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California Controversy

Lytle probe ignites scrutiny of Golden State regulatory system

California Controversy

In what could be the most significant regulatory scandal in recent history, the former head of gambling enforcement in California is being accused by the state attorney general of violating conflict-of-interest laws and jeopardizing a 6 million card-club skimming investigation.

The attorney general’s Bureau of Gambling Control (BGC) says confidential information an agency official leaked in 2013 to former BGC chief Robert Lytle “potentially compromised” an ongoing probe of M8trix Casino in San Jose, accused of diverting profits to shell companies to avoid taxes.

Lytle, who left the BGC in 2007 to become an industry consultant, acquired and disclosed confidential information to clients, including M8trix, before and after leaving the agency, the AG said in its accusation filed December 23 with the state Gambling Control Commission (GCC).

“Lytle’s receipt of such information and documents potentially compromised the effectiveness, and undermined the integrity, of the bureau’s investigations,” the AG says in its accusation, which seeks revocation of Lytle’s gambling licenses as a key employee and card club owner.

“This is huge,” a prominent gambling attorney says of the allegations.

Perhaps it is.

How Deep Does It Go?

Many industry observers regard the corruption probe as more than a case of a gambling regulator possibly gone astray.

They view the case as symptomatic of a dysfunctional, politically bifurcated regulatory system ill-equipped to provide direct oversight regulation of card clubs and tribal casinos that comprise the bulk of the nation’s largest statewide gambling industry.

“If these allegations are accurate, the state of California has to do a very public and massive review” of its regulatory system, says William Thompson, a gambling industry author and professor emeritus at the University of Nevada, Las Vegas. “California needs to take this case, shake it hard, and let people know they are taking action.”

Other states have bifurcated gambling regulatory systems.

But California has the only regulatory system in the country under two elected officials: a Gambling Control Commission under Governor Jerry Brown and an enforcement and investigatory Bureau of Gambling Control under Attorney General Kamala Harris’ Department of Justice (DOJ).

Many believe the size and diversification of California’s $10.4 billion—net win—gambling industry, which includes tribal casinos ($7 billion), card rooms ($800 million), racetracks ($600 million) and a state lottery ($2 billion), requires a consolidated regulatory apparatus.

They suspect the GCC and BGC, mandated by law to regulate some 80 card rooms while providing limited oversight over the state’s 59 American Indian casinos, is designed for failure. (Parimutuel wagering is regulated by the California Horse Racing Board and the lottery is under the jurisdiction of the California State Lottery Commission.)

California’s system has resulted in commission/bureau debates over information sharing and enforcement authority.

The latest squabble occurred in May, when the commission and bureau ping-ponged over which agency should revoke or impose conditions on M8trix’s license.

“If you want to deny, deny,” BGC attorney William Torngren told commissioners.

“We don’t know everything,” GCC Commissioner Tiffany Conklin replied. “You are the only agency that can make that determination.”

The hearing was particularly edgy for those in the audience aware that James Parker, the former bureau agent suspected of leaking information to Lytle, was living with GCC Executive Director Tina Littleton.

The commission will make the final determination on Lytle’s licenses. Its lawyers report to Littleton.

“It’s not being salacious to bring that up,” a gambling regulator said of the Parker-Littleton relationship. “That’s pertinent to the investigation.”

GCC Chairman Richard Lopes, a former BGC official, acknowledges the state’s bifurcated regulatory system could prove problematic.

“If you get an attorney general and governor with different views on how gambling should be regulated, it does make things somewhat difficult,” Lopes told delegates at an International Masters of Gaming Law (IMGL) conference in San Diego.

“The regulatory system should not be under the thumb of electoral politics,” Thompson says.

“California is one of the world’s largest gaming markets with diverse constituents, including tribes, racetracks and card rooms,” says Mark Lipparelli, an industry consultant and former chairman of the Nevada Gaming Control Board. “That it does not have a consolidated gaming regulatory body presents tough challenges and complexities.

“I am a believer in the two-tiered regulatory structure with a day-to-day, full-time regulatory body that has broad authority over the industry subject to an oversight body such as a lay commission.

“This provides for accountability, better consistency and appropriate due process. It also provides legislative leaders a better means to evaluate the important policy questions that arise across markets.”

Governor Brown, in a 2012 budget shuffle, shifted the commission’s investigatory, auditing, compliance and enforcement functions to the BGC.

Underfunded Agency

Unfortunately, AG Harris has devoted few resources to the agency, which is largely staffed with career law enforcement officers and not experienced regulators. The agency’s staffing is subject to strict union and Civil Service regulations, making it difficult to recruit from outside the DOJ.

BGC officials testified in commission and legislative hearings that the agency lacks the manpower and skills to enforce industry regulations.

Tribal operators complain that many field agents are veterans of the DOJ’s narcotics division who lack the regulatory mindset needed to oversee casino operations.

One tribal regulator who requested anonymity said bureau field auditors “come into the casino seeking crime, not compliance with gaming laws.”

“The culture has to change,” GCC Chairman Lopes told GamblingCompliance.com.

Tribal casinos are regarded as being well-regulated. Under the Indian Gaming Regulatory Act (IGRA), primacy for regulating gambling on Indian land is in the hands of tribes with limited oversight by the states and federal government.

But industry observers criticize the GCC and BGC for not adequately regulating and enforcing a card club industry using banking firms to evolve from poker to high-stake versions of blackjack, pai gow poker and baccarat in an effort to compete with Indian casinos.

GCC Commissioner Richard Schuetz, who has operated commercial and Indian casinos in several states, says card rooms constitute “the worse-regulated segment” of the nation’s gambling industry.

 “I’m not saying that to be mean,” Schuetz told those attending a recent commission hearing. “I’m saying that to be honest. We need to tighten up the regulations.”

Finally, there are those who suggest the Lytle corruption probe and the state’s regulatory woes could hinder ongoing attempts to legalize internet poker.

“An accusation suggesting there is corruption within the regulatory environment could become a sticking point with respect to a desire to expand gambling in the state with iPoker,” Schuetz says. “That’s one of the biggest implications of this. It may impact the iGaming debate. One of the biggest issues with iPoker is regulations.”

Schuetz is careful not to accuse Lytle of wrongdoing. But he says even a suggestion of corruption in the state’s regulatory system is harmful. “It reduces the public’s confidence in the ability of the state to regulate gaming,” he says.

Regulators Under Suspicion

The AG is seeking a fine and revocation of Lytle’s gambling licenses as a key employee and owner of two Sacramento card clubs. It is not a criminal investigation.

Lytle did not respond to a request for comment. But in a brief interview with GamblingCompliance.com he denied wrongdoing. “Obviously I’m a strong believer in due process and innocence until proven guilty,” Lytle told the internet news service. “I look forward to a hearing. I look forward to proving that I didn’t do anything wrong.”

According to the AG’s accusation, Lytle retired from the BGC on December 30, 2007.

“On or about” the next day he went to work for Garden City Casino, which later became M8trix, the AG says, apparently violating a three-year period during which he was prohibited by law from working in the industry.

He formed Lytle Consulting, and his website promotes having worked for 28 clients, including M8trix, for which he currently serves as head of compliance.

Before leaving the agency, Lytle directed BGC agents “to cut back ongoing investigatory activities regarding Garden City,” according to the accusation.

Between December 2012 and December 2013, Lytle “solicited and received confidential information” about M8trix from the bureau’s special agent in charge during “no less than 180” telephone calls, the accusation states.

The accusation does not name the special agent in charge. But sources and hearing transcripts indicate the position was held by Parker, who has since retired from the agency.

Parker could not be reached for comment. Littleton declined to discuss her relationship with the former agent.

Parker does not hold a gambling license and is not subject to BGC jurisdiction. Although violating confidentiality business codes is a misdemeanor, the statute of limitations has expired.

The seriousness of BGC officials disclosing confidential information and documents cannot be overstated.

“When people are filing for applications and providing information, it’s done under confidential terms,” Lipparelli says. “There’s a high expectation it will be treated as such. They’re turning their crown jewels over to an agency.

“Any time there’s a question about that process it tends to spook everyone, as if, ‘Okay, do I need to be extra careful about what I’m providing to the regulators?’ Those are questions that will cause concerns.”

Although it is not mentioned in the AG’s accusation, tribal officials contend Lytle’s conflict of interest extends beyond the AG’s accusation.

An opinion letter Lytle wrote 10 days before resigning stating that the deal need not be rotated among players in versions of blackjack has been used by card room owners, including Lytle’s clients, as justification to operate table games in apparent violation of regulations.

DOJ in March 2008 distributed a copy of state law requiring that the deal be rotated. But the practice of avoiding rotation of the deal remains common.

“It was his last favor to the card rooms as he walked out the door,” says a tribal official who requested anonymity. “And it was a huge favor. It was worth hundreds of millions of dollars to these guys.”

A Good, Bad And Ugly Regulatory Landscape

Lopes and Schuetz insist tribal gambling in California is well-regulated. The tribes, Lopes says, “have the best-regulated casinos on the planet.”

The same cannot be said of card rooms.

Poker rooms in California date to the mid-1800s, but it was not until the Gambling Control Act of 1997 that the state began regulating the clubs.

California’s card rooms have faced high-profile scandals, beginning with the 2012 temporary shutdowns on loan-sharking allegations of Artichoke Joe’s in San Bruno and the Oaks Card Room in Emeryville and continuing with the M8trix skimming investigation.

California law prohibits clubs from having a financial stake in the card games, meaning customers wager against each other with the house taking a nominal fee, or “rake,” for each hand.

But competition from Indian casinos gave rise about a decade ago to the widespread use of third-party proposition players (TPPPs) who bank high-stakes games, posing a challenge to regulators.

Four banking firms in 2012 paid stipulated agreements of $250,000 to $550,000 for violating state law.

Schuetz, in public hearings, likened the industry’s evolution from poker to high-stakes table games to “the Galapagos Islands.”

“When you switch over to the type of games in California now—non-poker games that by law are supposed to be player-banked, but most of the time it’s a third-party banker—it certainly makes the situation far more complicated,” Nevada gambling attorney and author Tony Cabot says. “You need different internal controls than with poker. You also have the contractual arrangement between the banker and the house.”

Tribes contend card rooms are advertising blackjack and baccarat, games prohibited by law, and using TPPPs to skirt regulations requiring that games be banked by players and not the club.

“Not only are the card rooms playing illegal banked games, they are effectively house-banked games,” the Yocha Dehe Wintun Nation said in an October letter to the commission and bureau.

The card room industry wields a great deal of political clout, often contributing 60 percent or more of a municipality’s taxes.

Out-of-Control Card Games

A commission request that TPPPs submit monthly game statistics to the BGC was met with resistance from a bureau chief who said the agency lacks manpower to analyze the data, a standard industry technique for spotting fraud and ensuring game integrity.

“The monthly submission is too much for us right now,” Assistant Bureau Chief Stacey Luna-Baxter told commissioners. “(Data is) going to sit there. We’re not going to be able to analyze it and do what we really need to do with it.

“We had existing backlogs for our mandated workload as it is,” says Luna-Baxter, claiming CBGC had “a number of turnovers and vacancies,” including a licensing division short 22 people.

“This is something we need,” Lopes says of the use of data in regulating the industry. “Having visited other regulatory agencies across the country, this is exactly what they do.”

“We have a regulatory apparatus that is understaffed and doesn’t have access to training as much as they need,” Schuetz says.

Vic Taucer, an expert on table games who recently surveyed card room casinos for tribal clients, says he found the card rooms lacked minimum internal operating controls and adequate surveillance.

“The first thing I searched out for was whether there were any valid operating controls,” Taucer says. “It was nil. There were none.”

George Joseph, a consultant on game cheating, calls the California card room industry “the Wild, Wild West.”

Card-room attorney Keith Sharp says it is wrong to assume there is a “systemic” regulatory problem in the card club industry.

 “The regulations are in good shape,” Sharp says. “The guys I represent in the card-room industry welcome fair and efficient regulations.”

Dave Vialpando, a former BGC agent who now acts as gaming commissioner for the Iipay Nation of Santa Ysabel, says the BGC has “some very well-qualified and dedicated agents.

“But if you ask me if the bureau is adequately prepared to regulate the industry, I’d say absolutely not,” Vialpando says, largely because the agency is overworked and understaffed.

 “When you spread your resources very thin, it may give the impression there’s a lack of skills,” Vialpando says. “I don’t think there’s a lack of skills. I think there’s a lack of sufficient resources.

“The commission is almost at the point of overkill when it comes to promulgating regulations, but whether or not they have the staff in the bureau to enforce and ensure the regulations are adhered to, that’s an entirely different matter.”

BGC staffing problems were addressed by BGC’s Luna-Baxter last April, when the Assembly Government Organization Committee discussed pending iPoker legislation.

“Currently within the bureau we do not have existing resources that we can shift to this new workload associated with internet poker,” she told the committee.

The bureau’s licensing division, short 22 positions, would need additional manpower, while its compliance and enforcement division would require both training and manpower, Luna-Baxter said.

 The bureau, fully staffed, would have 188 people. Its current budget is $28 million—$19 million from a tribal Special Distribution Fund and $9 million from the state’s Gambling Control Fund.

 “It is anticipated there will be significant implementation costs due to the need for technical expertise, increased auditing requirements and staffing needs,” Nathan DaValle, the bureau’s assistant chief for compliance and enforcement, told the committee.

 “Funding should be allocated to permit the bureau to contract and consult with technology experts familiar with internet poker platforms. Funding should be allocated for the hiring and specialized training of additional special agents, auditors, technology staff and support staff.”

Luna-Baxter at the hearing acknowledged there was a “lack of skill sets” in the bureau, but said Civil Service and union restrictions and the state process for seeking additional funding make it difficult to recruit specialists in auditing and statistical work.

“You’re looking at a six- to nine-month process,” Luna-Baxter said.

It has been suggested that the BGC seek assistance from tribal gambling commissions in meeting the regulatory demands of an iPoker industry. But many tribes believe the agency has an anti-Indian bias, a belief inflamed in January when BGC attorney Torngren argued in federal court for a restraining order to shut down Santa Ysabel’s bingo website.

Torngren said the “self-serving actions” of the tribe’s gaming commission were tantamount to allowing “the fox to guard the hen house,” a culturally insensitive if not racist remark that flies in the face of IGRA provisions giving Indian governments primacy over gambling regulations on tribal lands.

“The gasps of disbelief from the many tribal members in attendance were noticeable to all,” Vialpando says.

“That such a culturally insensitive comment would be made publicly from a state government official, in this day and age, is downright deflating and opprobrious.”

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Dave Palermo is an award-winning metropolitan newspaper reporter. He has written about American Indian governments for more than 20 years, working as an advocate for several tribes and tribal associations. He also has co-authored books on gambling and gambling law. He can be reached at dgpalermo1@gmail.com.

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