INDIANAPOLIS | East Chicago political insiders Thomas Cappas and Michael Pannos and their families reaped "enormous" salaries while at the helm of an embattled development firm accused of squandering millions in local casino cash, Indiana Attorney General Steve Carter states in a confidential report obtained by The Times.

The for-profit firm, East Chicago Second Century Inc., was stripped of its more than $2 million annual casino subsidy -- that was supposed to be earmarked for community development projects -- a year ago after Carter delivered his financial investigation to the Indiana Gaming Commission.

The Times made a public records request for the report in June 2006 and received a partially redacted copy this week.

The 896-page document provided by the Gaming Commission blacks out most the financial details Carter compiled using confidential state records.

However, a source familiar with the case said the amount paid to Cappas, Pannos and family members of the two men from 2002 through 2004 is in the millions and represents the vast majority of Second Century's payroll for the three years that Carter examined.

Second Century was created to develop affordable housing and other economic development projects in the city. And for a decade, it received 0.75 percent of the East Chicago casino's annual profits under a 1994 side deal that then-Mayor Robert Pastrick brokered to bring riverboat gaming to the lakefront city.

Second Century is run by Pannos, a former Indiana Democratic Party chairman, and Cappas, an East Chicago political insider whose ties to the Pastrick administration earned him the nickname "midnight mayor."

Cappas, Pannos, their wives and other family members were investors in the original Showboat casino that opened in 1997 and are believed to have made millions when Harrah's bought the East Chicago riverboat a year later. Shortly thereafter, the two men received permission to take over Second Century, telling the Gaming Commission in 1998 that they would take no salaries "but may be asking of a compensation package at some point in the future."

The compensation later paid to Cappas, Pannos and family members was "enormous" and was on the rise from 2002 to 2004, Carter says in an unredacted portion of his investigation. Other state officials who have seen Carter's full report also call the payouts excessive.

"Excessive is a kind term," said Ernie Yelton, the gaming commission's executive director.

But Second Century attorney J. Lee McNeely said Carter's report gives his clients no reason to blush.

"We are a private corporation, despite hysterical comments to the contrary by officeholders," McNeely said. "We have paid salaries, and we have paid expenses like any private corporation does. It's perfectly appropriate."

East Chicago, led by Mayor George Pabey, has waged a two-year legal war to wrest control of the more than $2 million in annual casino funds that had flowed to Second Century. And Carter has filed briefs in the case -- now before the Indiana Court of Appeals -- demanding Second Century provide a full account of the $16 million it has received.

Carter and Pabey argue Second Century was created to foster a public benefit, and therefore its finances should be brought to light. McNeely, meanwhile, says greater attention should be paid to the more than $361,000 in legal fees East Chicago has amassed in its court battle with Second Century and two separate nonprofits that receive another $6 million a year in casino funds.

East Chicago Corporation Counsel Carmen Fernandez called the city's legal fees a "drop in the bucket" compared to the $8 million annual windfall at stake in the casino cash clash.

"We look at it as an investment for the city of East Chicago," Fernandez said of the legal fees. "If we don't do this, the money keeps going down a black hole."