Rio settles suit over insider construction contracts

Rio Hotel & Casino Inc. and a shareholder have agreed to settle a lawsuit alleging the company improperly awarded lucrative construction jobs to companies owned by Anthony Marnell II. He is Rio's chairman, chief executive and largest shareholder.

Rio agreed to pay $100,000 in attorneys fees incurred by the shareholder, investment firm Park East Inc. But Rio admitted no wrongdoing, saying it accepted the settlement to put an end to the two-year suit.

"The parties agreed that the terms of the (construction) contracts are fair and reasonable to the company and its stockholders," Rio said in a statement.

In 1996, Park East sued the Rio and officers including Marnell and James Barrett, the company's president, alleging improprieties in construction contracts between the Rio and Marnell's construction company, Marnell Corrao Associates Inc., and his architectural firm, Anthony A. Marnell II, Chartered.

The contracts related to the construction of the Rio's distinctive curved, 41-story, 1,000-suite hotel tower, and to 120,000 square feet of meeting, retail and entertainment space. That construction began in 1995 and was finished last year.

The Rio opened in 1990 as a 424-room, 44,000-square-foot locals casino, but has expanded a number of times. The resort now has 2,500 rooms and a 120,000 square-foot casino. The Rio is expanding again, adding a 3,000-room hotel tower, a 100,000-square-foot convention center, and expanded retail, restaurant, pool and parking facilities. Marnell Corrao is serving as contractor on the current expansion.

"In each case," stated Park East's complaint, "the company has entered into, and performed, contracts with (Marnell Corrao and Marnell, Chartered) which required the company to pay unfair amounts in exchange for the services provided, amounts which far exceeded the normal, reasonable and customary charges for similar services in connection with similarly-sized projects."

Park East further alleged that the Rio, "did not submit the proposed contracts for bid or solicit proposals from independent architects or contractors."

Park East alleged a $6.63 million payment Marnell received for architectural work on the expansion -- an amount equal to 4.25 percent of the total construction costs -- exceeded customary fees for comparable work by 25 percent.

Marnell also received $11.4 million -- equal to 7 percent of the project's costs -- in contractor's fees, "which is far in excess of a reasonable fee," Park East alleged.

Finally, Park East alleged that $51 million paid "affiliates of Marnell and Barrett" for other architectural and construction costs "is enormous, and is grossly unfair to the corporation."

Park East had sought an end to such "self-dealing transactions," and repayment of the improper fees.

In a 1997 answer to the suit, the Rio denied all Park East allegations.

In April 1997, Marnell Corrao and Marnell, Chartered were dropped from the case as defendants, but Marnell himself remained a defendant.

Under the terms of the proposed settlement, Park East agreed to drop its suit in return for a Rio agreement to run any future Marnell-related construction projects by a special committee of the Rio's board of directors, or the board's audit committee.

Park East decided to settle the suit after investigating the Rio's contracts with Marnell, and comparing them to other comparable Las Vegas construction agreements.

Also crucial to the Park East decision was an Arthur Andersen report that found the Marnell construction costs to be comparable to those of other similar construction projects, according to court papers.

After reviewing the Arthur Andersen report, Park East concluded that "performance of the ... contracts was fair and reasonable to the Rio and its shareholders."

The settlement is quite a change in tune for Park East, which alleged in its December 1996 complaint that "four of the five directors of the company are either financially interested in the transactions ... or, by virtue of Marnell's domination, control and influence, are incapable of making an independent judgement with respect to the transactions."

Park East attorneys did not return calls for comment.

The proposed settlement requires the special board committee or audit committee to be comprised of independent company directors; that is, directors who have never been company executives, who aren't party to any Marnell contract with the Rio and who haven't received any payments beyond standard directors' compensation from the company.

According to the proposed settlement, "the audit committee of the Rio did review and approve the (recent expansion) contracts. ... Nothing in this stipulation shall be interpreted or understood to mean that the ... contracts, or any other contracts, were not approved in accordance with the provisions hereof."

A hearing to approve the proposed settlement is set for Sept. 15.

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