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December 18, 2014

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Investor in former Maxim hit by insider trading complaint

The Securities and Exchange Commission has accused a Dallas investor in the former Maxim hotel-casino in Las Vegas of engaging in insider trading. Attorney Gary Kornman also is the subject of a fraud lawsuit in Texas over a failed plan to turn the old Flamingo Road hotel, now a Westin franchise, into a timeshare complex.

According to an SEC complaint filed Wednesday in federal court in Dallas, businessman and attorney Gary Kornman obtained nonpublic information concerning the acquisitions of public companies in confidential discussions with prospective tax planning clients, including information about a casino merger.

Kornman and his attorneys could not be reached for comment by press time.

In February 2001, an executive with a medical supply company told Kornman that the company would likely be acquired by another firm, according to the complaint. Kornman purchased 6,600 shares of the company, MiniMed Inc., for about $38 per share on behalf of a hedge fund he controlled and made about $67,000 when the merger ultimately took place in August 2001, the complaint said.

In a November 2001 meeting with a board member of Hollywood Casino Corp., Kornman learned that Hollywood would soon be sold to another company for a certain price, the complaint continued. Kornman began acquiring Hollywood shares in the account of another hedge fund he controlled. Kornman reaped about $75,000 in profit when the hedge fund sold its 29,900 shares shortly after the merger was announced, it said.

Penn National Gaming Corp. announced in August 2002 that the company would purchase Hollywood Casino for $780 million and $569 million in debt.

The SEC complaint seeks to revoke profits of $142,231 from Kornman as well as prejudgement interest and a civil penalty.

During the period in question Kornman operated The Heritage Organization LLC, a firm he founded in 1994 that previously offered tax shelters and estate planning to wealthy clients and employed as many as 120 people in Dallas, the complaint said. The company, which helped clients shelter capital gains income, filed for Chapter 11 bankruptcy protection in May.

Kornman's illegal stock trading occurred in brokerage accounts of the hedge funds he managed, the complaint said. He discontinued operating the funds -- Heritage Capital Partners I LP and Heritage Capital Opportunities Fund I LP -- and liquidated them in 2003, it said.

The suit marks the latest legal claim against Kornman, who was sued in state court in Texas in April by his former Maxim partners.

The case is similar to a claim filed against Kornman in 2000 in federal court in Las Vegas and then closed in 2002.

The suit was revived by former partners of the Maxim's former owner, Premier Interval Resorts Inc. of Nevada. The investors, Hillel Meyers of Florida, Donald Saunders of Nevada and Thomas Russell of California, accuse Kornman and his business entities of engineering a fraudulent merger and reverse stock split to obtain control over Premier.

"What third-party claimants thought they were getting in Kornman was a trustworthy and reputable man who would be a significant financial partner in their timeshare venture," the suit said. "Instead, what they got was a disloyal and deceitful person whose lying, scheming and self aggrandizing behavior is both shocking and disturbing."

The investors' Dallas attorney could not be reached.

Years later, little is known about Revanche LLC, the company that was incorporated in Nevada days before the Maxim was originally scheduled to be sold at auction and that bought the property in a foreclosure sale for $10 million. Also unknown is why Meralex LP, the company that loaned Premier $42 million to operate the Maxim, foreclosed on the property and sold it for $32 million less than it was owed.

The Texas suit claims that Revanche LLC was affiliated with Meralex and that Kornman, through his Heritage Organization, loaned Meralex $26 million as part of the $42 million loan to Premier. The suit accuses Kornman of engineering the formation of Meralex, which was controlled by investor Howard Jenkins, chairman of the Florida-based Publix supermarket chain.

The suit also accuses Kornman and his affiliates of rejecting third-party offers to purchase the Maxim "at a significant profit over the amount Premier paid for it," wrongfully conveying the Maxim to Jenkins, mismanaging Premier's business operations and misappropriating corporate funds.

At the time of the original lawsuit in Las Vegas, Kornman said offers for the Maxim -- including a proposal from MTR Gaming Group to lease the hotel -- weren't financially feasible. Jenkins said at the time that a foreclosure and rebirth as a hotel-casino was the only way to make the Maxim a success, while Meralex attorneys said the company agreed to sell for $10 million because it had reached an agreement with Revanche to share in revenues from the Maxim's operations.

Revanche sold the shuttered property for about $38 million to privately-held hotel operator Columbia Sussex Corp. in 2002. Columbia Sussex, which owns several hotels nationwide, transformed the Maxim into a Westin hotel that opened in November.

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