Indiana, company settle lawsuit over East Chicago casino funds intended for development

Indiana has reached a settlement in a long-running legal battle over economic development funds generated by a cut of revenues from East Chicago's casino, the state attorney general announced Wednesday.

The agreement settled a lawsuit brought against private development company Second Century by former East Chicago Mayor George Pabey, who tried to gain control of the funds after being elected in 2004. The state later intervened in the lawsuit, alleging the funds were not being used for public benefit as legally required.

East Chicago was the only casino community in Indiana to allow a for-profit company to receive a portion of the casino proceeds, an arrangement that's now illegal in the state. Second Century was created to develop affordable housing and other economic development projects in the city and received 0.75 percent of the casino's annual profits under a 1994 agreement that Pabey's predecessor brokered to bring the casino to the Lake Michigan city.

As part of the deal announced Wednesday, Second Century will pay the city $154,000.

Attorney General Greg Zoeller, in announcing the settlement, said Second Century received about $16 million in casino revenues, but only $3.5 million went toward economic development projects while the firm's two principals and their relatives received about $6 million in wages.

"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," Zoeller said.

The settlement included a document that showed former Indiana Democratic Chairman Michael Pannos received nearly $2 million and partner Thomas Cappas received nearly $1.9 million between 1997 and 2008.

However, the company's attorney, J. Lee McNeely, said Pannos and Cappas did nothing wrong and invested more in development projects than Zoeller's office said.

"The analysis is a simplistic one that doesn't take into (account) what a development company does: You develop, you sell, you pay yourself out of the profits," McNeely said in a telephone interview.

"Projects were literally killed in the crib by the bringing of these lawsuits," McNeely said.

Cappas, Pannos, their wives and other family members invested in the Showboat casino that opened in East Chicago in 1997 and was sold a year later to Harrah's. Shortly thereafter, the two men received permission to take over Second Century, telling the Indiana Gaming Commission in 1998 that they would take no salaries initially but might seek compensation later.

Current East Chicago Mayor Anthony Copeland said the city would use the settlement money to deter crime.