A general partner in the Washington office of a national accounting firm testified yesterday that six loans between Capital Centre and the Washington Bullets and Washington Capitals were "sham transactions" that did not accurately reflect the teams' debts.
Testifying in Prince George's County Circuit Court on the fourth day of the trial in a lawsuit filed against Abe Pollin, general partner of the teams and of Capital Centre, Nathan Nadeo said the arrangements failed to reduce the money owed by the teams to an amount specified in Capital Centre's bond agreement.
Nadeo, a general partner in the Washington office of Arthur Young and Co., was called as a witness for Arnold Heft, a limited partner in Capital Centre, who contends Pollin improperly diverted money from the profit-making arena to the financially struggling teams. Heft is seeking to have rescinded two adjustments made by Capital Centre in June 1982 that reduced the amount of money owed by the teams to the arena, as well as an accounting of any damages that might have occurred. Pollin has called the suit "groundless."
In testimony introduced this week, it was revealed that on three occasions, the Centre made interest-free loans to the teams for the same amounts that they had paid to the arena only days before. Edmund Stelzer, comptroller for the Centre and the Capitals, has testified that Washington National Arena, Ltd., had believed these loans were new, not additions to existing debts.
The Washington National Arena, Ltd., operator of the Centre and its "affiliated entities" -- which include the teams -- cannot have money owed of more than $400,000 -- and older than 90 days -- according to the bond agreement with the Equitable Life Assurance Society of America, which lent $20 million for financing of the Centre.
The first of the transactions in question occurred in 1982. The Capitals paid $250,000 and the Bullets $150,000 on March 31. The next day, they received as loans checks for the same amounts from WNA.
Under questioning yesterday by Stephen Grafman, one of Heft's attorneys, Nadeo said those transactions, as well as similar ones in September-October of that year and in March-April 1983, were "sham transactions that in my opinion do not comport with generally accepted accounting principles."
In the WNA's quarterly report made March 31, 1982, the teams' "accounts receivable" totaled $258,000, according to evidence entered earlier this week. The Bullets' and Capitals' payments to the WNA were reflected in the report.
Nadeo testified yesterday such a transaction "purports to be something more than it really is."
Grafman asked if the accounts receivable were reported fairly in accordance with generally accepted accounting principles. "The exchange of checks did not have the effect of reducing the receivables," Nadeo answered.
He said that by applying the $400,000 the teams paid to Capital Centre to their accounts receivable, they actually owed $658,000, well above the ceiling established in Section 5.11 of the bond agreement.
WNA also made loans of $100,000 each to the Bullets and Capitals on Oct. 1, 1982, one day after the teams made payments to the Centre for the same amount. Nadeo said the $380,000 in accounts receivable reported by the teams should have been $580,000.
The loans made on April 4, 1983, were $200,000 to the Capitals and $85,000 to the Bullets, the same amounts they had paid to WNA on March 31 of that year. Nadeo testified that the teams' accounts receivable that were listed as $309,000 "should be increased by $285,000."
Burton Schwalb, an attorney for Pollin, said the quarterly reports to Equitable did not need to be drawn up under generally accepted accounting principles. He and Nadeo clashed on several topics, including what constitutes a "sham transaction" and how much time difference between a payment and a loan might be needed to avoid one.
In one of several pointed exchanges, Schwalb asked Nadeo to read aloud a paragraph on accounting principles. "Should I put in the commas?" Nadeo retorted. "Or periods?"
"Just read the material and I'll stop you if emphasis is needed," Schwalb replied with a smile.
The trial will resume Monday.