Giannoulias report exposes wrongdoing at Lincoln Hotel

Owners misdirected money, misused funds owed to state; Treasurer turns over evidence to law enforcement authorities

May 19, 2008

Owners of the Abraham Lincoln Hotel and Conference Center in Springfield employed a sophisticated scheme to limit and divert its cash flow according to a forensic review commissioned by Illinois State Treasurer Alexi Giannoulias. As a result, it appears the owners attempted to defraud the state of millions of dollars in loan payments.

Despite the hotel owners’ unwillingness to provide crucial documents relating to the financial history of the hotel and its parent corporation, headed by Springfield powerbroker and political-insider Bill Cellini, forensic accountants have identified approximately $2 million that was improperly diverted.

“We believe this report is just the tip of the iceberg,” said Giannoulias who has provided a copy of the recently issued report and other evidence detailing the financial irregularities and abuse to the offices of the Federal Bureau of Investigations (FBI) and the Illinois Attorney General.

The politically connected hotel owners, including Cellini who also served as head of the President Lincoln Hotel Corporation, pocketed catering profits, padded reserve funds, sent checks to a corporation official who falsified financial records and paid for legal and other professional services to make it appear the hotel never had cash available to pay down its state-backed loan, evidence in the report suggests.

The report indicates the owners hid hotel funds to avoid making payments on the $15.5 million state loan originally issued in 1982. As part of a restructuring of the loan agreement in 1990, the hotel owners struck a deal with Illinois lawmakers that allowed them to make payments on the loan only when the hotel showed it was making a profit.

“From the very limited information that we’ve had access to, it’s apparent that the owners of the hotel cooked the books to conceal profits and fleece taxpayers to avoid making good on a government loan that never should have been made,” said Giannoulias, who gained title of the hotel earlier this year and plans to sell it at auction in the next several months to get the loan off the books and generate the maximum return for the state.

Along with financial records, forensic accountants discovered correspondence from those who controlled the hotel that indicate an intention to divert funds from the state.

The owners have made only two loan payments in the last 10 years and none since 2002. At the time Giannoulias’ office took title of the hotel during a judicial sale last March, they owed $30 million in unpaid principal and interest.

Concerns regarding the lack of payment grew after a court-appointed receiver took control of hotel operations in March 2007 as part of Giannoulias’ effort to foreclose on the property. During the first year of receivership – from March 2007 to March 2008 – the Lincoln Hotel showed a net profit of almost $1.2 million.

“After more than a decade of claiming not to have made a dime, the hotel suddenly makes a net profit of more than $1.2 million in one year,” Giannoulias said. “Many questions remain regarding the previous owners and that’s why we’ve forwarded this evidence to law enforcement authorities to investigate.”

Catering Contract ($475,000)
According to financial records, the hotel owners used layers of contracts from 1996 until 2006 to skim 80 percent of profits from an exclusive catering agreement with the Springfield Metropolitan Exposition and Auditorium Authority (SMEAA), the report indicates.

Directly contrary to the terms of the state-backed loan, Cellini arranged that the hotel enter into a contract between the hotel and his corporation. This cozy deal enriched the owners and siphoned off an unfair share of revenue that should have gone to the hotel.

Under the agreement, the hotel was entirely responsible for the catering but only received 20 percent of the profits. The rest went to the Cellini-run corporation, which performed no services other than to prevent the money from showing up as hotel profits.

Forensic accountants found that $475,000 was diverted to Cellini’s corporation through this contract, but they were unable to recover records on how this money was spent.

“Cellini’s corporation lined its pockets with catering profits while doing absolutely none of the work,” said Giannoulias, noting that the hotel owners intentionally misrepresented the terms of the catering contract in audits submitted to the state. “Not only was Cellini ripping off the state, but the astonishing terms of this contract enabled him to swindle his own hotel and SMEAA, which were legally bound to honor the agreement.”

Profits used to pay legal fees ($722,000)
The owners used hotel profits to pay legal fees that had nothing to do with the hotel ownership or operation, the report indicates. According to the report, beginning in 1992 until 2006, the owners began spending money from the hotel to cover legal expenses associated with three separate lawsuits involving the hotel and its ownership, including one that sought to improve its audit reporting.

“The owners claimed that the legal fees were part of normal operating expenses,” Giannoulias said. “Ironically, they were using money that belonged to the state and taxpayers to defend their fraudulent activities and fight the state.”

Reserve funds improperly deducted ($508,000)
Under the terms of the loan, the hotel owners were allowed to use reserve funds to pay real estate taxes, insurance premiums or other limited costs. A single deduction was permitted each year, but from 1998 to 2006, the owners regularly made each deduction twice, once in the year the money was reserved and once in the year the money was actually spent, records show. This reduced the hotel’s cash available to pay the state.

“By making double deductions, the owners were able to hide funds,” Giannoulias said. “Their creative accounting practices significantly reduced their cash flow, enabling the owners to cheat the state.”

Improper expenditures ($247,000)

• Improper professional fees ($154,000)

The hotel owners used hotel cash to have their personal tax statements prepared and to have other personal tax consequences analyzed. From 1992 to 2006 the hotel paid for the preparation of the personal tax statements of the owners. The hotel paid for two separate reports analyzing the tax implications to the owners from certain transactions of the hotel. In each instance, the owners improperly benefited from these payments.

“The borrowers failed to make loan payments to the state yet they were using the hotel’s funds as their personal piggy bank to pay for expenses they should have paid for themselves,” Giannoulias said.

• Falsified financial calculations ($88,000)

The owners also submitted incorrect financial calculations and manipulated cash flow in order to avoid making loan payments, the report indicates.

The calculations were ordered by a Chicago-based individual, who served as both secretary of the President Lincoln Hotel Corporation and as an official of a private management company controlled by Cellini. Paid $2,000 a quarter for dubious management services, he also instructed personnel to redirect money to reduce cash available on the balance sheet, the report shows.

The individual was intimately involved in the preparation of the hotel’s accounting records and received approximately $88,000 in improper payments between March 1992 and December 2006.

• Money to Asphalt Pavement Association ($5,000)

Other hotel money that should have been used for payments to the state included nearly $5,000 to the Illinois Asphalt Pavement Association, a group that is headed by Cellini. The money included payments described as lobbyist registration fees and Christmas gifts.

o Christmas Gifts: $2,2259.02
o Undisclosed Expenses: $1,817.04
o Carmel Apple Gifts: $644.82
o Lobbyist Registration Fees: $150 (for three separate years)
o Shipping Expenses: $19.88
Total: $4,890.76

“I can’t even begin to fathom why hotel owners who felt no obligation to pay their mortgage found it acceptable to pay for Christmas gifts and lobbyist registration fees of the Asphalt Pavement Association,” Giannoulias said.

In 1982, a group of politically connected investors received a $15.5 million state-backed loan to build the hotel in downtown Springfield. It opened in 1985 as the Ramada Renaissance, but the borrowers quickly fell behind in making payments. Mismanagement resulted in the hotel losing its franchise agreement with Marriott International, Inc. in 2005.

A month after taking office last year, Giannoulias successfully urged a Sangamon County judge to appoint a receiver to take over day-to-day operations beginning March 1 and the hotel immediately began realizing a profit.

Giannoulias plans to sell the Lincoln Hotel to the highest bidder in the next several months. Money from the sale would be applied to paying down the borrowers’ debt.

After gaining a foreclosure order against the owners of the Collinsville Holiday Inn, which was also built as part of the Illinois Insured Mortgage Pilot Program and whose owners similarly failed to repay the state for a loan to construct the hotel, Giannoulias took title of that property in November 2007. The state will hold an auction to sell the Collinsville hotel and is currently accepting bids until May 21.

An investigation headed by the Treasurer’s Office into mismanagement and financial wrongdoing at the Collinsville Holiday Inn revealed that the owners diverted hotel profits to enrich themselves. Giannoulias turned over documents revealing the improprieties to federal authorities in May 2007.