Indian Backers Take High Risks
December 1, 2002

An elite group of top-shelf speculators has lined up behind Connecticut's Indian tribes, willing to spend millions of dollars merely to reach the starting line in the race to open the state's next gambling casino.

Few of the new casino players are bigger than William Koch, no. 354 on Forbes' list of wealthiest Americans and a daring former America's Cup skipper. He's the silent, and previously unnamed, partner behind North Stonington's Eastern Pequot tribe, whose only publicly identified investor is David A. Rosow, a Fairfield golf course developer.

Koch already has jumped the biggest hurdle: having his tribe recognized by the federal government, an entitlement that carries with it the right to open a gambling casino here.

Off Koch's flank is casino impresario Donald Trump, who is backing another faction of the Eastern Pequots, the Paucatucks, with investor J.D. DeMatteo of Burlington. Earlier this year, the two bands were united by the federal Bureau of Indian Affairs as members of a single tribe, the historical Eastern Pequots. Trump, who is plunging into Indian gaming ventures across the country, shows no sign of giving up on Connecticut.

The Easterns aren't the only gaming investment opportunity in Connecticut. Sandwich king Fred DeLuca, founder of Subway Restaurants in Milford, has been secretly bankrolling the Schaghticoke Tribal Nation, a group awaiting a preliminary federal ruling on recognition later this week. Also backing the Schaghticokes - who decline to reveal their investors - are the Eastlander Group, a Middletown venture capital firm, and another newly formed group, the Native American Gaming Fund, a New London corporation recently assembled by former state Rep. Dean P. Markham and former New York Yankee John C. Ellis.

Other investors financing tribes through the cumbersome federal recognition process are Rochester, N.Y., shopping mall magnate Thomas Wilmot, the money behind the casinos developer Lyle Berman, who is supporting the Nipmuc Tribe. Both men preside over companies created to invest in numerous tribes across the nation, covering their bets while hoping that one will be the next an casino, where gamblers pump money into slot machines at the rate of $1 million an hour.

"It's a small group of people who are willing to take the risk," said G. Michael Brown, the former CEO of Foxwoods who now works for the Seneca Indians. That New York tribe is racing to open a casino in Niagara Falls by New Year's Eve - financed by the same Malaysian family that backed the Mashantuckets with Foxwoods.

"Someone has to take the risk that the tribe will be recognized, that a [gambling agreement] will be negotiated and the casino will be approved," said Brown, who also has done consulting work for the Schaghticokes.

Risky or not, the payoff potential has created a "mad dash into Indian Country" by investors, said New Mexico lawyer Alexis Johnson.

"Have you ever seen a period in history when so many non-natives were racing so fast to have tribes recognized?" asked Johnson, a longtime gambling opponent. "Anyone out there who thinks Indian gambling is about Indians is not thinking. Indian gambling is about gambling."

A Long, Costly Process

To succeed, investors in Indian tribes need plenty of patience, along with a willingness to throw open their checkbooks.

They must wait while tribes navigate the years-long federal recognition process, which requires a phalanx of lawyers, genealogists, historians, anthropologists and public relations firms. The Eastern Pequots, for example, had two previous investors pull out before Koch and Rosow stepped in.

"It is costly and it is extensive," Mohegan Tribal Chairman Mark Brown said. He said his tribe had perhaps $23 in savings before it hooked up with Waterford hotel developer Len Wolman, who led them to South African casino tycoon Sol Kerzner, Wolman's partner in Trading Cove Associates, to develop Mohegan Sun.

"My concern," Mark Brown said, "comes with how people interpret what this whole thing is about. ... The backer does not make the tribe. The backer is there to facilitate the tribe in moving forward in the process."

Along the way, lobbyists must be hired to influence decision-makers and generous campaign contributions must be funneled to politicians. The Eastern Pequots spent $500,000 of Rosow's and Koch's money to hire Ron Kaufman, a Republican insider with close ties to the White House and Gov. John G. Rowland. The Schaghticokes have spent nearly $250,000 over the past few years on lobbyists in Hartford.

Investing in a tribe also means putting tribal members on the payroll, opening tribal government offices and negotiating options to buy land. Most difficult of all, several investors said privately, are the tribal politics. Quarreling factions and rival chiefs can make it nearly impossible to keep a deal alive for the years it typically takes before the Bureau of Indian Affairs acts on a recognition petition.

Last year, the Mohegans completed a $1 billion expansion of Mohegan Sun, and its gaming revenues now rival neighboring Foxwoods, a facility viewed as the gold standard of Indian gaming. For their gamble, Wolman and Kerzner stand to earn $600 million - not bad for an initial investment of about $10 million.

Wolman, chairman of a collection of gaming, hotel and construction companies based in Waterford, is building the hotel and convention center at Adriaen's Landing in Hartford.

Trading Cove Associates is now backing a Wisconsin tribe that hopes to open a casino in New York State and recently gave the tribe 125 acres it had bought in Stockbridge, N.Y. The tribe, the Stockbridge-Munsee Band of Mohican Indians, has federal recognition and historical ties to upstate New York, but no deal with the state to open a casino.

Even so, Wolman said, "We feel that there's a real opportunity."

It's hard to miss what's happening in Indian Country. While revenue in Las Vegas has stagnated recently, Indian gaming is on a roll, particularly in California, which has 107 federally recognized tribes and 49 casinos. According to the National Indian Gaming Association, 562 tribes have federal recognition nationwide, and 201 sponsor some form of gambling.

Earlier this year, Merrill Lynch predicted that Native American gaming would grow to more than $13 billion in annual revenue in 2002, an increase of 10 percent - compared with just 1 percent for Las Vegas.

Drumming Up Money

Within a few days, the Schaghticoke Tribal Nation could be swimming in offers from would-be investors. But first, the Schaghticokes desperately need a preliminary positive recognition finding from the BIA on Thursday.

New investors in the tribe say Subway's DeLuca is no longer actively financing the tribe's efforts, though he may step back in at a later date. Because of this, the Schaghticokes have had to look elsewhere for money, said Stephen A. Zrenda, one of the tribe's new backers who is a lawyer in Oklahoma City. Fund-raising "will take off" if the tribe gets a positive finding, he said.

This fall, the Native American Gaming Fund has been wooing potential investors willing to buy a minimum of $25,000 in private shares in a company that hopes to raise $2.9 million in seed money for a casino, including an immediate $500,000 payment to the tribe.

"As you know, [the tribe] intends to develop a casino in order of magnitude comparable to Foxwoods and Mohegan Sun," said a recent letter to prospective investors. The fund, organized by Markham, Ellis and Zrenda, would in turn "acquire rights to 8-10 percent of the [tribe's] resort/casino." Fund managers also plan to hire a "major casino management firm" for the tribe this winter.

Ellis is a real estate investor who spent 16 years in professional baseball. Markham is a longtime tribal adviser and serves as its business manager. They did not return calls for comment.

DeLuca, who did not respond to calls or e-mails about his involvement with the tribe, was brought in by the Eastlander Group, a relatively small real estate investment firm.

"The Eastlander Group is a venture capitalist group. They don't supply the money. They have other sources. ... A big one is Subway," said Theodore Coggswell, a prominent former tribal member who lives in New Jersey. He said Eastlander's principals, Davide Pugliares and Joseph Mazzotta of Wethersfield, often attended tribal meetings and freely discussed their role. The two men did not return calls for comment.

Interest From Big Money

People close to investors and tribal leaders say it is the big money that typically approaches a tribe, often through an intermediary, with a promise of financial support for federal recognition in return for a casino development and management deal.

Increasingly, the offers come from big-time gaming companies looking to build casinos wherever Indian gaming is legal or in states where it may soon become legal, such as Massachusetts, Rhode Island and Maine.

Gambling giant Harrah's, for example, manages four Indian casinos and has shown interest in Rhode Island, perhaps with the Narragansett Indian Tribe. MGM Mirage recently announced a deal to design a $95 million Indian casino in downtown Palm Springs.

In Connecticut, a subsidiary of a casino resorts has been assured the right of "development and management of a casino" located on Paucatuck Eastern Pequot land, according to federal Securities and Exchange Commission filings. Trump earlier this year also began running a casino for the Twenty-Nine Palms Band of Luiseno Mission Indians of California. Its name: Trump 29.

Yet succeeding at tribal gaming remains a chancy proposition.

A casino developer and manager, has loaned Indian tribes around the nation more than $60 million - but has no revenue to show for it. One of these, the Nipmuc Nation, is interested in a casino along the Massachusetts-Connecticut border, perhaps in Union. The tribe has appealed the BIA's preliminary decision last year denying it recognition.

Berman, the Lakes chairman, did not return a call for comment. He recently told the Associated Press that his company is "the equivalent of a well-funded research and development group. ... A tremendous amount of effort is being focused on obtaining regulatory and development approvals for our new Native American-owned casino projects."

The Next Big Winner?

Koch may be the next investor to hit the jackpot, as backer of a tribe that won recognition last summer. The historical Eastern Pequots could open the next casino in Connecticut - provided the state's appeal of the recognition is unsuccessful.

Meanwhile, the long-standing tribal dispute with the Paucatuck faction, which has its own development deal with Trump and DeMatteo, would have to be worked out. Trump and Koch, however, know each other socially and own homes a few houses away from each other in an exclusive Florida neighborhood, so the possibility of a deal between them is not out of the question.

Koch's company says it "relies on scientific research to make calculated risks." The son of an oil industry tycoon, Koch has a doctorate from MIT and is a driven competitor. He estimates he spent $68 million of his own money to win the America's Cup sailing trophy in 1992.

Lately, Koch gets as much attention in gossip columns as he and his $650 million fortune get in the business pages. His highly publicized breakup and divorce, as well as a long feud with his brothers, who run the family energy business in Wichita, Kan., have sometimes attracted more attention than his own holding company, the Oxbow Group.

Rosow, the Fairfield golf course developer who knows Koch through the America's Cup competitions, already has been looking at potential development sites.

The Eastern Pequots also have a close relationship with the Mashantucket Pequots, whose reservation lies next door. Rosow did not respond to repeated requests for comment, but a spokesman for Koch confirmed his interest in the tribe.

"He is a passive investor in the tribe. We do not dispute that," Brad Goldstein said from the offices of the Oxbow Group in West Palm Beach. He described Koch's role as "someone who puts seed capital down but does not take an active role in managing it."

Wilmot, the Paugussetts' investor since 1996, said he has played a similar role, although he has a close relationship with tribal leaders. During the past six years, Wilmot has seen his tribe rejected for recognition by the BIA, only to be given another chance after an appeal to the federal Department of Interior.

"When we started on this we had no idea it would take as many twists and turns," said Wilmot, whose company is one of the biggest shopping center owners in the country. "It takes a great deal of patience to go through this process."

Wilmot, chairman of Wilmorite Inc., who said he is supporting other tribes in Illinois and California, said the cost of backing a tribe through the recognition process can run as high as $10 million.

Both the Paugussetts and the Miami Indians of Illinois are using massive land claims as leverage to gain land for a casino development - to the dismay of state officials and homeowners.

The incentive, Wilmot said, is the "huge untapped gaming market" in New England and elsewhere.

Over the years, Wilmot said he has built a friendship with the Paugussett leader, Chief Quiet Hawk. Besides his significant business interests, Wilmot says he's a genuine supporter of Indians and their pursuit of sovereign rights.

"I've had an interest in Indian history since I was a kid," he said.