Indiana Attorney General Greg Zoeller will distribute more than $150,000 to the city of East Chicago after reaching a settlement with the principals of a private company who are accused of improperly taking riverboat casino revenue. Zoeller will also make public the company's records. October 23, 2014

News Release

EAST CHICAGO, Ind. — Concluding a lawsuit the State brought against a for-profit company to obtain financial records, Indiana Attorney General Greg Zoeller will distribute the company’s $154,042 settlement payment to the City of East Chicago for public benefit, while he makes public the records showing how the company’s principals used funds intended for local economic development to enrich themselves.

Zoeller said that millions of dollars in riverboat casino revenue the company, East Chicago Second Century Inc., received over a decade as part of a local economic development agreement was supposed to be used to benefit the East Chicago community; but instead approximately $6 million of these funds went as compensation to Second Century’s two principals and seven of their family members and associates. Michael A. Pannos was paid nearly $2 million between 1997 and 2008 and Thomas Cappas was paid nearly $1.9 million. Though the pipeline of casino funding to the company was discontinued three years ago and Second Century was forced to wind down its operations, Zoeller has sought a full accounting of how Second Century spent casino revenue it received, and those records finally were obtained through the State’s lawsuit Zoeller’s office pursued against the company. The Attorney General’s Office plans to post the records online for the public to inspect.

“It is a shame the Second Century defendants exploited a weakness in the local development agreement law and steered casino revenue to their own personal benefit with no transparency rather than to the benefit of the community, and a shame that the State ever approved this arrangement in 1996. My office vowed to pursue this lawsuit for as long as it took to provide the public an accounting of the money that was intended to uplift residents of East Chicago. Now that we have succeeded in obtaining transparency, it is hoped that this sad chapter in East Chicago’s history can be closed and a new, more hopeful chapter can move forward,” Zoeller said. The Attorney General’s Office represented the State in the remaining litigation against the Second Century defendants.

Zoeller today joined East Chicago’s new mayor, Anthony Copeland, in announcing that the $154,042 settlement payment that the Second Century defendants paid will be conveyed to the city administration to assist in meeting a community need. Mayor Copeland announced the settlement funds would serve a crime-deterrent purpose in the city.

“Now that the past has been laid to rest, let today’s guardians keep watch. We will use the settlement money to establish a motion detector light program called ‘BRIGHT LITE’ to aid in deterring crime in our community,” Mayor Copeland said.

This is the second such settlement payment by defendants the State has collected that the Attorney General has turned over to the city. In June 2013, Zoeller’s office conveyed to the city a similar $331,000 payment, the proceeds from combined settlements arising from a related lawsuit: Zoeller’s civil racketeering case against former East Chicago Mayor Robert Pastrick, who was removed from office in 2004, and Pastrick’s co-defendants. Mayor Copeland announced in June 2013 that the city would use the RICO settlement funds for park equipment as part of improvements to East Chicago’s eight parks to benefit the public.

Separately, the long-running lawsuit against Second Century ultimately resulted in Second Century’s principals settling and providing financial records of how they spent revenue they received from the riverboat casino in East Chicago under a local development agreement. The public disclosure revealed that more than $6 million of casino revenue was used for compensation, including salaries, pension and insurance, to Pannos, Cappas and seven of their family members and associates from 1997 to 2008. By contrast, the disclosure showed only $3.5 million in casino revenue was spent on “net investments” by Second Century, which was created ostensibly for local economic development in East Chicago.

Specifically, Michael Pannos, a former Indiana Democratic Party state chairman, was paid nearly $2 million between 1997 and 2008; and Thomas Cappas was paid nearly $1.9 million in the same time frame. Second Century also spent $1.16 million on pensions, $1.4 million on insurance and $2.2 million in legal and accounting fees from 1997 through 2008, the disclosure revealed.

Under the settlement agreement, Second Century must cease and desist all operations, and the company and all affiliated entities must dissolve. The company agreed that the State can publicly disclose financial records obtained through the lawsuit discovery process.

Created in the mid-1990s in a deal engineered by former Mayor Pastrick’s administration, East Chicago Second Century Inc. was a for-profit company that received a cut of gaming revenue, 0.75 percent, from the local riverboat casino in East Chicago, ostensibly for local economic development. (On Jan. 8, 1996, the Indiana Gaming Commission had issued a certificate of suitability to Showboat Marina Partnership based on representations made in the Showboat Agreement and in public testimony.) In other Indiana cities with riverboat casinos, gaming revenue is shared under local development agreements (LDAs) with nonprofit organizations or municipal governments for purposes that benefit those communities, such as infrastructure improvements and charitable grants. But East Chicago stood alone — the only riverboat community in Indiana where a percentage of local-development gaming revenue was also steered to a private, for-profit company with no transparency or disclosure of spending.

Through June 1996, approximately $16 million in casino revenue had flowed to Second Century, an Attorney General’s Office investigation later found. But Second Century’s principals, Pannos and Cappas, did not publicly disclose then how the funds were used nor whether the funds benefited East Chicago residents. Following an investigation requested by the Indiana Gaming Commission, then-Attorney General Steve Carter sought to enforce the state’s public charitable trust laws. In 2007 Carter intervened in a lawsuit between the City and Second Century, Pannos and Cappas. The AG contended Second Century was not using gaming proceeds for public benefit as the law required and sought to compel disclosure of the company’s financial records.

The case was litigated up to the Indiana Supreme Court, which ruled in 2009 that the Attorney General had the legal authority to bring the action against Second Century. Zoeller, who succeeded Carter as Attorney General in January 2009, continued to pursue the case.

Remaining funds that had been steered to Second Century were frozen in escrow while the lawsuit was under way. In September 2011, under a settlement facilitated by the Attorney General and approved by the Gaming Commission, the City of East Chicago, a nonprofit foundation and Second Century all reached an agreement to distribute the remaining escrowed funds to the city and foundation, to benefit the community. The city’s portion was $11.7 million, and Second Century received no further casino revenue.

The remaining litigation was the Attorney General’s case seeking disclosure of financial records to determine how Second Century, Pannos and Cappas spent the casino revenue they received during the company’s years of operation. In October 2012, Marion County Superior Court Judge David Shaheed denied Second Century’s motion to dismiss the Attorney General’s suit. In June 2013, Judge Shaheed granted the State’s motion to

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