Trial testimony reveals that SugarHouse casino was almost never built

Neil Bluhm: "This was the riskiest thing I've ever done."
Neil Bluhm: "This was the riskiest thing I've ever done."
Posted: August 19, 2012

WILMINGTON - He's an octogenarian trial lawyer with a fierce reputation, but on matters of finance, Richard A. Sprague calls himself "an ignoramus."

"I wouldn't know budgeted development costs from a hole in the wall," Sprague testified at a trial in Wilmington over the expansion of the SugarHouse Casino in Philadelphia.

Sprague said he needed a financial partner when he was putting together a 2005 bid for one of Philadelphia's two casino licenses.

He approached Las Vegas casino operator Steve Wynn, but those talks went nowhere.

Sprague had better luck with billionaire Chicago developer Neil G. Bluhm.

The Philadelphia investors, led by Sprague and Robert Potamkin, the auto-dealership scion, brought local connections to the deal, while the Chicago partners, led by Bluhm, promised to raise the money for a casino.

But the falling out of those two groups in the last year is now the subject of a lawsuit in Chancery Court here.

Local investors have accused the Chicago partners of not following through with a "supermajority" vote on the planned expansion of SugarHouse. The vote would give them effective veto power over the project, which they argue is not big enough.

Though the subject of the lawsuit is the expansion, the trial has revealed how the SugarHouse Casino almost did not get built.

The Pennsylvania Gaming Control Board selected SugarHouse for a casino in 2006 but did not award the license until January 2008.

The SugarHouse partners had 120 days to exercise an option to buy 22 acres of waterfront property on North Delaware Avenue in Fishtown and Northern Liberties. But the group was facing problems.

Mayor Nutter openly opposed the site, saying it did not fit his vision for developing the central Delaware waterfront.

The project also faced about a dozen legal challenges. In one, local legislators were challenging its riparian rights, or the ability of partners to build on waterfront land.

Bluhm testified that in early 2008, he and Sprague flew to California to "plead" with the owner of the land - Watche A. Manoukian, who also is a majority owner of Parx Casino in Bensalem - for more time to seal the deal.

He refused.

The partnership had to come up with $80 million, but with the economy weakening, no one was lending, Bluhm said.

The cost of the project had ballooned to $742 million.

Faced with losing the site, Bluhm and his affiliates, already in for $80 million, came up with another $80 million to buy the land. But it came at a hefty price: They were issued preferred stock paying a dividend of 20 percent.

"I've been in business for 42 years," Bluhm testified, "and this was the riskiest thing I've ever done."

"We have more money in this project than we really want to have in the first place," he said.

Once the land was purchased, the partners still faced intense political opposition from Nutter.

Bluhm testified that at the 2008 Democratic National Convention in Denver that August, he asked for help from then-Gov. Ed Rendell.

Rendell set up a meeting in his hotel suite with Nutter and Bluhm. "I tried to calm things down," Bluhm said, "and come up with a plan that might work."

The financial situation, meanwhile, was about to get worse. In September 2008, the stock market suffered its biggest one-day decline, shattering confidence and drying up lending.

The next month, the SugarHouse partners gathered at Sprague's home. Bluhm told them that if they stuck to the plan of development envisioned in 2006, the results could be "potentially horrendous."

The partners agreed to scale back the project and proceed in two phases, starting with a $395 million interim casino that would be expanded when conditions allowed.

The gaming board approved the revisions. SugarHouse broke ground in October 2009 and opened the following September, becoming the city's first casino.

In spring 2011, Bluhm testified that he wanted to approach the gaming board about an expansion. With SugarHouse chief executive Greg Carlin, Bluhm met to discuss the plan with Sprague and Potamkin.

But the Philadelphia partners did not like what they heard.

They said the expansion was far less than what was presented to the gaming board in 2009. According to expert testimony, though the revised plan would add a poker room and 80 table games, the expansion would generate 11 percent less in revenue than the 2009 plan.

Sprague wanted to invoke a supermajority vote on the expansion, but Bluhm refused. The Philadelphia partners sued in April 2011.

Bluhm has maintained that the dispute is really about "coercing" him to accept a lower dividend on his preferred stock.

An attorney for the Chicago partners, Ronald L. Marmer, asked Sprague whether it was true he would have "traded his vote on the expansion" in return for Bluhm's lowering the dividend on his stock.

Sprague answered that it was a "factor" for resolving issues. But, he added, "it did not mean we'd give up whether we had a supermajority vote."

Judge Donald F. Parsons Jr. said the trial would resume for only two more hours at a future, undetermined date.


Contact Jennifer Lin at 215-854-5659, jlin@phillynews.com, or follow on Twitter @j_linq.

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