California Countdown

A longstanding battle about the right to offer banked card games could be about to boil over. Who will prevail—the tribes or their rivals, in the card rooms?

Ardath Hyer and her husband moved to Redding, California 16 years ago, hoping to buy a house, which they could not afford when they lived in Santa Cruz.

“It was our dream,” she said at an October workshop held by the California Department of Justice, Bureau of Gambling Control (BGC). “When I moved here and started a job at the Casino Poker Club, it enabled me to buy a home. It also enabled me to gain guardianship of my four nieces and nephews, raise them and give them a life here.”

If California regulators require rotation of the player-dealer position for versions of blackjack and other banked card games—which the BGC is contemplating—Hyer said she and thousands of card room employees would lose their jobs.

“I believe that this will hurt all small card rooms,” she said of the proposed regulation. “It’s such a large part of our income.”

 

California Sweep

Card room industry officials say “California games”—including versions of blackjack banked by third-party proposition player firms, or TPPPs—account for at least 70% of industry revenues. Many suspect the figure is much higher.

They say tightened game rules could cripple an industry that employs more than 20,000 workers and generates in excess of $2 billion in annual revenues and more than $300 million in federal, state and local taxes. It also could have a major impact on municipalities that depend on tax revenues from the clubs to fund city services.

But state regulators—comprised of a California Gambling Commission (CGC) under Governor Gavin Newsom and a BGC under Attorney General Xavier Becerra—are threatening to make drastic revisions in regulations and game rules for the state’s licensed card rooms.

The move is in response to pressure from American Indian casino operators who contend card rooms violate state law and the tribes’ constitutionally guaranteed exclusivity to not only slot machines but banked and percentage table games.

Proposition 1A, approved by 63% of California voters in 2000, launched what is today an $8.9 billion Indian casino industry comprised of 63 licensed casinos.

 

Taking It to Court

Tribes are bringing the issue to a head, filing state and federal lawsuits against the state and card rooms.

“The tribes are very committed to seeing this through, to point out the card rooms are operating illegally and causing financial damage to our properties,” says Steve Stallings, chairman of the California Nations Indian Gaming Association and a council member for the Rincon Band of Luiseño Indians. “The state has been derelict in its duties to regulate the industry.”

In an effort to resolve the dispute, BGC Director Stephanie Shimazu is rescinding rules for card room games similar to blackjack prohibited by state law. Shimazu and the BGC also are promulgating regulations that will likely require rotation of the player-dealer position, limiting the ability of card rooms to offer the lucrative California games bankrolled by TPPP firms.

“I understand people feel very strongly about this issue,” Shimazu told attendees at the hearing in Redding. “We are in the informal stages of the regulatory process, and we will continue with the informal stage until such time we are comfortable we have received, reviewed and analyzed all your input and concerns.

“The regulatory process can be lengthy,” she said.

For eight years, tribes have been bickering with the commission and bureau in an effort to get gambling regulations and game rules in compliance with state penal codes and the Proposition 1A constitutional amendment limiting banked games to tribal casinos.

The issue came to a head in November, when the Rincon and Santa Ynez Band of Chumash Indians sued nine card rooms and several unnamed TPPP firms in San Diego County Superior Court. The two tribes contend illegal card room games deprived them of $18 million a year in table game revenue from 2013 to 2018.

Three other tribes—the Yocha Dehe Wintun Nation and the Sycuan and Viejas bands of Kumeyaay Indians—filed suit in the Ninth Circuit U.S. District Court against the state, claiming it had breached tribal-state compacts and violated their exclusive rights.

“I would like to make it clear, we are not challenging the right of a business to operate, but rather the non-compliance with California law,” Rincon Chairman Bo Mazzetti says.

If the CGC and BGC “enforced the current laws that exist,” Mazzetti says, “we would not have taken this action. Unfortunately, this lack of enforcement gives us no other option but to pursue legal remedies. We are simply asking that card rooms comply with the law.”

 

Political Roadblocks

“We felt it was time to put this issue front of a judge to make a decision independent from the state,” says Chumash Chairman Kenneth Kahn. “We feel like we have a pretty solid case.”

Politics have gotten in the way. California has the country’s only politically bifurcated regulatory system, divided between two elected officials, the governor and the attorney general.

The system is responsible for directly regulating the card clubs while providing oversight for tribes, which under federal law have primacy for regulating their casinos.

Tribes have contributed millions of dollars in regulating their operations, which have been relatively free of scandal. The card clubs, on the contrary, have been hit with some $10 million in federal money-laundering violations in the last decade—more than the nearly 1,000 U.S. commercial and tribal government casinos combined.

Veteran casino executive and former California Gambling Control Commissioner Richard Schuetz calls card rooms the “worst-regulated segment” of the legal gambling industry. His opinion is echoed by others who contend card rooms lack sufficient internal operating controls, prompting a rash of raids by the federal Financial Crimes Enforcement Network (FinCEN).

State attorneys general have not shown a willingness to crack down on the industry, a malaise blamed on the industry’s political clout generated by jobs and municipal tax revenues.

The tribes’ Ninth Circuit lawsuit alleges that state regulators have been “complicit, at times even encouraging” unlawful conduct by card rooms running banked games such as blackjack. The games, approved by the bifurcated regulatory agency, have enabled the card rooms to evolve beyond offering strictly poker with the club getting a fee or “rake” per hand.

The most egregious misstep was a December 2007 opinion by former bureau chief Robert Lytle that the player-dealer position in California games need not be “continuously and systematically” rotated as required by state law, but merely offered to participants in the game.

Lytle issued the opinion—later rescinded by the agency but still followed by most card rooms—just days before leaving the bureau to work as a card room consultant and owner. His licenses to work in the industry were later revoked by former Attorney General Kamala Harris.

“It’s not breaking news these days that many California card rooms located in urban areas have been allowing blackjack and banking their own games in violation of state law,” wrote John L. Smith in CDC Gaming Reports. “There’s a good possibility California regulators will look very bad before this mess is over.”

Mazzetti says the growth of the card room industry is largely due to the permissive attitude of regulators toward card room game rules and other regulations.

“Both the employees and the taxes were generated by illegal income, and the state allowed that,” Mazzetti says. “They created the monster. Now they don’t know how to get the monster back in the cage.”

 

‘A Different Interpretation’

Card rooms used BGC workshops to rally workers, city officials and others to generate positive press coverage. It worked. Mainstream newspapers focused on the impact tightened game regulations could have on jobs and tax revenues. Little attention was paid to the legal issues.

“As the leader of my community, I am most disappointed in the harsh, unwarranted treatment of the driving economic force in our community,” Hawaiian Gardens Mayor Myra Maravilla said of the Hawaiian Gardens Casino, which generates 76% of the city’s tax revenue.

“What did we do to deserve you picking on low-income immigrant communities that primarily rely on our casino revenue? This is a direct assault on our working families, our seniors and our youths.”

“For you to unilaterally change this game so it becomes less desirable endangers employment for our residents, needlessly endangers the budget for the city of Inglewood and seems to be a solution in search of a problem,” Inglewood Mayor James Butts told regulators.

“The impacts to our city are significant,” City of Commerce Major Hugo Argumendo said of the proposed regulations. “Our city would have no choice but to begin to lay off many of our employees. The casino itself would also have to reduce its employment.”

Ryan Stone, owner of three card rooms in California, told the San Diego Union Tribune that the tribes “continually make false statements about the legality of our business in an effort to shut down the card room industry, which supports our cities and provides living-wage jobs to thousands of people in California.” He called the lawsuit by the Rincon and Chumash “the latest attempt to interfere with a legal industry that has existed in California for over 150 years.”

“We understand the need for compliance and rule-making,” Kyle Kirkland, president of the California Gaming Association and general manager of the Club One Casino and Poker Room in Fresno, told the Redding workshop. “What we would ask is that we carefully balance the legal needs and social impacts. We’ve talked of course about the jobs and the investment we have with the communities.

“Our games are very different from tribal games,” Kirkland says. “The fact that we offer the player-dealer position is substantially different.”

While state law and Penal Code 330.11 allow games to be dealt by TPPPs, it requires the player-dealer position to be “continuously and systematically” rotated. It does not require every player to accept the offer of the deal.

“We have a different interpretation of ‘continuous’ and ‘systematic,’” Kirkland said. “That’s not defined. We have a different interpretation of the Lytle letter and how it was put together and put forth.

“Both player-dealer games and blackjack-style games have been approved by the California Department of Justice and played at California card rooms without harm to or complaint from the public for decades.”

Kirkland told KUSI News in San Diego, “Some of the tribal casinos have been complaining about what some of the card rooms are doing, basically saying, ‘Hey, well, wait a minute. We think we’re the only ones that do gaming in the state.’ And that’s not true. The tribes have monopoly exclusivity on slot machines, but they don’t on table games.”

That’s misleading.

The California Constitution in Section 19(f) states that only tribes can operate slot machines. But it also gives tribes exclusivity to operate “banking and percentage card games.”

 

Stepping Up to the Plate

Tribal silence on the issue ended March 5 with the fifth BGC workshop in Riverside, when six tribal chairs, nine county and city officials, about 200 employees and representatives of 16 community groups packed the Cesar Chavez Community Center to make their case.

“We respect the process that you have undertaken, which is why we have chosen not to turn the prior workshops into political rallies,” said Lynn Valbuena, chairwoman of both the San Manuel Band of Mission Indians and Tribal Alliance of Sovereign Indian Nations.

“We hope that our respect for, and deference to, this process is not misinterpreted as indifference, because it is not. In fact, the record reflects that for almost a decade, tribal governments throughout the state have been pleading with the bureau to investigate what we consider unlawful Nevada-style games at urban card rooms.”

Unlike commercial casinos, tribal gambling operations generate revenue for government services to tribal citizens. That includes table game revenue, which on the average generates from 10 percent to 20 percent of a tribal casino’s win.

But roughly 80 percent of the 63,000 tribal casino jobs are held by non-Indians, according to CNIGA. Tribal casinos also generate more than 22,000 non-gambling jobs, according to a Beacon Economics study funded by CNIGA tribes.

Tribal casinos in 2014 generated $392.4 million in state and local tax revenues, according to Beacon Economics. Tribes contract with non-Indian counties and municipalities for other services. Tribal fire departments respond to off-reservation emergencies and have mutual aid agreements with the Forest Service and other fire departments.

Tribal governments under the Indian Gaming Regulatory Act (IGRA) are required to contribute part of their gambling revenue to local charities. California tribes donate about $102 million a year to state and local charities, according to Beacon Economics.

 

Letter of the Law

Engaging in dueling statistics is not likely to solve the dispute.

“Public perception is certainly an important component when it comes to big issues,” Chumash Chairman Kahn says. “But we felt by taking the matter to a court of law, we can take the politics out of it. Our concern is the state’s lack of action in enforcing the law.”

While the tribes and other interested observers are impressed with Shimazu’s resolve in reaching a regulatory fix, they are not optimistic.

“I always thought what the bureau was doing was just a delay, an effort to kick the can down the road,” Schuetz says.

“Political pressure is on the bureau to do something about the card rooms,” adds a club executive who requested anonymity. “But if they do anything—do something about rotation or even get rid of blackjack—people will be out of work and these communities will take a beating. And that will politically backfire on the state.”

Some believe the tribes and card rooms will attempt to negotiate a fix, particularly if judges in the two lawsuits reject efforts to dismiss the litigation.

“I don’t think tribes have any interest in having the card rooms close down. It’s not our interest at all,” Stallings says. “Their businesses will be affected. But the gloom and doom they’re talking about is just not true.”

“If judges reject motions to dismiss, the card rooms will be running to meet with the tribes,” says a lawyer familiar with the issue who requested anonymity. “Tribes have the law on their side.”

Tribal officials are concerned that allowing card rooms with upscale hotels and restaurants to offer banked games and sports betting will transform their facilities into virtual urban casinos capable of competing with the more rural tribal operations.

Mark Macarro, chairman of the Pechanga Band of Luiseño Indians, reminded BGC officials that voters who in two ballot initiatives upheld the right of tribes to operate casinos on Indian lands also rejected expanded gambling in the state.

“We’re not here asking for a vote,” Macarro testified. “That vote actually occurred—twice, in fact. We’re not here asking for a new law. That law already exists. We’re not here asking to shut anybody out.

“We’re simply asking you to enforce the law.

“For eight years we’ve been patiently waiting for the bureau to enforce the law and our constitutional rights,” Macarro said. “Respect the constitution, the will of the voters, and enforce the law.”

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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