WILMINGTON, Del. -- The California Public Employees' Retirement System and a real estate partner are suing Hyatt Corp., charging the hotelier with illegal purchasing activities and falsifying audited financial statements at a Hyatt Regency the pension fund owns in Indianapolis.
The 103-page suit was filed against Hyatt in U.S. District Court in Wilmington, by CalPERS, National Office Partners LP and Hines National Office Partners LP.
They are seeking to recover some $12 million in management and incentive fees.
The suit accuses Hyatt of profiting illegally through self-dealing and kickback schemes with vendors at the hotel.
These purported schemes led to, among other problems, poor maintenance that adversely affected indoor air quality and promoted microbiological growth in the air-handling system at the hotel.
The suit also seeks to abrogate immediately Hyatt's contract to manage the 496-room hotel.
CalPERS, Sacramento, owns 98% of National Office Partners. The other 2% is owned by Hines, based in Houston, which is the general partner.
Hines manages the NOP properties in a portfolio that CalPERS valued at $1.6 billion as of March. That portfolio includes the Indianapolis hotel. CalPERS and Hines formed NOP in 1998.
CalPERS bought the hotel for $100 million in 1987 from Merchants National Bank and Trust Co., Indianapolis, which had held it as a trustee.
In 1998, CalPERS turned the ownership over to NOP.
Hyatt has managed the hotel since 1977, the suit states.
CalPERS officials are reticent about the suit. A spokesmen said officials of the $175 billion pension fund don't want to make any comment or issue any news release about the suit.
Hines executives said they won't comment. Lori Armon, Hyatt spokeswoman in Chicago, didn't respond to a request for comment. Hyatt is a privately held company controlled by the Pritzker family of Chicago.
The suit charges, "Hyatt embarked upon a systematic and intentional series of schemes . . . to surreptitiously override the provisions" of its management contract, "which restricted Hyatt's compensation to a basic and an additional fee" at the hotel.
The suit contends Hyatt or its affiliates obtained kickbacks from vendors to the hotel to increase illegally its revenue beyond the terms of the hotel management agreement.
Before the purported wrongdoing was uncovered, Hyatt, in accord with its contract to manage the hotel, received from 1987 through this year, $8.9 million in basic management fees, an amount equal to 3% of revenue for each month at the hotel. It also was entitled to almost $3.5 million in incentive fees through 1998.
According to the suit, the contract limited Hyatt's total compensation to these two fees.
The suit seeks to recover the $8.9 million in fees already paid to Hyatt. It also seeks to refuse payment of any incentive fees. The suit doesn't say when incentive fees, which have accumulated over the years, were to have been paid.
Plus, the suit contends the plaintiffs "are entitled to the disgorgement of additional monies unlawfully extracted by Hyatt from the hotel."
In addition, the suit seeks to recover an unspecified amount in punitive damages.
The suit states the illegal activity goes back 13 years and contends Hyatt issued "false and fraudulent audited financial statements" for the years 1987 through 1998 at the hotel.
Among the accusations, the suit describes several schemes Hyatt purportedly created to illegally enrich itself, including:
* Setting up MT Phone Co., which engaged in purchasing long-distance telephone service from AT&T Corp. MT Phone then sold the telephone service back at a premium to hotels under Hyatt management. "Hyatt failed to disclose the existence of MT Phone, its markups and/or its income and profits to plaintiffs," the suit states.
* Offloading corporate overhead and the overhead of affiliates such as MT Phone onto the hotel. "The effect ... was to increase Hyatt's profits from the hotel in direct violation of the restrictions of the management agreement," the suit states.
"The management agreement expressly provides that Hyatt may not reimburse itself as part of (its hotel) chain expenses for `the costs of food and beverage, personnel and other operation departmental supervision and control services,' " the suit states.
The complaint reveals suspicions were raised about illegal activities in audited financial statements for 1996 through 1998 prepared by Ernst & Young LLP and issued to Hyatt. In these statements, Hyatt inserted for the first time a footnote describing "related party transactions" at the hotel that totaled some "$2 million for each year at issue."
"Outrageously, Hyatt omitted any mention of such related party transactions in the year-end audited financial statement for the years 1987 through 1995," the suit states.
Among other accusations, the suit states that last February, representatives of the plaintiffs and Hyatt conducted a three-day examination of the hotel's mechanical, electrical and plumbing systems, and reviewed its safety and preventive maintenance records and procedures.
"Upon visual examination, plaintiffs discovered Hyatt's poor, substandard and deferred maintenance of the MEP systems, which created numerous problems," the suit states.
"Plaintiffs aver that Hyatt created the operational problems by failing to perform periodic and/or preventive maintenance and repairs."
The plaintiffs are being represented by the law firms of Duane, Morris & Heckscher LLP in Wilmington and Philadelphia, and Morgan, Lewis & Bockius LLP in Washington.