October 2015 nearly marked the end of the road — rather, railroad, for Pacific Imperial Railroad, the company that leases the 100-year-old Desert Line from the Metropolitan Transit System. According to documents released by Metropolitan Transit System, the public agency was close to revoking the lease due to lack of progress in reconstructing the line.
In a November 19 letter to Pacific Imperial's then–top shareholder Dwight Jory and his colleague and fellow Pacific Imperial shareholder Charles McHaffie, Metropolitan Transit System's chief counsel Karen Landers threatened to pull the lease from the fledgling railroad company.
"The primary cause of this default was [Pacific Imperial's] failure, after almost three years, to obtain the financing necessary to complete the milestones set forth in the lease. This failure to secure financing resulted in: [Pacific Imperial] only partially completing its Desert Line Reconstruction Plan, [its] failure to timely submit a construction schedule and specific work plan for each bridge, section of track or other work, failure to start construction in any manner, and [the company's] failure to move beyond interim management and an interim business plan."
As reported by the Reader, on several occasions, the local transit agency has had a bumpy ride with McHaffie and Jory at the helm. Since the 1990s, the Las Vegas land speculators have been accused of fraud on numerous occasions. The two have had dozens of lawsuits filed against them, many of which from investors in the Desert Line who say the pair scammed them. Also, since acquiring the lease, the railroad company has failed to meet most if not all of Metropolitan Transit System's reconstruction milestones.
Despite the poor track record, the transportation agency appeared content sticking with Pacific Imperial Railroad — after all, as part of the 2012 lease agreement, the company was paying $1 million per year to lease the 70-mile track that weaved north of the border at Campo into Imperial County.
In January 2015 that seemed to turn around. McHaffie and Jory had informed MTS that Pacific Imperial Railroad had sold the majority of shares to a New York investment firm, Conatus Capital Group Incorporated. The announcement meant the end of McHaffie and Jory's stewardship of the railroad. In response, Metropolitan Transit System chief Paul Jablonski granted the company more time to begin reconstructing the line.
But in mid-October, the agency learned that the buyout was never finalized.
Landers and Jablonski threatened to revoke the lease.
"Therefore, in a series of meetings and/or calls with you [Jory] and Mr. McHaffie during the week of October 19th, we informed you that we had lost confidence in your ability to perform under the lease, that the lease could be declared in immediate default, and that we would issue a notice of default if the Conatus Capital Group transaction had not closed by Friday, October 23, 2015."
On October 23, McHaffie informed Metropolitan Transit System that the deal was done. Additional extensions for reconstruction were granted.
Again, the agency soon learned that not all was as it seemed.
On November 18, representatives from Conatus Capital Group informed Landers and MTS brass that McHaffie tried to make last-minute changes to the buyout agreement. The deal was off.
Landers gave McHaffie a day to get the deal done. If unsuccessful, Metropolitan Transit Agency was pulling the lease.
"MTS has always acknowledged the vision of you and Mr. McHaffie in recognizing the value of the Desert Line to the San Diego and Baja California manufacturing industries and its potential as a renewed, valuable shipping corridor," wrote Landers. "However, that vision can only take the project so far, it has been clear for almost two years that new, professional management, ownership and financing was necessary to turn this vision into a reality. Unfortunately, your failure to obtain sufficient investment to perform under the Lease has eroded the value your initial efforts brought to this project."
The two sides reached an agreement and Conatus Capital took the reins from Pacific Imperial.
As later reported by the Reader, the authenticity of Conatus Capital Group has also been questioned.
In press releases announcing the buyout, the group was described as a "New York–based conglomerate." In reality, according to business records kept with the State of Nevada, the group Conatus Capital Group had been formed in August of that year, two months prior to the supposed buyout and was registered not in New York but Nevada. In fact, there is a large hedge-fund manager Conatus Capital Management Group registered in the New York area but there were no ties between the two.
And while details on reconstruction are unclear, in June 2016 Pacific Imperial announced it had agreed to sublease the rights of the railroad to Baja California Railroad, the entity that owns and operates the track south of the border, thus removing Pacific Imperial from overseeing reconstruction of the line.