Tatl' of N Rut 3JI'r!Ii'lj COMMISSION of INVESTIGATION COMMISSIONERS JAMES T

~tatl' of N rUt 3JI'r!iI'lJ COMMISSION OF INVESTIGATION COMMISSIONERS JAMES T. O'HALLORAN 28 WEST STATE STREET EXECUTiVe 01 RECTOR ARTHUR S. LANE .TRENTON, N.J. 08608 CHAIRMAN TELEPHONE (eDit) 292:6761 .JOHN O. DAVIES EXECUTIVE ASSISTANT ROBERT). DEL TUFO JOHN J. FRANCIS. JR. COUNSEL HENRY S. PATTERSON. II MICHAEL V. COPPOLA ROBERT E. GEISLER AUGUST, 1983 JAMES A. HART GERARD P. LYNCH TO: The Governor and the Legislature of the State of New Jersey The New Jersey State Commission of Investigation herewith submi ts its Report and Recommendations on its investigation of and publ ic hearing on the Vernon Valley Recreation Association' s leasehold in Sussex County. Th is transmittal is made under Section 10 of L. 1979, Chapter 254 (N.J.S.A. 52:9M-10), of the Act creating the Commission. Respectfully submitted, Arthur S. Lane, Chairman Henry S. Patterson, II, Commissioner Robert J. Del Tufo, Commissioner William S. Greenberg, Commissioner* *Commissioner Greenberg did not participate in the investigation or public hearing because of prior professional associations. CONTENTS Page INTRODUCTION. • RECOMMENDATIONS IN BRIEF. 1 TESTIMONY - First Day (3-28-83) 3 Opening Statement 3 Terms of Lease Outlined/4 First probe of Man-Made Lake/7 "No Permit Requested or Issued"/9 State Forest Cut Down/13 Land Misuse Dates Back to 1979/16 Engineer's View on Construction/20 passing the Buck on Rent Withholding/21 Lease Monitoring Duties Never Explained/31 State Relied on Vernon Valley Accountant/39 Vernon Valley Accountant's version/42 Were Ski Lessons Mandatory?/59 Retracts Testimony on Lessons/60 Lessons Voluntary and Cost Extra/61 Best Customer Denies Lessons Requirement/62 Another Client Denies Lessons Mandate/66 No One Knew of Mandatory Lessons/67 Revenue Diversion, Rent Withholding Traced/68 TESTIMONY - Second Day (3-29-83). 75 Transition Statement •••• 75 Lease Problems Date Back to 1977-78/75 Vernon valley's Insurance Broker/85 How Davis, Dorland Was Misused/95 Recalls London & world Reinsurance/99 CPA Testifies on London & World Assets/l03 He Signed as "Authorized Agent"/lll London & World "Claims Department"/120 CPA Confirms Insurance Was Inadequate/133 State Labor Department's Role/138 State Insurance Department's Role//145 Tracing Mulvihill's $175,000 "Premium" Check/148 How $175,000 Check was Disbursed/153 SCI's Probe of London & World Assurance/161 Surplus Lines Insurance Tax problems/167 Firemen's Relief Tax Payments Denied/183 Further Firemen's Relief Fund Testimony/185 State Firemen's Relief Association Comment/186 TESTIMONY - Th ird' Day (3-'3:0-83:) 188: Tr ansi tion St atement. • • • • 188 Performance Bonds Faked/r8S' Bonds Came From Mulvihill's Offi.ce/192 "They Didn't Look Like Performance Bonds"/196 The" Assistant Secreta,ry of the Corporation" /201 Handwriting, Expert Testifies/204 Who was Mi.chael. Teschner?/207 Vernon' Valley princ.ipals Re·f:uae' to Testify/2:14' Passing the Buck on Lease. Administration/2l4; Chief Accountant's Financial Summary/221 Clos·ing Statement .' .' • RECOMMENDATIONS IN DETAIL 227 Transmittal l'i1otice. 227 Recommend'a.t.ions. • • 228 Yearly Audits!228 Establish state Insurance Safeguards!229 Use Only State-Approved Insurers/229 Centralize Lease Controls/230 Enlarge DEP Staff Resources/231 Add Criminal Pen'alties/232 Terminate Vernon Valley Le.ase/232 -1- STATE COMMISSION OF INVESTIGATION Report on Public Hearinq on Vernon Valley Recreation Association Introduction The SCI's publ ie hearing on Vernon valley Recreation Association (Vernon Valley), a ski resort and amusement park in Su~rex County, was held on March 28-30, inclusive, in Trenton. The hearing focused on the administration of a lease by New Jersey's Department of Environmental Protection (DEP) with Vernon Valley and Vernon Valley's violations of the lease. ~t the conclusion of this hearing, the Commission publicly declared that the three days of testimony had revealed "marked evidence of wrongdoing" by the corporation as the lessee as well as "laxity and ineptness" on the part of State as the lessor. This testimony confirmed nonpayment and tardy payment by Vernon Valley of hundreds of thousands of dollars in rents due to the state, the diversion by Vernon Valley of millions of dollars in income from the revenue base on which State rents are calculated; construction by Vernon Valley of a lake, dams and spillways, without required permission, that confront the area with serious flood hazards, the destruction by Vernon valley of valuable timberlands without State authorization, the failure by Vernon Valley to obtain adequate liability insurance for prolonged periods, and the false representation by Vernon Valley of a "paper" company in the British West Indies as a legitimate liability insurance carrier, which also was utilized to launder a purported $175,000 insurance premium back to Vernon Valley and to issue fake performance bonds. The testimony "particularly illustrated the arrogance with which Vernon Valley violated the terms of its lease," the SCI noted. The public hearing testimony, which is abridged in this report, was the basis for a series of corrective recommendations submitted by the SCIon May 26 to the Governor and the Legislature. These recommended reforms of New Jersey's leasehold procedures involving public lands were proposed -- and are restated in this document - with the hope that, in any continued or future rental of State property for private exploitation, there will be greater assurance that each party to the lease fulfills its extraordinary obligations to the true owners of such lands -- the public. Recommendations in Brief Following is a summary of detailed recommendations which will be found beginning at P. 227 of this report. These proposals are briefly stated at this point to assist the reader in grasping the highlights of the public hearinq testimony. The recommendations in brief: Require annual financial audits of State leases which require rent based on a percentage of lessee's revenues. -2- -- Require more stringent liability insurance safeguards when State acts as a landlord. -- Require all of New Jersey's governmental entities -- State, county and local -- to utilize only those sureties licensed and approved by the New Jersey Insurance Department in insurance transactions, including performance bonds. -- Require control of all leases of public property to pri vate companies to be centralized in and monitored by the Bureau of Real Property Management in the State Treasury Department IS Division of Real Property. -- Enlarge DEPfs staff of conservation officers, provide more appropriate public lands inspections and policing equipment and conduct training programs for State employees whose geographic area of responsibilities includes State lands leased to private entities. -- Increase sanctions for violations of New Jersey I s Safe Dam Act by including a criminal penalty. -- Terminate the Vernon valley Recreation Association lease with the State DEP. ,- -3- THE TESTIMONY -- FIRST DAY MONDAY. MARCH 28. 1983 Opening Statement SCI Chairman Lane opened the hearing with a statement pointing out that the proceedings would concern the 50-year lease by the New Jersey Department of Environmental Protection (DE.?) with Vernon valley Recreational Association, a subs." diary of the put.:icly traded Great American Recreation, Inc., in the Vernon ~ownship-Great Gorge area of Sussex County. Chairman Lane emphasized the Commission's belief that whenever the State rents State property for private commercial use, each party to the lease has to "automatically assume certain obligations to the actual owners of such property, the taxpaying publiC." He stated further: These unstated but nonetheless compelling obligations include for the landlord, State government, the burden of safeguarding a continuing public ownership interest in the property, and for the corporate tenant a willingness to avoid any breach of public trust and confidence in maintaining its leasehold privilege. These obligations constitute the critical issue at this public hearing on the manner in which Vernon Valley Recreation Association operated its ski resort and amusement park on public property in Sussex County and the manner in which the State monitored the lease. Forthcoming testimony will address a variety of issues, including whether Vernon valley paid rent in a timely fashion; whether it presently owes large sums in rental monies to the State; whether Vernon Valley, through its outside auditors, has violated other provisions of its lease, including failure to provide the State with adequate and accurate reports of its ski revenues on which rent to the State is computed; whether the company also has failed to notify the State in advance of changes in the physical layout of its leasehold, whether Vernon Valley has for prolonged periods of time failed to obtain legally certifiable insurance coverage as required by its lease, whether a captive corporation was used to promote an illusion of insurance coverage that created for State government potential liability for death, injury and property damage claims, whether a purported insurance premium payment in the amount of $175,000 was diverted to companies owned by -4- Ve,rnoJ;l'vall,ey',a :p,rincipal :o.f.fi,ce:r "and :sha;re ,I).pjtde:r; ana" iJl'sof:ar ,as the Sbate i scon c:er;ned" whe:ther hI ind,acceptanc,e of.fa'cts <lend ,figure:sr:epp,rt,edbythelesseeand 'the fa:iIure to properly 'inspec,t the premises ci..ost,e:r,eo ,o:r permLttedt'h,ese :wrong,f,ul :a'c:t's. merms ,of Vernon Yal1eyLe,ase 'OUtlined Sidney Y:tki:J;l" as,sist.ant commissione'r for management ,a,nd budge'ts o'f ,tb.e .oEP,.w:as the first wi t,ness. Ques:tioned by SCI Exe.cut iveDir,e,c:tor Jame'sT. D"Hal1.oran., he descr ibedthe lease bet,ween th,e ,Stat.,e and the Vernon Valley Recreation Associa'tion, which wa.ssi.gn,ed on June 6, 19.6.8,.

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