You Can't Cheat an Honest Man - James Walsh [54]
Ashford Castle was an ancient fortress in County Mayo, on Ireland’s west coast. In the late 19th century, it had been rebuilt by Lord Ardilaun, a member of the Guinness brewing family. In the 1940s, Ashford and 11 surrounding acres had been converted into a luxury hotel. By the late 1970s, it was owned by an Irish businessman who couldn’t get it to generate enough revenue to pay the mortgage.
In 1980, Allied Irish Banks (AIB) foreclosed on Ashford. It didn’t want the hotel—but it couldn’t find a buyer. In 1985, it teamed with Dowling, Curley and Nickerson to syndicate the hotel in the U.S.
Dowmar sold rooms, or “units,” to investors. Because investors could spend two weeks each year in their units, the deal had an attractive time-sharing aspect. Technically, though, the deeds were securities because the investors had a right to share in the hotel’s total income.
The syndication raised $7.5 million to buy Ashford from AIB, which financed most of the investments itself at a relatively high interest rate.
For the big bank, it was a great deal, transforming a white elephant into the personal loans to a bunch of wealthy Americans. It was also a great deal for Curley, Nickerson and Dowling, who collected syndication fees. Better yet, through an entity called Ashford Castle Inc. (ACI), they gave themselves a contract to manage the hotel.
Numerous American investors were solicited through personal contacts, a slick direct mail campaign and an appealing private placement memorandum. “It sounded like a great investment,” says Peter McSorley, owner of a New York taxicab company. “We were told that big dividends would pay off the mortgage.”
Among the Ashford group’s members were such notables as Jay Higgins, a former vice chairman of Salomon Brothers; the Rooney family, which owns the Pittsburgh Steelers football team; Prescott Bush, the brother of the former U.S. President; and, Dublin-born Anthony J. O’Reilly, president of H.J. Heinz.
Throughout the solicitation process, AIB made efforts to conceal its ownership of Ashford. The bank did this, primarily, to get higher prices for the property than it would have if the buyers had known the hotel was in foreclosure.
Two years after the Ashford deal, Dowmar was broke. So, it found another old Irish castle to sell to the same American investors. Dromoland Castle, near the town of Shannon, had been home to various lines of Irish royalty since the late 1600s. In 1963, it had been converted into a luxury resort hotel. In 1987, it was acquired by Curley, Nickerson and Dowling. Acting as Dromoland Castle Inc. (DCI), they raised almost $13 million. AIB had no equity in the castle this time; but it did serve as the project’s sole financier and escrow agent.
The Dromoland private placement memorandum contained misrepresentations about the financing and the use of proceeds. Also, the syndication was consummated even though the requisite minimum subscription level stated in the Dromoland PPM was never reached.
The Ashford deal’s financial structure created a hidden drain on shareholders’ equity; the problem was much worse with Dromoland. For one thing, Dromoland needed extensive renovations. For another, the perps were using Dromoland money to keep Ashford investors current.
Andrew Schlafly, a lawyer for some of the investors, said: “If Dromoland Castle’s promoters had to siphon off revenues and capital to pay down Dromoland’s [AIB] financing, they also had to use Dromoland’s funds to continue paying the older Ashford loans.”
So, in the same period of time that the Ashford investors lost onethird of their equity, Dromoland’s investors saw their equity sink to zero under a debt that eventually reached $9 million. “It was a classic Ponzi situation, where later investors lose more than earlier investors,” Schlafly said.
The cash infusion from Dromoland smoothed things over for a little while. But,