On Tuesday I wrote that Starwood is suing the Parker Meridien and Perker Palm Springs hotels, accusing them of fraud and seeking to abrogate their contracts.

Starwood is trying to cancel its agreements with the Parker Meridien hotels in New York and Palm Springs after the properties allegedly faked accounting records and guests in order to claim over $1 million in payments from SPG.

LoyaltyLobby tracked down a copy of the lawsuit (.pdf) and it makes for interesting reading.

It reveals the details of the fraud. Starwood Preferred Guest was the first program to offer ‘no capacity controls’ on award nights. If a standard room is available at a hotel, a member can use points for the room. The way that they do that is offering deeply discounted payments to hotels for their rooms most of the time (since those rooms would otherwise go empty), but when a hotel is full they pay that hotel its average daily room rate (so that giving a member an award doesn’t trade off with revenue they could have received for the room).

What the two properties allegedly did was fake their occupancy rates in order to claim they were full, so that Starwood would have to reimburse them at their full rate instead of at discount rates.

I had understood that Starwood Preferred Guest reimbrused its hotels for average daily room rate when occupancy exceeds 90% on a given night. So I’m glad to have read the suit, since I learned that the actual occupancy rate for that level of reimbursement is 95%. Perhaps that’s pretty inside baseball, but it’s important learning for me since I occasionally repeat the detail as part of my understanding of the economics of the program.

Supposedly the scheme to inflate occupancy began at the New York hotel shortly after beginning to participate in SPG in 2008.

They created fake reservations and checked in those reservations to inflate occupancy rates. Most of the reservations were ostensibly complimentary bookings for travel agents, something hotels try to avoid offering when they’re otherwise going to be fully booked. They also checked in ‘no show’ reservations in order to look more full. And they checked hotel employees into free rooms.

Somewhat surprisingly, the hotel ownership claims that Starwood isn’t entitled to end the relationship. The amount of money at issue is in the hundreds of thousands of dollars at each of the two properties, so one imagines that the ‘errors’ could be defended as inadvertent or the result of misunderstandings, and that repayment would be sufficient to cure the breach. Clearly Starwood wants no part of that.

There’s no question that there’s a real incentive for hotels to show occupancy at 95% or above (without showing additional revenue that Starwood would earn off of), in order to boost their payments from Starwood Preferred Guest.

If this scheem was going on at the Parker Meridien properties, one wonders if it’s going on elsewhere. And not just with Starwood, as some other chains operate under a similar structure for their own reward nights.

While reports have to be filed by the hotel, reports can be fabricated, and Starwood’s internal audit procedures didn’t detect the fraud (such as unusually high numbers of free room nights correlating with nights where the hotel was booked full), relying instead of a whistleblower. So both Starwood Preferred Guest and other hotel loyalty programs probably need to take note and evaluate their own internal audit procedures.

It’s the high occupancy rate payments that have historically driven SPG costs — and are one reason that the chain has looked at ways of offsetting those costs, such as through the introduction of higher redemption tiers. The Parker Meridien case is clearly not what gave us ‘category 7′ in SPG (based on timing), but the issues in the Parker Meridien case are the same as those which drove the introduction of the category.

So a program’s failure to crack down on fraud by its hotels is a straight line to program devaluation as a means of controlling costs. And as a result, this is more than of prurient interest, but of real concern to members.

  1. Jim l said,

    Parker meridien in NYC has been running sales at 199 lately. It seemed odd to me that they would be so cheap compared to other NYC hotels, especially in high season. Yes they had to close for sandy and the crane incident, but It didn’t make sense to me why they were at such a low price point compared to others. Any correlation with the suit? Interesting post Gary. Thanks

  2. RKToledo said,

    Explains why some SPG members report routinely achieving successful Ghost Stays with Starwood despite being against SPG T&C. Ghost Stays are truly a monetary benefit to the hotel in more ways than one.

  3. B said,

    Kinda explains why NY Property charges its Platinum member $10/day mandatory hotel fee for use of “Internet, Gym and Pool” – which should be a complementary item for its Platinum member. They are trying to make more money by introducing these crazy fee’s.

  4. Nick @ PFDigest said,

    Very interesting stuff, thanks for posting. There are some people who think it’s wrong to game the system a bit, but things like this are a reminder that the companies we’re gaming are themselves gaming. Though I guess in this case the hotel managers might have benefitted from reading Frequent Miler’s post about gaming ethics.

    Question: do other hotel loyalty program reimbursements work similarly to Starwood’s? I’m wondering how widespread this sort of thing is and what sort of incentives managers in other hotel chains have.

  5. VG said,

    This sort of fraud is very bad for those of us who use loyalty programs. When fraud raises the cost to SPG of providing benefits, the program is less likely to improve benefits and more likely to increase the number of points required. SPG is not the loser here, loyalty program members are the eventual losers.

    I am glad SPG is taking a hard line instead of a wrist slap. It is more likely to deter such behavior by other hotels.

  6. JacobGBG said,

    Since it is in the guests best interest to keep this kind of generous award space offering I hope the hotels are severely punished.

  7. jfhscott said,

    Those bastards. Good that there was a whistleblower. Can a chain truly develop dependable metrics which identify when a property has an inordinate number of “sold out” (95%)nights? I just don’t know that they can. The variations in the types of hotels may be too broad to develop such metrics – The W Miami Beach likely has far more Saturday night redemptions when they are full than some Four Points in Spokane. Equally, redemptions at the Four Points Munich will be concentrated over Oktoberfest, as they are .25 miles from the Oktoberfest grounds (nice to have a clean potty at the ready even if one does not use the room). I just suggest that there will be so many “honest” outliers that one cannot develop helpful metrics in this regard.

  8. AlohaDaveKennedy said,

    The statistical reality in internal audit is that the auditors rarely detect fraud without a tipoff. Absent continuous monitoring to spot a pattern, errors and fraud look too much alike. Unfortunately, the statistical reality for those who tip the auditors off (whistleblowers) is that reporting fraud rarely ends well for the reporter.

    “While reports have to be filed by the hotel, reports can be fabricated, and Starwood’s internal audit procedures didn’t detect the fraud (such as unusually high numbers of free room nights correlating with nights where the hotel was booked full), relying instead of a whistleblower.”

  9. Scott said,

    This is pretty interesting, thanks.

  10. Josh said,

    Interesting post, esp the part re: Le Meridien’s fraud implicitly leading to devaluation of loyalty currency. However, I wonder whether any of your readers consider that they too contribute to persistent loyalty currency devaluation through some of the more abusive spend/churning tactics? Too much currency in circulation chasing too few goods invariably leads to inflation.

  11. Goosh said,

    “prurient interest”

    I had to look up the word prurient. Learn something new every day.

  12. mrredskin said,

    i have a feeling these aren’t the only two hotels doing this

  13. PointsCashMiles said,

    Thanks for the update – certainly entertaining and I enjoy the insight into how the hotel rewards programs operate. I think the scary part of this is, that despite the huge dollar amount of the scam, SPG still would have had no idea it was going on without the whistle blower. It makes me wonder how many other hotels might be doing something similar.

  14. D Wonder said,

    SPG has become very disappointing IMHO with absurd over priced hotels in many markets and inflated redemption costs/Devauation.This wasnt the case back in 1999 when the program for a number of years and its hotels were brilliant and exceeding fair in almost every regard.
    I would say this is just the tip of the iceberg
    All along I saw it as pure Starwood greed and I left the program over the past few years. Now I really wonder how widespread the practice is and if the very reasons I left SPG was tied to fraud and the inability of Starwood to monitor its hotels accounting practices which inflated everything across the spectrum
    It’s really a good thing in the end as I will assume Starwood /SPG will lay down new accounting procedures to avoid such widespread problems in the future
    Hopefully!

  15. bbbb said,

    Just the tip of the iceberg.

  16. GUWonder said,

    A crackdown on hotels doing this kind of thing against hotel loyalty program operators can only be a good thing for consumers.

    I too doubt that such shady business practice is limited to just these two SPG hotels and the SPG program.

    By the way, I have some doubt that SPG was the first hotel loyalty program without capacity controls as there were loyalty programs around well before SPG and the world is a pretty big place still.

  17. GUWonder said,

    With regard to my first paragraph above, I failed to correct that for the utility of phantom stays for booked consumers who no-show or otherwise fail to cancel/change the reservation before hitting the cancellation deadline.

  18. jfhscott said,

    This also makes me wonder if any hotels have now been alterted to a way to scam SPG.

  19. Gary said,

    @GUWonder – fair but certainly the first major program to offer it

  20. James K. said,

    If you think this qualifies as “prurient,” then your love of points/miles goes even farther than I thought it did :)

  21. Regcheck said,

    A similar example of hotel fraud can occur in meeting planning. Contracts typically discount room rates but require organizers to achieve certain minimum room-night bookings. Hotels charge for rooms unsold below the minimum, UNLESS the hotel is “sold out.” Hotels are prone to lie, saying they are not sold out when in fact they are, in order to collect on these unsold rooms. (This is a much larger profit than tweaking SPG or the like.) For this reason, meeting planners who are below their room-night minimums enlist straw purchasers to make reservations, thereby testing if the hotel is full. If the hotel tries to charge for unsold room-nights, the meeting planners will reveal proof that the hotel was full.

  22. Starwood Raises the Price of Cash & Points Awards — Why That May Not Be a Bad Thing - View from the Wing said,

    […] Starwood set up the program to reimburse hotels at their average daily room rate on those nights when a hotel’s occupancy exceeds 95%. When a hotel sells out, award nights are expensive for Starwood Preferred Guest (as we learned from Le Parker Meridien’s alleged fraud). […]

  23. Do SPG hotels make money off of your points? - FlyerTalk Forums said,

    […] Originally Posted by tfong007 Where can I get the documents related to this suit? Here is a link to a blog post that includes a .PDF of the lawsuit: What Starwood's Lawsuit Against Two of it Own Hotels Reveals About the Starwood Preferred Guest Prog… […]

  24. What Court Documents Reveal About Le Parker Meridien’s Alleged Fraud Scheme Against Starwood Preferred Guest - View from the Wing said,

    […] Loyalty Lobby uncovered additional filings in the lawsuit between Starwood and the Parker Meridien hotels over Parker Meridien’s alleged fraud in boosting their supposed occupancy rates in order to overcharge SPG for guests&#8217…. […]

  25. More Prurient Spectating in the Parker Meridien/Starwood Lawsuits - View from the Wing said,

    […] lawsuit between Starwood and the Parker Meridien Hotels is fascinating not just because it’s a window into agreements between loyalty programs and […]

  26. D Wonderment said,

    Ever wonder folks when they say there are no more standard rooms available at the lowest points bucket? Just how manipulated that honesty and integrity is?
    Hello Sheraton on the Park Sydney Australia!
    Need a few other 4 dozen SPG property names?
    There is gross manipulation of the system.
    SPG has lost much of my business long before the Le Parker M scandal
    There is a cost to running any program with devalued point currency and inability to use it in a fair and reasonable manner.Sadly though a number of hotels may be at fault for this fraudulent business behavior at the end of the day I hold SPG/Starwood accountable for not having the proper monitoring operating procedures,account practices and metrics system to run a transparent honest loyalty program in place.
    You can boast about how great your program is and say anything in your advertising howevever if it walks like a duck quacks like one its a duck.

    The long term damage and my lack of faith in SPG was not just perception its going to take a long time to ever trust the program if ever fully and their hotel partners.The bulk of my business is elsewhere today.Not that I don’t think that this nonsense/fraud doesn’t go on in other programs it does to some degree

  27. Update on the Lawsuit Between Starwood and Le Parker Meridien Hotels - View from the Wing said,

    […] The lawsuit between Starwood and the Parker Meridien Hotels is fascinating not just because it’s a window into agreements between loyalty programs and hotels that we don’t often get to see the details of but also because it reveals a ton about how the programs work. […]

  28. Hotel Crashing: The Parker Palm Springs | The Poe Log said,

    […] Overall, this stay at The Parker Palm Springs was better than my first stay, but still questions about quality linger.  Additionally, this will most likely be my last stay as I expect the hotel will no longer be n Starwood Preferred Guest (SPG) member in the near future due to a series of ongoing lawsuits regarding my beloved SPG Points.  You can read about the lawsuits here […]

  29. How much does SPG pay a hotel for points? - FlyerTalk Forums said,

    […] About 1 cent per point unless of course the hotel is full. http://boardingarea.com/viewfromthew…guest-program/ […]

  30. Pizza In Motion – Starwood Preferred Guest Announces Their Category Changes For 2014 said,

    […] some form or fashion on this.  One of the reasons we have so much detail on Starwood is because of the lawsuit they had last year with a few properties that tried to game the system.  At any rate, Starwood adjusts categories for some properties each year (both up and down) based […]

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