Testimony of Eduardo Gonzalez before the United States
Senate Committee on Governmental Affairs -- The Asset
Forfeiture Program --- A Case Study of the Bicycle
Club
Casino
Mr. Chairman and Members of the Subcommittee --
I appreciate the opportunity to appear before the Subcommittee today
to discuss one of the Department of Justice's most important law enforcement
initiatives -- the asset forfeiture program -- and in particular the U.S.
Marshals Service's management of seized
assets. I am accompanied by my Assistant Director, Kenneth Holecko,
and Gerald McDowell, Chief of the Criminal Division's
Asset Forfeiture and Money Laundering Section.
As you are aware, pursuant to the Comprehensive Crime Control Act of
1984 (Public Law 98-473), the Marshals Service is
responsible for the management and disposal of assets seized by investigative
agencies participating in the Department of Justice
asset forfeiture program. My belief in the value of this law enforcement
tool is rooted in my personal experience. I have been in
law enforcement most of my adult life, starting at the Metro-Dade Police
Department in Miami, Florida, in 1965. In the 26-1/2
years I spent with Metro, I witnessed first-hand the ravages visited
on our communities by drug dealers and other criminals whose
motivation for committing crimes was to support their drug habits.
I witnessed the growing despair of law-abiding citizens, the desperation
of young men and women, suffocated by the rising tide of
criminality in their schools, their jobs, and their neighborhoods.
As I rose through the ranks, I experienced the frustration that came
from our inability to respond other than through traditional methods
which had already proven to be ineffective.
Relief did come to Dade County and countless other jurisdictions across
the nation, however, in the form of asset forfeiture and
equitable sharing programs. These programs provided the impetus to
forego "turf wars" and to focus instead on cooperative efforts which would
benefit our law-abiding citizens while striking fear in the hearts of criminals.
As more joint efforts were launched, more criminals were arrested and
more assets were seized. As these funds started to flow
into the agency, Metro-Dade was able to move more effective law enforcement
strategies from the planning table to the streets of
the community.
It was these equitable sharing funds that enabled Metro-Dade to launch its nationally recognized Tactical Narcotics Teams (TNT), a policing strategy that reflected the basic tenets of community policing: consultation with the community to determine its needs, the adaptation of policing strategies to meet those needs, and a mobilization of the agency and the community.
These funds also enabled us to pilot the DARE program -- which has gained
national recognition for its success in raising drug
awareness and promoting drug resistance among school-age children --
and eventually to install it in all of the middle schools of
Dade County. And these funds enabled community-based groups to take
young men and women who had had minor scrapes with
the law and to provide them with the education and skills to make them
productive, rather than destructive, members of the
community.
As Chief of Police in Tampa, Florida, I saw asset forfeiture proceeds
used to fund school resource officers -- police assigned to
local schools, bringing stability and guidance to their areas. Funds
were also used to support narcotics investigations.
In my opinion, asset forfeiture is one of the most effective law enforcement
tools we have. It is a critically important element of
the Department of Justice's law enforcement efforts, and there is no
question in my mind that the program, by any measure, is a
success. It advances important national law enforcement objectives
in two major respects.
First, and fundamentally, the primary purpose of the forfeiture laws
is to deter criminal activity by depriving criminals of property
used or acquired through illegal activities. Separating the criminal
from the fruits of his crime is a major goal of any case involving
asset forfeiture, and whether any such case is a success or not has
to be judged, in large part, by whether this goal was
accomplished. Criminals must not be allowed to view a jail sentence
as simply a cost of doing business, a temporary interruption in
their otherwise luxurious life styles. Throughout my career in law
enforcement, I too often heard criminals say that they would
gladly trade time in prison for a millionaire's life after their release.
Asset forfeiture has shattered that fantasy in countless cases.
Second, through the asset forfeiture statute's "equitable sharing" provisions,
the forfeiture program provides critical resources to
state and local law enforcement. Equitable sharing of seized assets
encourages higher levels of cooperation among law
enforcement agencies, and the citizens in our communities are the beneficiaries
of these cooperative efforts.
We can all agree that there is a sense of poetic justice in the way
the asset forfeiture program shifts funds generated by criminal
enterprises and uses them to fight crime. Since the equitable sharing
program began in 1985, the Justice Department has
transferred over $1.6 billion to State and local law enforcement agencies
to use in their communities. Attached for the record are
the most recent state-by-state equitable sharing statistics.
It is obvious that the amount of funds available for equitable sharing
will be maximized through an efficient and professionally
managed seized assets program. Mr. Chairman, this committee's devotion,
and your personal dedication, to improving the economy
and efficiency of government operations is renowned, and I want to
assure you of my shared commitment to that goal.
Upon becoming Director of the Marshals Service, I fully embraced the
principles of the President's National Performance Review
to create a government that costs less and works better. To that end,
at our House appropriations hearings last March, I committed to improving
the overall operation of our seized asset management program through a
major structural reorganization. It will not
only improve our business practices, but also will strengthen our oversight
of the program. I hope that this reorganization will be
cleared by our oversight committees quickly, so that we can implement
these valuable reforms.
At last year's appropriations hearing, I also committed to reducing
our seized asset inventory before my next appearance before
that committee. I am pleased to tell you that we have done so. Between
July 1995 and November 30, 1995, we reduced our
inventory of salable properties that have been forfeited for more than
a year by 35%, from 751 to 489. Of these 489, 136 currently
have firm contracts for sale, 31 are scheduled for auction, 16 will
be disposed of through Weed and Seed, and 130 are being
actively marketed and targeted for sale before April 1, 1996.
In addition, of the 489 properties, there are 129 which we are not legally
authorized to dispose of at this time, generally because of
the nature of the asset or the appeal status of the forfeiture. This
means that only 47 overage, readily saleable properties will
probably not be disposed of by April 1, 1996.
I have instituted other management reforms. In August 1995, all district
offices were required to submit marketing plans for any
forfeited properties that had been in their inventories for over one
year. These plans were carefully reviewed and each U.S.
Marshal received a personal response from me regarding their district
plan. Each Marshal was also advised that he or she would
be held personally responsible for seized asset management in his or
her district.
Currently, we are engaging Arthur Andersen & Co., one of the "Big
Six" accounting firms, to develop a comprehensive quality
program, which will include process reviews of our overall strategy
for the management and disposition of seized assets. This
program will give each district the skills and tools it needs to manage
its seized assets program effectively. Additionally, we are in
the process of organizing a title symposium in conjunction with the
American Land Title Association in an effort to educate the title insurance
industry about the forfeiture process, thereby making it easier for buyers
of forfeited property to obtain title insurance.
The end result will be the expeditious disposal of properties that
would have otherwise been difficult to sell.
Our increased emphasis on strategic planning and marketing, along with
the personal involvement of each Marshal, is already
showing results. For example, the Central District of California (Los
Angeles), which has the largest real property inventory in the
nation, has gone from 431 properties in August 1994 to 160 properties
at present -- a 63% reduction. A major reason for Los
Angeles' success has been its development of several creative marketing
strategies. One of those strategies includes the disposal
of 25 mostly over-aged residential real properties by auction through
the General Services Administration. This auction came to be
known as the "203K Auction," because the District identified several
properties as potentially eligible for a 203K approved loan,
under which the buyer not only finances the price of the property,
but also the cost of the repairs, which rolls into a 30-year
mortgage. This enables many buyers the opportunity of purchasing a
home they otherwise might not have. The Marshal in Los
Angeles has told me that his ability to apply his knowledge of the
local market had been a significant factor in the eventual sale of
the properties. It is clear that placing authority and responsibility
with a manager in the affected area produces results.
Several other districts have participated in a project called "Government
Owned Real Estate" (G.O.R.E.), under which
difficult-to-sell properties held by a number of federal agencies were
disposed of through auction. Three U.S. Marshals Service
employees received Hammer Awards from the Vice President for work on
the G.O.R.E. project. Other large districts throughout
the country are also pursuing this strategy of combining resources
with other government agencies and disposing of properties
through auctions.
The Marshals Service reorganization envisions streamlining the seized
asset management structure by eliminating seized asset
regional offices and granting more authority to the Marshals in the
various districts. It also provides for the establishment of
performance standards and strengthening of our oversight program. Oversight
will be enhanced through the reassignment of 10
personnel from these regional offices to our Program Review Division.
Our goal is to review, on an annual basis, the 20 largest
districts, which manage 80% of the total inventory.
Our seized assets performance standard establishes the goal of disposing
of real property, within one year of seizure, at 85% of the appraised value.
Each district will be measured against this standard, and assistance will
be provided to districts experiencing
difficulties in achieving the goal.
But we are not waiting for the completion of the reorganization of the
Marshals Service. We already are aggressively pursuing
ways to make the program better. For example, in addition to establishing
a comprehensive quality program in November 1995, we
awarded a contract to Price Waterhouse to perform a variety of business
services nationwide, such as pre-seizure planning,
business valuations, and business disposals. We are also seeking a
contractor with a national reputation for expertise in property
management and marketing. We anticipate that we will be able to obtain
such services off the GSA schedule and begin
implementation in the near future. In short, we are doing much to make
our asset management program businesslike and efficient.
Although, as I have indicated, the asset forfeiture program is a law
enforcement tool, we must also recognize that it also is a
complex financial and management operation. During FY 95 we disposed
of 31,615 assets valued at $706 million. We also took
custody of 32,315 new assets valued at $606 million.
Some of these assets presented novel management and disposition issues.
For example, we seized two medical clinics and a
laboratory from a defendant convicted in an insurance fraud scheme.
The ongoing businesses had over 25,000 patient files and 650 pieces of
equipment that had to be inventoried. After the successful collection of
outstanding receivables and liquidation of the
assets, over $1 million was recovered by the government from this case.
In another case, the Marshals Service took custody of a 25-acre vineyard
that had served as a front for a marijuana growing
operation. We sold the vineyard for $345,000, or 90% of its appraised
value. The Marshals Service has also managed and disposed of an exotic
car dealership and a real estate business seized in a drug trafficking
and money laundering case, resulting in a
recovery of over $2.1 million dollars for the government.
Should we back off from seeking forfeiture of a criminal's assets because
they are complicated or difficult to manage? I don't think so. In fact,
I know that we can never let criminals believe there is a safe haven to
hide or launder their dirty money. Even the most sophisticated or devious
criminal must be certain of our resolve to track down their ill-gotten
assets and place those assets at the
disposal of the law abiding community.
The Bicycle Club, which your Subcommittee has targeted as a topic of
this hearing, is one example of this resolve. Before I
discuss this particular case, I must stress for the record that it
represents but a tiny fraction of the entire and ever-changing
inventory of seized assets the Marshals manage. Businesses make up
less than six hundredths of one percent of our total
inventory, and the Bicycle Club is one of only 13 operating businesses
we manage. It is indeed fortunate that these assets are rare,
because, as I have mentioned, they are generally the most complex and
time consuming to manage and dispose of.
Bicycle Club
The Bicycle Club is a card club casino, licensed by the State of California
and located in the city of Bell Gardens, California. The
Club was largely financed with the proceeds of a massive drug trafficking
ring which literally reached across the entire United
States. This wasn't any low-level, street corner operation: Barge loads
of marijuana -- over 500,000 pounds, in fact -- were
smuggled in by this ring. The drugs were offloaded in ports including
San Francisco; New Orleans; Melbourne, Florida; the
Brooklyn Navy Yard; and Bridgeport, Connecticut.
When the government put an end to this operation's drug trafficking
and consequent money laundering, the United States acquired
an interest in the Club through forfeiture. While the description of
the process through which the government acquired its interest is complicated,
it is important because this sequence of events led to many of the circumstances
that have made operation and
disposition of this asset a unique challenge for the Marshals.
In 1988, Benjamin Barry Kramer and certain co-defendants were convicted
in the Southern District of Illinois of conspiring to
import and distribute marijuana in violation of 21 U.S.C. § 841(a)
and 846, and of being principal administrators of a continuing
criminal enterprise, in violation of 21 U.S.C. § 848. The jury
also returned a special verdict ordering Kramer to forfeit $60 million,
which represented a portion of his ill-gotten gains from these criminal
violations. When traced, part of the marijuana money
Kramer was ordered to forfeit was demonstrated to have been invested
in the Bicycle Club. In short, Kramer used the Bicycle
Club to launder the huge profits he made smuggling drugs.
Kramer's money laundering was intricate. While conducting his drug trafficking
operation, Kramer sent his drug proceeds to a
bank in Liechtenstein from whence it went to another offshore entity
and then eventually to something called the LCP Partnership
(LCP), controlled by Sam Gilbert. Under Gilbert's direction, LCP entered
into a joint venture with another California partnership,
Park Place Associates (PPA), run by California businessman George Hardie,
to establish the Bicycle Club. Michael Gilbert, Sam
Gilbert's son, assisted his father in the money laundering and acquired
a portion of LCP in the process.
When federal authorities learned about this money laundering operation,
both Ben Kramer and Michael Gilbert (Sam Gilbert had
died in the interim) were prosecuted in the Southern District of Florida
and, in 1990, convicted of violations of the RICO statute and the Travel
Act. The underlying offenses included the laundering of about $10.8 million
through LCP -- money that, for the most
part, had been derived from Ben Kramer's marijuana smuggling. As part
of the judgment of conviction, Kramer was ordered to
forfeit about $10 million. The interests of Kramer and Michael Gilbert
in LCP were also ordered forfeited.
After the jury's verdict, the entire Bicycle Club -- the interests of
both LCP (comprising a 65% interest in the Club) and PPA --
were ordered forfeited by the court. But because PPA's interest in
the Bicycle Club had not been obtained with Kramer money,
PPA subsequently was determined to be an innocent owner and its interest
was returned. In addition, a number of LCP partners,
pursuant to a settlement with the United States, were allowed to retain
varying amounts of their interests in the LCP partnership.
One of the LCP partners, M. Dale Lyon, claimed that he was an innocent
owner of 15% of the LCP. His claim, which the
government contested, led to lengthy and complicated forfeiture proceedings
in Florida and California. Finally, in 1993, Lyon
entered a plea agreement with respect to criminal charges relating
to his dealings with Kramer, which resulted in the forfeiture of
his LCP interest. As a result of the Florida and California cases,
the Government acquired a 55% interest in LCP.
Because of the multi-jurisdictional nature of the forfeiture, we knew
management decisions about the Club would be difficult.
Representatives of the United States Attorneys' offices for the Southern
District of Florida and the Central District of California,
the Marshals Service headquarters and its Los Angeles District office,
and the Asset Forfeiture Office (now the Asset Forfeiture
and Money Laundering Section) of the Criminal Division therefore formed
a working group to make joint decisions in order to
protect the United States' interest in the Club.
From the time the Club was seized, a court-appointed trustee has managed
the Government's interest. Consistent with the court's
orders, this trustee, in turn, has been overseen by the government
working group. The Club's then-existing management team was
left in place by the District Court for the Southern District of Florida.
The Court appointed the Finance Director for the City of Bell Gardens as
interim trustee. Because the city received a substantial portion of its
revenues from the Club, thereby creating a
potential conflict of interest for the Finance Director, it was later
determined that he should be replaced. The government working
group conducted a search for a suitable replacement in the fall of
1992.
Harry Richard, a former CEO of Main Street Station Casino and Hotel
in Las Vegas with considerable experience in the gambling
business, was ultimately selected. In March 1993, the Court appointed
Mr. Richard as successor trustee.
Due to the nature of the asset and other circumstances, management of
the club has posed significant challenges. For example, the Equal Employment
Opportunity Commission (EEOC) found that under the management of the then-General
Manager, George
Hardie, the Club had systematically discriminated against African-Americans
and women. Mr. Hardie failed to inform Mr. Richard of the EEOC finding.
In addition, there were a number of lawsuits involving the general manager
that exposed the Club to
significant liability, one of which led to a $10 million settlement
payment.
On May 9, 1994, the non-government members of LCP demanded that Mr.
Richard remove Mr. Hardie as general manager due
to related concerns and declining Club revenues. Mr. Hardie resigned
under pressure in July 1994, and Mr. Richard assumed the
General Manager's role in addition to his responsibilities as trustee.
Having fulfilled an important law enforcement objective by ending the
money laundering of drug trafficking proceeds and forfeiting
the interests related to that drug trafficking, we have proceeded diligently
to sell the government's interest in the Bicycle Club -- a
process that we concede has been more lengthy and complicated than
we would have liked. While several previous potential deals
have fallen through due to insufficient offering price or lack of solid
financing, I am pleased to tell the Subcommittee today, as the
Department informed you last week, that we have signed a letter of
intent for the sale of the government's interest in the Bicycle
Club. We hope to conclude this agreement in the very near future.
Although our overriding goal since forfeiture has been to sell the government's
interest in the Club, we have had a duty as
temporary owner of a significant interest in the Club to preserve this
asset pending sales efforts. Our review of the Club's
performance reveals that, since the ouster of the former general manager
in 1994, the Government trustee has successfully
maintained the value of the Bicycle Club and revenues have remained
high, despite increased competition from new and existing
casinos in the area, removal of the Asian games contractor whose illegal
activities brought in millions of tainted dollars, and other
factors outlined above. Attached for the record is a copy of the most
recent review of the Bicycle Club that was prepared by Don
Kelly and Company, an independent financial management firm.
Considering the effects of these outside market forces, the financial
position of the Club has improved. The financial indicators of
the Bicycle Club are as follows:
_________________________________________________________________
FINANCIAL INDICATORS OF THE BICYCLE CLUB
_________________________________________________________________
DESCRIPTION AUDITED NOVEMBER PERCENT
(IN THOUSANDS) 1989 1995 CHANGE
_________________________________________________________________
TOTAL ASSETS $32,179
$35,373 10%
TOTAL LIABILITIES 24,819
18,291 <26%>
PARTNERS' CAPITAL 7,360
17,082 132%
_______________________________________________________________
TOTAL LIABILITIES 32,179 35,373 10%
AND EQUITY
________________________________________________________________
It is important to note that our management of the Government's interest
in the Club, though lasting longer than we would have
hoped, has not cost the taxpayers a single penny. Quite to the contrary,
the government has received income of approximately $6
million each year from Club distributions, which has vastly outpaced
our expenses related to the Club, and has provided significant
non-taxpayer deposits to the Assets Forfeiture Fund.
Lessons Learned
Hopefully, the Marshals Service's relationship with the Bicycle Club
is near an end. We have learned much from this experience,
and it is clear that we made some mistakes in our management and oversight.
We are moving forward aggressively to address the
problems that have been uncovered. Among the lessons we have learned,
and the steps we are taking, consistent with existing
statutory authority, are these:
I have instructed Mr. Holecko to conduct
a rigorous internal review of our involvement in the oversight of the trustee
for
this asset. I also have asked the Inspector
General of the Department to perform a "cradle-to-grave" review of the
management of the Club. In addition, the IG
and the Marshals have contracted for an audit of the fees charged by the
trustee's attorney. Based on the auditor's
recommendations, the Service has requested additional information from
the
trustee's lawyer to support his claim for
fees. Finally, the Service has used its contract with Price Waterhouse
to complete
an audit of the trustee's payments. That report
is complete, and we are working with the trustee to implement its
recommendations.
The Marshals Service must play an integral
role in any pre-seizure planning, including obtaining our concurrence if
trustees are to be used in the management
of property. The 1990 seizure of the Bicycle Club predated issuance of
the
Department's updated policy on pre-seizure
planning in 1994; many of the problems involved in management of this asset
could have been avoided if that policy had
been in effect.
We are developing trustee qualifications
guidelines that will specify what experience and background to look for
in
trustees before we appoint someone to serve
in that capacity.
We are developing a policy which defines
the scope of a trustee's duties, and which establishes a formal role for
the
Marshals Service in the oversight of trustees.
We are developing standard contracts that we can enter into with trustees and their attorneys.
We will require trustees to prepare budgets
for their management activities and have those budgets approved in advance.
In the same vein, we will develop guidelines
on trustee compensation.
We will subject trustees to annual audits
of their finances and operations, along with contract management reviews
of the
trustees.
We intend to strengthen the internal oversight
of trustees by carefully segregating their authorization, certification,
and
payment responsibilities.
Finally, I want to address one specific aspect of the Bicycle Club's
operations that is of concern to both the Department of Justice
and the Subcommittee: the Club's political contributions to committees
supporting or opposing ballot referenda as well as to
individual candidates and parties. Mr. Chairman, we all know that gambling
is a heavily regulated industry and that the gaming
industry is an active participant in the political process. As a matter
of fact, a recent Sacramento Bee story stated that two dozen
of California largest gambling interests made $3.3 million in campaign
and lobbying expenditures in 1994 alone.
It may make sound business sense for a gambling operation such as the
Bicycle Club to make political contributions to candidates
as well as to committees involved in ballot issues that could affect
the club's competitive standing. The fact that the government
owns part of this business, however, brings different factors into
play. Accordingly, the Department has determined that such
contributions are inappropriate, and we have taken the following steps
in regard to this matter:
The Service has instructed the trustee not
to make any other political contributions as long as the Federal government
holds an interest in the Club.
I have referred this matter to the Department's
Inspector General as part of his review of the Club, in order to determine
the legality as well as the propriety of the
contributions that have been made.
In the future, Marshals Service policy guidelines
on trustee operations which I mentioned earlier will preclude such
contributions.
Conclusion
The Bicycle Club has presented management and legal issues unlike any
other property in the history of the Marshals Service's
seized asset program. It was a challenge we accepted because, as I
said before, there must be no safe haven for the proceeds of a criminal
enterprise. I promise you that we will not shrink from our duty to combat
sophisticated criminals and forfeit their ill-gotten
assets just because they may be clever enough to invest their money
in businesses that are difficult to manage. We look forward to working
with the Subcommittee in our efforts to ensure that crime literally does
not pay.