg approached the tribe with a bailout deal, and the Akwesasne casino operator, Ivan Kaufman, was all in favor.

Kaufman even bragged to Park Place general counsel Clive Cummis on Feb. 16, 2000, that he was manipulating the finances of the casino to push the tribe into Park Place’s hands, according to a tape he made of the phone call.

“I have kind of delayed their payrolls and slowed it down so badly that, you know, they’re looking at Arthur as the savior,” he said in the tape.

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