U.S. Probes How Japanese Bought Riviera Club

A shadow looms behind the tranquillity of the Riviera Country Club, the historic golf course that sprawls across a verdant bluff overlooking the ocean in Pacific Palisades: The club’s Japanese owners are suspected of laundering money tainted by corruption back home.

U.S. investigators say they are looking into connections between the owners--who bought the Riviera for $108 million four years ago--and Japan’s most notorious political powerbroker, Shin Kanemaru, who stands accused of graft, tax evasion and financial links to Japanese organized crime.

Officials from two federal law enforcement agencies confirmed that they are in the early stages of a money-laundering investigation involving the Riviera, apparently examining whether any of the funds used in its purchase can be traced to Kanemaru.

The club’s owners deny any wrongdoing, although they acknowledge their close ties to Kanemaru--the de facto boss of bosses in Japan’s ruling Liberal Democratic Party until his arrest March 6 on tax evasion charges.

The Riviera--home each year to the L.A. Open golf tournament and scheduled host of the 1995 PGA championship--has been widely viewed as a model Japanese investment since Kaneo Watanabe and his son, Noboru, completed their purchase of the club in 1989.

Initially, the sale was a flash point for public uneasiness over Japan’s appetite for American cultural icons.

But tensions gradually dissipated as the Watanabes demonstrated their reverence for the game of golf and the club’s traditions. The new owners reassured nervous members by upgrading the golf course and improving clubhouse cuisine.

But the Kanemaru affair may darken this honeymoon.

Published reports in Japan allege that Marukin Corp., the Watanabes’ family owned development company, maintains close financial ties with Kanemaru and is believed to have helped hide some of his illicit assets.

Not true, protests Noboru Watanabe, an avid golfer who says his personal infatuation with the Riviera was the driving force behind the acquisition.

Contacted by telephone at his Tokyo office, Watanabe, 47, said Japanese press reports of Marukin’s ties to Kanemaru are “distorted and unbalanced.” He acknowledged that his 73-year-old father has had a longstanding friendship with Kanemaru, but emphatically denied any financial impropriety.

On March 19, prosecutors executed search warrants at Marukin’s offices in Japan in connection with the criminal investigation of Kanemaru. But Watanabe minimized the significance of the searches and expressed dismay at learning of the U.S. money-laundering probe in Los Angeles.

“I have no idea what that could be about,” Watanabe said. “There’s no such thing going on as far as I know.”

But a high-ranking U.S. law enforcement official, in interviews with The Times, cited the Riviera as one of several targets in a broad investigation of alleged Japanese money-laundering. The Riviera probe was confirmed by a supervisory investigator in a second federal agency.

U.S. authorities have warned for years that ill-gotten gains are suspected of being hidden in the flow of legitimate investment from Japan. But only recently have they begun making headway investigating specific cases, assisted by greater cooperation from Japanese law enforcement.

Because of public outrage over the magnitude of his alleged avarice, Kanemaru’s case has been a top priority in the Japanese criminal justice system.

But the Riviera is no open-and-shut case--and possibly no case at all.

U.S. investigators have divulged no tangible evidence of money-laundering, a term that generally refers to the surreptitious movement of cash to obscure ownership and disguise ill-gotten gains.

But there are clues in the public record that suggest the kinds of issues that investigators will weigh in their probe. For instance:

* Why was the identity of the investors shrouded in secrecy when the deal was first announced?

* Nearly half the purchase price--$53 million--was paid in cash; can the source of that money be traced?

* Given that the total price of $108 million is difficult to justify with projections of a reasonably profitable return, why did Marukin make the investment?

The younger Watanabe concedes that $108 million was an excessive price for the golf course, one of several trophy courses acquired by Japanese during a spate of investing in the 1980s--purchases financed by the mercurial rise of Tokyo real estate and spurred, perhaps, by vanity rather than business sense.

Marukin, he now acknowledges, does not expect to see a profit from the Riviera purchase.

“The Riviera wasn’t available for the price we originally had in mind,” Watanabe said. “But for me this was more than a business deal. . . . It was a dream. I’ve been dreaming about the Riviera since I was a student. We wanted to get the Riviera because it was America’s most famous golf course, and we wanted to study and learn from it.”

Actually, the golf course is hardly the country’s most famous. But it is a venerable institution in California, and it is well known in Japan.

Watanabe said he hoped to exploit the prestige of the Riviera as a flagship property while Marukin expanded into resort development.

So far, however, Marukin’s ambitious plan for a chain of Riviera golf courses exists only on paper.

*

The lead character in this mystery has been conspicuously missing from the local scene.

Shin Kanemaru is not known to have set foot on the premises of the Riviera Country Club. But he would have plenty of reasons to make some of his money disappear in a legitimate real estate investment in the United States.

Arguably, Kanemaru is one of the richest men in the world. Until just a few months ago, he reigned over a shadowy political arena, sitting atop the pyramid of kickbacks, bribes and under-the-table campaign contributions that fuel kinken seiji , the institutional corruption of Japan’s “money-power politics.”

His arrest for tax evasion stemmed from the Sagawa Kyubin scandal, in which a Tokyo trucking company with yakuza (Japanese mob) associations allegedly paid millions of dollars in bribes to politicians, most notably Kanemaru.

The Riviera Country Club enters the picture in the form of Kaneo Watanabe, Noboru’s father and Marukin’s president, who is described in published reports as one of Kanemaru’s closest cronies. The elder Watanabe is a prominent political backer in Kanemaru’s home turf whose successful construction company allegedly fed from the trough of Kanemaru’s pork-barrel machine.

But the reputed ties go deeper than mere patronage. Marukin is characterized by the Japanese press as a Kanemaru kinmyaku-- a term that literally means “vein of gold” and suggests a clandestine financial relationship, typically one that channels illicit political funds.

Although Kanemaru was forced to resign his seat in Parliament amid the furor over the Sagawa Kyubin scandal, he is criminally charged only with evading income taxes on his assets--not with extorting financial tribute from contractors and party loyalists.

Hiding assets from tax investigators is the name of the game, and that’s where kinmyaku comes in handy.

Kaneo Watanabe was not available for comment, but his son has been actively rebutting any allegation of wrongdoing. In a letter dated April 6 and sent to an American acquaintance, Noboru Watanabe tried to set the record straight:

“You might have heard about the unfortunate circumstance of Mr. Kanemaru,” Watanabe wrote. “I would like to let you know that despite our families’ long-term personal friendship, our business interactions do not relate anything to the current dubious problems.”

*

Marukin’s purchase of the Riviera Country Club and Tennis Club began in somewhat murky circumstances.

On May 3, 1988, LAACO Ltd.--the closely held partnership that opened the Riviera in 1927--announced plans to sell the club to unidentified Japanese investors for $108 million.

The secrecy surrounding the deal prompted an outcry from community leaders and from some of the approximately 660 golf-playing members, who feared that they would lose rights and privileges under foreign ownership.

But the deal never was in jeopardy.

Although the Riviera is a prestigious private club, fabled as a gathering place for Hollywood elite during the early era of “talkies,” membership has always been on a non-equity basis. They could complain, but members had no financial influence over the transaction.

Marukin, it turned out, had asked LAACO to keep its identity confidential until the transfer of ownership was final.

The Watanabes were bewildered when LAACO informed them of its disclosure obligations under Securities and Exchange Commission regulations, according to a former Marukin employee involved in the acquisition. They had expected a discreet transaction between two family-owned private concerns, said the former employee, who spoke on the condition of anonymity.

Indeed, LAACO--which also owns the Los Angeles Athletic Club downtown--is a limited partnership controlled by the Hathaway family, descendants of one of the Riviera’s founders, Frank Garbutt. But the company’s partnership units are traded on the over-the-counter market, and that obliged it under SEC rules to make a public disclosure of the intended sale.

(Susan Hathaway, LAACO’s president and Garbutt’s great-granddaughter, declined to be interviewed for this article.)

What happened next is not entirely clear. Marukin withdrew its initial offer to buy 100% of the club, instead agreeing to pay $53 million in cash for a 49% stake, with a one-year option to acquire the rest. The Japanese firm’s identity was not revealed until Sept. 9, 1988, four months after LAACO’s initial announcement.

Yasushi (Joe) Masaki, general manager of the Riviera and Marukin’s local representative, said the confidentiality--and the revised purchase arrangement--were intended to mute controversy during the transition to Japanese ownership. Managing the club in partnership with LAACO for a year also provided Marukin with on-the-job training, Masaki said.

Details of the financing of the initial $53-million cash payment were not made public. In an interview with The Times, Noboru Watanabe said the funds came from Marukin’s cash reserves--money the company had leveraged from unspecified Tokyo real estate assets and kept on hand for investment purposes.

When Marukin exercised its option to buy the remaining 51% of the Riviera in September, 1989, it borrowed $55 million from Sumitomo Bank, according to Los Angeles County property records.

Since the Riviera purchase, Marukin has enhanced its investment by spending more than $2 million repairing the fairways and landscaping. Now it is rebuilding the 66-year-old greens at an additional cost of more than $1 million, Masaki said.

The Riviera avoids operating at a loss only because the parent company provides cash infusions and covers the financing costs left from the purchase, he said.

“There’s no way we could take in enough money to make a profit if we had to cover the interest on that capital,” Masaki said.

*

The Watanabe family business started out as a textile manufacturer before World War II in Kawaguchiko, near Mt. Fuji in Yamanashi Prefecture--in the heart of Kanemaru’s electoral district.

In 1969, father and son started the real estate firm Marukin Shoji. Over the years, Marukin diversified into construction and civil engineering. Eventually, the firm opened a branch office in Tokyo that specializes in urban renewal and construction of “intelligent buildings,” office buildings wired for advanced data and telecommunications networks.

Marukin claimed more than $1.5 billion in assets in a recent company brochure. With 40 employees, it had earnings of 24 billion yen (about $200 million) in the year ending March 31, 1992, according to Teikoku Data Bank.

“Our company grew very rapidly, and that caused people to speculate that we got help from Mr. Kanemaru,” Noboru Watanabe said. “But that’s totally wrong. There is no kinmyaku connection.”

But Kanemaru’s aides did rent an office owned by Marukin, occupying the condominium unit that Marukin’s Tokyo branch vacated when it moved to one of its newly completed smart buildings, Watanabe said.

Kanemaru himself maintained a public office on another floor of the Palais Royale building in Tokyo’s Nagatacho, a district dominated by Parliament and the business of politics. But he did not hang his shingle on the door of the suite rented from Marukin--nor on a third suite on yet a different floor, which the Japanese press describes as Kanemaru’s “clandestine offices.”

It was in one of the unmarked rooms that Japanese investigators found a cache of bearer bonds--part of an $84-million booty of gold bars, cash and securities that Kanemaru had allegedly hidden from tax authorities.

Watanabe said he had no knowledge of the activities of Kanemaru’s associates while they were tenants in Marukin’s former office.

Prosecutors also reportedly are scrutinizing about $170 million in loans extended to Marukin by a financial institution allegedly used by Kanemaru to launder millions of dollars in unreported income through the purchase of discount bonds.

Watanabe said the loans involved mortgage-backed securities related to the refinancing of debt and had no connection to Kanemaru. He insists that his father and Marukin are not under serious suspicion by Japanese authorities.

After all, Watanabe said, his company was only one of the scores of construction firms whose offices were raided in a sweep by investigators. Marukin officials have not been called in for questioning since the search, he noted, while other construction chieftains have been summoned by prosecutors.

*

But even if they emerge unscathed by the Kanemaru case, the Riviera’s owners are vexed by the same kinds of problems that have damaged just about everyone in Japan’s real estate industry lately.

The collapse of the speculative land bubble and the ensuing recession have savaged property values, pulling the rug out from under a lot of financing that was backed by real estate assets.

Under the circumstances, the plan to parlay the Riviera’s prestige into a profitable network of international resort properties is on hold--but not forgotten.

“We’ve been severely affected by current financial conditions,” Watanabe said. “We’re not planning to go out and develop properties all over the globe. But we’re taking it one project at a time.”