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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) October 15, 1998
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PRT FUNDING CORP.
PRATT CASINO CORPORATION
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(Exact name of each Registrant as specified in its charter)
DELAWARE 75-2502289
DELAWARE 33-69768 75-2502292
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
c/o Sands Hotel & Casino, Indiana Avenue and Brighton Park,
Atlantic City, NJ 08401
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (609) 441-0704
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(Former name or former address, if changed since last report.)
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ITEM 4. CHANGES IN REGISTRANTS' CERTIFYING ACCOUNTANT
(a) PRT Funding Corp. and Pratt Casino Corporation (collectively, the
"Registrants") are both wholly owned subsidiaries of Greate Bay Casino
Corporation ("GBCC"). GBCC recently filed a complaint against the certifying
accountants for GBCC and the Registrants, Arthur Andersen LLP ("Andersen"), and
others alleging negligent advice and breach of contract with respect to certain
tax consequences resulting from the spin off of its stock held by Hollywood
Casino Corporation ("HCC") to HCC's shareholders on December 31, 1996. A copy of
the complaint is included as an exhibit to this Form 8-K and is incorporated
herein by reference.
In view of the pending litigation discussed above, the Audit Committee of
GBCC's Board of Directors voted on October 15, 1998 to terminate Andersen as
GBCC's independent accountants. There were no disagreements with Andersen of the
type that would require disclosure under Item 304 of Regulation S-K. Andersen's
report on the financial statements of PRT Funding and the consolidated financial
statements of Pratt Casino Corporation as of December 31, 1997 and for the three
year period then ended included explanatory paragraphs referring to the
Registrants' disclosure concerning substantial doubt about their ability to
continue as going concerns. Such uncertainties resulted from the filing by Pratt
Casino Corporation's most significant operating subsidiary on January 5, 1998 of
a petition for protection under Chapter 11 of the United States Bankruptcy Code.
As previously disclosed in the Registrants' Form 10-Q for the period ended
June 30, 1998, the Registrants were recently advised that they may have to
modify their tax treatment with respect to the spin off of GBCC's stock by HCC.
The Registrants commenced an investigation and are continuing to work with the
assistance of outside advisors and consultants to determine the extent of
changes that might be required to their 1996 and subsequent income tax returns
and the appropriate financial statement disclosure. Based on its initial review,
Pratt Casino Corporation expects that it will be required to recognize taxable
income for 1996 and succeeding periods. Management believes, however, that net
operating loss carryforwards and other tax attributes will largely offset the
taxable income. The consolidated financial statements of Pratt Casino
Corporation reflect a valuation allowance relating to the deferred tax assets
associated with the net operating loss carryforwards at December 31, 1996 and
1997. To the extent that net operating loss carryforwards and other tax
attributes are used to offset such taxable income, they will not be available to
offset future taxable income. Until the Registrants complete their
investigation, the full impact of the revised tax treatment on their financial
statements is uncertain. The Registrants will disclose the results of their
investigation when additional information is known .
(b) GBCC, with the consideration and approval of its Audit Committee, has
engaged the firm of Deloitte & Touche LLP as the new certifying accountants for
GBCC and the Registrants.
ITEM 7. EXHIBITS
Exhibit
Number Description
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99.1 Petition filed on October 8, 1998 in the District Court of Dallas
County, Texas by Hollywood Casino Corporation and Greate Bay Casino
Corporation ("Plaintiffs") against Arthur Andersen L.L.P., Richard
L. Robbins, Michael E. Gamache, Daniel J. Meehan, and Brent A.
Railsback ("Defendants")
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PRT FUNDING CORPORATION
PRATT CASINO CORPORATION
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Registrants
Date: October 21, 1998 By: /s/ Edward T. Pratt, Jr.
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Edward T. Pratt, Jr.
Chief Financial Officer and
Principal Accounting Officer
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INDEX TO EXHIBITS
Exhibit
Number Description
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99.1 Petition filed on October 8, 1998 in the District Court of Dallas
County, Texas by Hollywood Casino Corporation and Greate Bay
Casino Corporation ("Plaintiffs") against Arthur Andersen L.L.P.,
Richard L. Robbins, Michael E. Gamache, Daniel J. Meehan, and
Brent A. Railsback ("Defendants")
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EXHIBIT 99.1
NO. ________________
HOLLYWOOD CASINO CORPORATION (S) IN THE DISTRICT COURT OF
and GREATE BAY CASINO (S)
CORPORATION, (S)
(S)
Plaintiffs, (S)
(S)
v. (S) DALLAS COUNTY, T E X A S
(S)
ARTHUR ANDERSEN L.L.P., RICHARD (S)
L. ROBBINS, MICHAEL E. GAMACHE, (S)
DANIEL J. MEEHAN, and BRENT R. (S) JURY TRIAL REQUESTED
RAILSBACK, (S) --------------------
(S)
Defendants. (S) ____TH JUDICIAL DISTRICT
PLAINTIFFS' ORIGINAL PETITION
-----------------------------
TO THE HONORABLE JUDGE OF SAID COURT:
Hollywood Casino Corporation ("Hollywood") and Greate Bay Casino
Corporation ("Greate Bay"), plaintiffs, file this their Original Petition
against Arthur Andersen L.L.P., Richard L. Robbins, Michael E. Gamache, Daniel
J. Meehan, and Brent R. Railsback (collectively "Arthur Andersen"), defendants.
This is an action to recover millions of dollars in damages suffered by both
Hollywood and Greate Bay because of Arthur Andersen's negligent advice and
breach of contract concerning the tax consequences of a taxable spin off of
certain subsidiaries (the "Spin Off").
THE PARTIES
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1. Plaintiff Hollywood Casino Corporation is a Delaware corporation with
its principal place of business in Dallas County, Texas.
2. Plaintiff Greate Bay Casino Corporation is a Delaware corporation with
its principal place of business in New Jersey.
3. Defendant Arthur Andersen L.L.P. is a limited liability partnership of
certified public accountants. As such, Arthur Andersen is deemed to be a
citizen of each and every state in which its
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partners are domiciled, including Texas and New Jersey. Arthur Andersen may be
served with process by serving any partner at its offices located at 901 Main
Street, Suite 5600, Dallas, Texas 75202. Tex. Civ. Prac. & Rem. Code (S) 17.022.
4. Defendant Daniel J. Meehan is a partner of Arthur Andersen who works
out of Arthur Andersen's Roseland, New Jersey office. Upon information and
belief, Mr. Meehan is a New Jersey resident. Mr. Meehan may be served with
process by serving him at Arthur Andersen L.L.P., 101 Eisenhower Parkway,
Roseland, New Jersey 07068, or at any other place where he may be found. Mr.
Meehan is the Arthur Andersen tax partner who supervised the tax engagement
relating to the Spin Off.
5. Defendant Brent R. Railsback is a citizen of the State of Texas and is
a partner of Arthur Andersen who works out of Arthur Andersen's Dallas, Texas
office. Mr. Railsback may be served with process by serving him at Arthur
Andersen L.L.P., 901 Main Street, Suite 5600, Dallas, Texas 75202, or at any
other place where he may be found. Mr. Railsback is the Arthur Andersen tax
partner who supervised the tax return preparation engagements for Hollywood for
1996 and 1997 and Greate Bay for 1997.
6. Defendant Michael E. Gamache is a partner of Arthur Andersen who works
out of Arthur Andersen's Roseland, New Jersey office. Upon information and
belief, Mr. Gamache is a New Jersey resident. Mr. Gamache may be served with
process by serving him at Arthur Andersen L.L.P., 101 Eisenhower Parkway,
Roseland, New Jersey 07068, or at any other place where he may be found. Mr.
Gamache is the Arthur Andersen engagement partner who supervised the audit
engagements at issue in this case for Hollywood for 1996 and 1997 and Greate Bay
for 1997.
7. Defendant Richard L. Robbins is a partner of Arthur Andersen who works
out of Arthur Andersen's Roseland, New Jersey office. Upon information and
belief, Mr. Robbins is a New Jersey resident. Mr. Robbins may be served with
process by serving him at Arthur Andersen L.L.P., 101 Eisenhower Parkway,
Roseland, New Jersey 07068, or at any other place where he may be found. Mr.
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Robbins is the Arthur Andersen engagement partner who supervised the 1996 audit
engagement for Greate Bay.
JURISDICTION AND VENUE
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8. Plaintiffs' claims arise under Texas common law and are not within the
exclusive or original jurisdiction of some other court or administrative body.
For this reason, and because the amount in controversy exceeds the minimum
jurisdictional amount of this Court, this Court has subject matter jurisdiction.
9. This Court has both general and specific personal jurisdiction over
Arthur Andersen because it conducts business throughout the State of Texas and
because plaintiffs' claims arise in part out of business they have done with
Arthur Andersen and/or Arthur Andersen's agents in Texas This Court has specific
personal jurisdiction over Messrs. Robbins, Gamache, and Meehan because each of
them conducts business throughout the State of Texas and because plaintiffs'
claims arise in part out of business they have done with these defendants in
Texas. This Court has both general and specific personal jurisdiction over Mr.
Railsback because he is a Texas resident, he conducts business throughout the
State of Texas, and because plaintiffs' claims arise in part out of business
they have done with him in Texas.
10. Venue is proper in this Court under section 15.002 of the Texas Civil
Practice & Remedies Code because all or a substantial part of the events or
omissions that give rise to plaintiffs' claims occurred in Dallas County,
because Arthur Andersen has a principal office in Dallas County, and because no
mandatory venue provision requires that venue be elsewhere.
BACKGROUND
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11. Hollywood owns and operates a number of casino and other properties
and companies around the United States. As its outside auditor, Arthur Andersen
has certified the company's financial statements for a number of years, prepared
its consolidated tax return for 1996, and provided Hollywood and Greate Bay with
ongoing tax advice for a number of years. In addition, Arthur Andersen has
provided advice on other matters.
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12. In 1996, Hollywood decided to spin off a consolidated group of
subsidiary companies if--and only if--it could do so without creating excessive
tax liability for either the parent company or its shareholders. The group of
subsidiary companies were highly leveraged and were seriously underperforming.
By spinning off these subsidiaries, Hollywood hoped to improve its balance sheet
and net worth.
13. Hollywood asked Arthur Andersen to perform the appropriate tax basis
study with respect to Greate Bay and its subsidiaries and to advise Hollywood
with respect to the tax implications of such studies in connection with the
proposed Spin Off. After considerable analysis in the fall of 1996 (for which
Arthur Andersen charged Hollywood over $225,000), Arthur Andersen ultimately
concluded that the proposed transaction would create no more than $15 million in
taxable income to Hollywood. Arthur Andersen further advised Hollywood and
Greate Bay to take certain steps to substantially eliminate the taxable income
resulting from the Spin Off, including the capital contribution of certain
outstanding indebtedness. After believing that it had reduced the taxable
income from the Spin Off to $1,666,218, in reliance on Arthur Andersen's advice,
Hollywood spun off Greate Bay and its subsidiaries on December 31, 1996, and
thereafter issued shares in Greate Bay (the parent of the spun off companies) to
Hollywood's shareholders as a distribution.
14. In early August 1998, Hollywood learned for the first time that Arthur
Andersen's advice regarding the tax consequences of the 1996 Spin Off was wrong.
Hollywood was advised that IRS regulations clearly required Hollywood to realize
significantly greater income than the $1,666,218 that Arthur Andersen had
advised would result from the Spin Off. This additional taxable income directly
resulted from Arthur Andersen's misinterpretation of IRS regulations and
subsequent erroneous advice to Hollywood and Greate Bay.
15. Arthur Andersen failed to advise Hollywood that all excess loss
accounts ("ELAs") existing in Greate Bay and any and all of its subsidiaries
would be recognized as taxable income as a consequence of the Spin Off.
Consolidated federal income tax return regulations provide that profitable
members of a
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consolidated group can offset taxable income with the losses of unprofitable
members, which may create a negative basis in such unprofitable members --a/k/a
an ELA. As long as the unprofitable members remain consolidated, these ELAs do
not pose a tax problem. If ever these companies are deconsolidated, however,
this "negative basis" is recognized and the ELAs become taxable income. Arthur
Andersen also failed to advise Hollywood and Greate Bay that, upon deemed
deconsolidation of Greate Bay and its subsidiaries as a result of the Spin Off,
all intercompany debt obligations must be deemed to be satisfied and reissued at
fair market value (this deemed reissuance is referred to as "Marked-to-Market").
16. While Arthur Andersen advised Hollywood that it would have taxable
income on the ELA attributable to Greate Bay (the parent company of the group of
spun off companies), what Arthur Andersen failed to advise Hollywood and Greate
Bay is that because the Spin Off had the effect of deconsolidating the entire
Greate Bay group of twenty-five companies, any ELAs at any level of the spun off
group constituted taxable income to that company's parent. Thus, once Greate
Bay and its subsidiaries became deconsolidated from Hollywood, IRS regulations
required Arthur Andersen to not only look at Hollywood's negative basis in its
immediate subsidiary, Greate Bay, but each of Greate Bay's subsidiaries as well.
Arthur Andersen failed to analyze each and every company in the entire group of
formerly consolidated companies to determine whether any of those companies had
a negative basis in its immediate subsidiary, and whether decoupling that
subsidiary would constitute a taxable event to the parent.
17. As the direct result of Arthur Andersen's negligence, negligent
misrepresentations, and breach of contract, when Hollywood filed its
consolidated federal income tax return for the year ending December 31, 1996, it
failed to take into account the various ELA's at the individual, subsidiary
company level, which caused Hollywood to severely underpay its federal income
taxes. In sum, Arthur Andersen failed to recognize or consider approximately
$60 million in ELAs that constituted taxable income to Hollywood for both
regular and alternative minimum tax purposes as a result of the Spin Off.
Hollywood would have never spun off Greate Bay and its subsidiaries had it known
of the true tax effect of the Spin Off.
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18. In early August of 1998 when Hollywood brought this problem to the
attention of Daniel J. Mehan, the Arthur Andersen partner who had primary
responsibility for this transaction, Arthur Andersen still mistakenly took the
position that Hollywood did not have to consider each and every ELA in the
entire family of Greate Bay companies. However, after Arthur Andersen re-
analyzed the situation it admitted in a written memorandum dated August 9, 1998,
that "[i]t is possible that two corporations in the third tier of subsidiaries .
. . had ELAs that were triggered upon the [Spin Off]," which is directly
contrary to Arthur Andersen's original advice. More importantly, in a separate
letter dated August 9, 1998, Arthur Andersen conceded that "there is a
significant likelihood that the tax authorities will challenge the treatment of
this transaction because of its complexity and that the issues will, in all
likelihood, be contested in litigation." Although Arthur Andersen claims there
is "substantial authority" for the erroneous advice it gave, it can not and will
not certify that the advice it gave was correct, and Hollywood's current tax
advisors strenuously disagree that any authority exists for Arthur Andersen's
previous position.
19. Because of Arthur Andersen's erroneous advice, Hollywood will be
required to amend its 1996 income tax return, and has revised the company's 1997
return (which had been prepared but not filed by the time Hollywood learned of
Arthur Andersen's mistake). Hollywood and Greate Bay will be required to
restate their 1996 and 1997 financial statements or, alternatively, will have to
reflect in their 1998 financial statements the true effect of the 1996 Spin Off
and related disclosures.
20. Arthur Andersen does not deny that it provided the advice, and it now
concedes that the advice is probably incorrect. Hollywood and Greate Bay have
begun steps to mitigate and remedy the harm that Arthur Andersen's bad advice
has caused them to suffer.
21. As for the amount of damages, plaintiffs are still trying to ascertain
the total harm Arthur Andersen's advice caused them to suffer. Not only will
Hollywood have to pay millions of dollars in additional taxes for both 1996 and
1997, it will also have to apply approximately $60 million in regular net
operating losses ("NOLs") and $19 million in Alternative Minimum Tax NOLs to
offset taxable income
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created by recognition of ELAs--NOLs that it would have used to shelter future
income from taxes. In addition to its massive additional federal income tax
liability, Hollywood and Greate Bay may also be liable for additional state
income taxes as the result of the Spin Off, which they are presently trying to
quantify. All of the adverse tax consequences that have or will be suffered by
Hollywood and/or Greate Bay, including the implementation of tax planning
strategies subsequent to the Spin Off that relied upon the availability of
NOL's, are the direct result of the erroneous advice Arthur Andersen gave
Hollywood and Greate Bay regarding the Spin Off. Finally, the stock of Greate
Bay that Hollywood issued and paid as distributions to its shareholders will now
have significant adverse tax consequences for those shareholders, thereby
subjecting Hollywood to the possibility of shareholder suits.
22. These damages were all caused as a direct result of the negligence
and breach of contract of Arthur Andersen by its failure to provide to Hollywood
and Greate Bay competent and professional advice. At a minimum, Arthur Andersen
has a duty to consider--and competently advise its clients about--all applicable
tax laws and IRS regulations. Not only do the standards of Arthur Andersen's
profession require much more than mere familiarity with applicable laws and
regulations, so do Arthur Andersen's own internal policies as well. Arthur
Andersen failed to live up to its own high standards as well as the lesser
standards of its profession. Indeed, Arthur Andersen failed to master even the
plain language of the law and applicable regulations.
23. Moreover, in addition to the faulty and mistaken tax advice that
Arthur Andersen provided to Hollywood and Greate Bay, Hollywood's and Greate
Bay's financial statements are not correctly certified, and its federal income
tax returns not accurately prepared. These constitute further acts of
professional negligence, or, in the alternative, breaches of various agreements
between Arthur Andersen and both Hollywood and Greate Bay.
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FIRST CLAIM FOR RELIEF: NEGLIGENCE--THE 1996 AND 1997 FINANCIAL STATEMENTS
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24. Hollywood and Greate Bay incorporate by reference all preceding
paragraphs.
25. Hollywood and Greate Bay engaged Arthur Andersen to audit its
financial statements for both 1996 and 1997. Arthur Andersen had a duty to use
ordinary care, diligence, and prudence in the discharge of its professional
obligations as Hollywood's and Greate Bay's independent auditor.
26. The standards of its profession, Generally Accepted Auditing Standards
("GAAS"), require Arthur Andersen to state whether Hollywood's and Greate Bay's
financial statements were presented in accordance with Generally Accepted
Accounting Principles ("GAAP") and to state whether the disclosures in each
company's financial statements were reasonably adequate. Arthur Andersen failed
to exercise adequate competence and breached its duties of due care, diligence,
and prudence by conducting the audit of Hollywood and its subsidiaries,
including Greate Bay, in a manner that was not in accordance with GAAS and by
stating its professional opinion that Hollywood's and Greate Bay's consolidated
financial statements and the disclosures contained therein complied with GAAP
when, in reality, Arthur Andersen knew or should have known through the exercise
of due care, that the financial statements did not comply with GAAP.
27. Likewise, Arthur Andersen knew or should have known through the
exercise of due care that Hollywood's and Greate Bay's consolidated financial
statements did not fairly and accurately present the financial position of the
consolidated group of companies.
28. And Arthur Andersen was negligent and failed to exercise its duties of
due care, diligence, and prudence in conducting and reporting the results of the
1996 and 1997 audits of Hollywood, Greate Bay, and their subsidiaries.
. 29. As a direct and proximate result of Arthur Andersen's negligence,
Hollywood and Greate Bay have suffered damages as described above, and are
entitled to recover those damages from Arthur Andersen.
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SECOND CLAIM FOR RELIEF: NEGLIGENCE--THE 1996 FEDERAL INCOME TAX RETURN
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30. Hollywood and Greate Bay incorporate by reference all preceding
paragraphs.
31. Hollywood engaged Arthur Andersen to prepare its consolidated 1996
federal income tax return. Arthur Andersen had a duty to use ordinary care,
diligence and prudence in the discharge of its professional obligations as
Hollywood's tax preparation expert. 32. Arthur Andersen failed to exercise
competence and breached its duties of due care, diligence, and prudence in
connection with the preparation of Hollywood's consolidated federal income tax
return for 1996 by severely understating the amount of federal income taxes
Hollywood was required to pay, when Arthur Andersen knew or should have known,
through the exercise of due care, that Hollywood owed many millions of dollars
in additional federal income taxes. Had Arthur Andersen informed Hollywood of
the additional income taxes it would have owed because of the proposed Spin Off,
Hollywood would never have spun off the subsidiaries or would have taken further
steps to reduce or eliminate the additional income tax liability.
33. Arthur Andersen was negligent and failed to exercise its duties of due
care, diligence, and prudence in preparing Hollywood's consolidated 1996 federal
income tax return.
. 34. As a direct and proximate result of Arthur Andersen's negligence,
Hollywood and Greate Bay have suffered damages and are entitled to recover those
damages from defendant.
THIRD CLAIM FOR RELIEF: NEGLIGENCE--THE PROPOSED SPIN OFF
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35. Hollywood and Greate Bay incorporate by reference all preceding
paragraphs.
36. In addition to its normal audit and tax work, Hollywood engaged Arthur
Andersen to provide specific tax advice regarding a proposed Spin Off of a
number of Hollywood's subsidiaries. Arthur Andersen had a duty to use ordinary
care, diligence, and prudence in the discharge of its professional obligations
to Hollywood in connection with this tax advice, which duties Arthur Andersen
breached.
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37. Arthur Andersen knew or should have known, through the exercise of due
care, that IRS regulations clearly required the identification of each and every
ELA that existed within the group of spun off companies in order to determine
Hollywood's potential taxable income from the Spin Off. Arthur Andersen knew or
should have known through the exercise of due care that Greate Bay and its
subsidiaries not only had sizable ELAs, but also that those ELAs would
constitute taxable income to Hollywood in the event of any Spin Off.
38. Arthur Andersen was negligent and failed to exercise its duties of due
care, diligence, and prudence in providing tax and consolidation advice to
Hollywood and Greate Bay.
39. As a direct and proximate result of Arthur Andersen's negligence,
Hollywood and Greate Bay have suffered enormous damages and are entitled to
recover those damages from Arthur Andersen.
FOURTH CLAIM FOR RELIEF: NEGLIGENT MISREPRESENTATION--
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THE 1996 AND 1997 FINANCIAL STATEMENTS
--------------------------------------
40. Hollywood and Greate Bay incorporate by reference all preceding
paragraphs.
41. Arthur Andersen made false statements, material misrepresentations of
fact, and material omissions with respect to its certification of Hollywood's
and Greate Bay's financial statements. Hollywood and Greate Bay reasonably
relied on those misrepresentations and omissions to their detriment. Arthur
Andersen failed to exercise reasonable care and competence in expressing its
opinions as to Hollywood's and Greate Bay's financial statements and/or in
failing to obtain and disclose to Hollywood and Greate Bay all material facts.
42. Arthur Andersen's negligent misrepresentations and omissions were the
proximate cause of damages to Hollywood and Greate Bay. Therefore, both
companies are entitled to recover compensatory damages from Arthur Andersen.
FIFTH CLAIM FOR RELIEF: NEGLIGENT MISREPRESENTATION--
------------------------------------------------------
THE CONSOLIDATED 1996 FEDERAL INCOME TAX RETURN
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43. Hollywood and Greate Bay incorporate by reference all preceding
paragraphs.
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44. Arthur Andersen made false statements, material misrepresentations of
fact, and material omissions with respect to its preparation of Hollywood's
consolidated 1996 federal income tax return. Hollywood and Greate Bay reasonably
relied on those misrepresentations and omissions to their detriment. Arthur
Andersen failed to exercise reasonable care and competence in expressing its
opinions as to Hollywood's consolidated 1996 tax return and/or in failing to
obtain and disclose to Hollywood and Greate Bay all material facts.
45. Arthur Andersen's negligent misrepresentations and omissions were the
proximate cause of damages to Hollywood and Greate Bay. Therefore, both
companies are entitled to recover compensatory damages from Arthur Andersen.
SIXTH CLAIM FOR RELIEF: NEGLIGENT MISREPRESENTATION--
------------------------------------------------------
THE PROPOSED SPIN OFF
---------------------
46. Hollywood and Greate Bay incorporate by reference all preceding
paragraphs.
47. Arthur Andersen made false statements, material misrepresentations of
fact, and material omissions in connection with its tax advice to Hollywood
regarding Hollywood's Spin Off of Greate Bay. Hollywood and Greate Bay
reasonably relied on those misrepresentations and omissions to their detriment.
Arthur Andersen failed to exercise reasonable care and competence in knowing and
understanding the law applicable to the proposed transaction. In doing so,
Arthur Andersen failed to live up to its own standards or the standards of its
profession.
48. Arthur Andersen's negligent misrepresentations and omissions were the
proximate cause of damages to Hollywood and Greate Bay. Therefore, Hollywood
and Greate Bay are entitled to recover compensatory damages from Arthur
Andersen.
SEVENTH CLAIM FOR RELIEF: BREACH OF CONTRACT--
THE 1996 AND 1997 FINANCIAL STATEMENTS
--------------------------------------
49. Hollywood and Greate Bay incorporate by reference all preceding
paragraphs.
50. In the alternative, Hollywood and Greate Bay contracted with Arthur
Andersen to audit its financial statements for both 1996 and 1997. In that
agreement, Arthur Andersen promised to conduct
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its "audit in accordance with generally accepted auditing standards." As well,
Arthur Andersen promised to "bring to [plaintiffs'] attention any material
errors[] and irregularities" and "evaluate the overall financial statement
presentation." Arthur Andersen breached its agreement with both Hollywood and
Greate Bay by, among other failures, failing to conduct the audit in accordance
with the standards of its profession.
51. One of the standards of its profession, GAAS, require Arthur Andersen
to state whether Hollywood's and Greate Bay's financial statements were
presented in accordance with GAAP and to state whether the disclosures in each
company's financial statements were reasonably adequate. Arthur Andersen failed
to exercise competence and breached its duties of due care, diligence, and
prudence by conducting the audit of Hollywood and its subsidiaries, including
Greate Bay, in a manner that was not in accordance with GAAS and by stating its
professional opinion that Hollywood's and Greate Bay's consolidated financial
statements and the disclosures contained therein complied with GAAP when, in
reality, Arthur Andersen knew or should have known, through the exercise of due
care, that the financial statements did not comply with GAAP.
52. Arthur Andersen knew or should have known, through the exercise of due
care, that Hollywood's and Greate Bay's consolidated financial statements did
not fairly and accurately present the financial position of the consolidated
group of companies.
53. Arthur Andersen breached its agreement with Hollywood and Greate Bay
to professionally and competently perform the 1996 and 1997 audits of Hollywood
and its subsidiaries.
. 54. As a direct and proximate result of Arthur Andersen's breach of
contract, Hollywood and Greate Bay have suffered damages and are entitled to
recover those damages from Arthur Andersen.
EIGHTH CLAIM FOR RELIEF: BREACH OF CONTRACT--
THE 1996 AND 1997 FEDERAL INCOME TAX RETURNS
--------------------------------------------
55. Hollywood and Greate Bay incorporate by reference all preceding
paragraphs.
56. In the alternative, Hollywood contracted with Arthur Andersen to
prepare Hollywood's consolidated 1996 income tax return and Hollywood and Greate
Bay hired Arthur Andersen to prepare
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their 1997 federal income tax returns. Arthur Andersen breached that agreement
by failing to accurately prepare Hollywood's consolidated 1996 federal income
tax return and to properly advise Hollywood and Greate Bay of its tax liability
for 1996 and of the dramatic reduction of NOLs available to offset future
taxable income.
57. Arthur Andersen failed to exercise competence and breached its
agreement with Hollywood in connection with the preparation of Hollywood's
consolidated federal income tax return for 1996 by severely understating the
amount of federal income taxes Hollywood was required to pay, when Arthur
Andersen knew or should have known, through the exercise of due care, that
Hollywood owed many millions of dollars in additional federal income taxes. Had
Arthur Andersen informed Hollywood of the additional income taxes it would have
owed because of the proposed Spin Off, Hollywood would never have spun off the
subsidiaries or would have taken further remedial steps to reduce or eliminate
the additional income tax liability.
58. Arthur Andersen also failed to exercise competence and breached its
agreement with Hollywood and Greate Bay in connection with tax advice it
provided to them regarding their respective consolidated federal income tax
returns for 1997. Hollywood has suffered material, unexpected, and adverse tax
consequences in connection with the filing of its 1997 tax return resulting from
the erroneous advice provided by Arthur Andersen regarding the Spin Off. Arthur
Andersen knew or should have known, through the exercise of due care, that
Hollywood owed many millions of dollars in additional federal income taxes for
1997.
59. Arthur Andersen breached its agreement with Hollywood to
professionally and competently prepare Hollywood's consolidated 1996 federal
income tax return and to advise both Hollywood and Greate Bay regarding their
1997 federal income taxes.
60. As a direct and proximate result of Arthur Andersen's breach of
contract, Hollywood and Greate Bay have suffered damages and is entitled to
recover those damages from Arthur Andersen.
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NINTH CLAIM FOR RELIEF: BREACH OF CONTRACT--
THE PROPOSED SPIN OFF
---------------------
61. Hollywood and Greate Bay incorporate by reference all preceding
paragraphs.
62. In the alternative, in addition to its normal audit and tax work,
Hollywood contracted Arthur Andersen to provide specific tax advice regarding a
proposed Spin Off of a number of Hollywood's subsidiaries. Arthur Andersen
breached that agreement by misconstruing applicable IRS regulations and by
subsequently providing erroneous advice to Hollywood.
63. Arthur Andersen knew or should have known, through the exercise of due
care, that IRS regulations clearly required the identifications of each and
every ELA that existed anywhere within the group of spun off companies in order
to fully determine Hollywood's potential tax liability. Arthur Andersen knew or
should have known, through the exercise of due care, that Greate Bay and its
subsidiaries not only had sizable ELAs, those ELAs would constitute taxable
income to Hollywood in the event of any spin off. In addition, Arthur Andersen
should have known, through exercise of due care, that upon the deemed
deconsolidation of Greate Bay and its subsidiaries all intercompany debt
obligations should have been Marked-to-Market.
64. Arthur Andersen breached its agreement to provide competent and
professional tax advice to Hollywood.
65. As a direct and proximate result of Arthur Andersen's breach of
contract, Hollywood and Greate Bay have suffered enormous damages and are
entitled to recover those damages from Arthur Andersen.
GROSS NEGLIGENCE
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61. Hollywood and Greate Bay incorporate by reference all preceding
paragraphs.
66. Arthur Andersen's acts, misrepresentations, and omissions involved an
extreme degree of risk to Hollywood and Greate Bay, considering the probability
and magnitude of potential harm to plaintiffs and others.
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67. Arthur Andersen had actual, subjective awareness of the risk involved,
but nevertheless proceeded in conscious indifference to the rights, safety and
welfare of Hollywood, Greate Bay, and others.
61. Accordingly, Arthur Andersen committed gross negligence.
ATTORNEYS' FEES
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61. Based on Arthur Andersen's breaches of its contracts with plaintiffs,
plaintiffs hereby seek recovery of their reasonable attorneys' fees in addition
to the amount of their valid claims and costs pursuant to Tex. Civ. Prac. & Rem.
Code (S) 38.001 et seq.
JURY DEMAND
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61. Plaintiffs hereby request a trial by jury and have paid all required
fees to obtain one.
PRAYER FOR RELIEF
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62. Based on the foregoing, Hollywood and Greate Bay pray for relief as
follows:
. Judgment against Arthur Andersen for compensatory and actual
damages within the jurisdictional limits of the Court;
. Pre-judgment interest;
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. Post-judgment interest;
. Attorneys' fees and costs; and
. Such other and further relief, at law or in equity to which they
may show themselves entitled.
Respectfully submitted,
SUSMAN GODFREY L.L.P
/s/ Mark A. Evetts
--------------------------------------------
Stephen D. Susman
State Bar No. 19521000
E. Lawrence Vincent, Jr.
State Bar No. 20585590
Mark A. Evetts
State Bar No. 00793709
2323 Bryan Street, Suite 1400
Dallas, Texas 75201-2663
Telephone: (214) 754-1900
Telecopy: (214) 665-0830
ATTORNEYS FOR PLAINTIFFS HOLLYWOOD CASINO
CORPORATION AND GREATE BAY CASINO CORPORATION
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